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Factors Affecting Walmart’s Fiscal 2Q18 Margins

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Gross margin continues to decline

Walmart’s (WMT) margins continue to decline despite improved sales performance. The company’s strategic lower pricing and increased investments in the digital arm is taking a toll on its margin’s growth rate.

In fiscal 2Q18, Walmart’s gross margin, based on net sales, contracted 11 basis points to 25%. The company’s increased investment in price and its growing share of e-commerce in sales mix more than offset the positives stemming from its improved top-line performance.

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Walmart’s US segment marked a decline of 5 basis points in its gross margin as higher savings from strategic sourcing were more than offset by unfavorable mix and lower pricing. Meanwhile, International and Sam’s Club’s gross margin was negatively impacted by price investments, higher shrinkage, and promotions such as cash rewards.

How Walmart’s peers are performing

In comparison, rival Target’s (TGT) gross margin decreased 40 basis points as increased digital fulfillment charges more than offset higher sales. Mass merchandisers are focusing on accelerating sales growth through increased investments in the business, including the strengthening of the e-commerce platform. 

Increased competition from Amazon (AMZN) and other deep discount stores have forced these companies to offer lower prices to drive store traffic. This, in turn, affects their margin performance figures.

Analysts expect Costco (COST) to report healthy margins growth in its upcoming quarter, reflecting higher sales. Costco’s growth programs are funded by higher savings from the company’s shift to the Citi (C) Visa co-branded card program and an increase in the membership fee.

Operating margin and outlook

Walmart’s (WMT) operating margin decreased ~30 basis points to 4.9% during fiscal 2Q18, reflecting a lower gross margin and increased investments in the digital business.

Going forward, Walmart’s margins are expected to remain muted as the company’s strategic investment in price as well as its digital business subdue its growth.

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