The One Thing That Could Save Wal-Mart Stores Inc (NYSE: WMT)’s Earnings Report Today

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By Mark Michaels on August 14, 2014 Company, Consumer Staples

Wal-Mart is set to release its second quarter earnings report today at when the market closes. In my PREVIOUS ARTICLE, I discussed the mix results that analysts and investors are expecting from the retail giant, and the less than rosy outlook that lies ahead for the Bentonville, Arkansas-based company. However, the company can pull itself up to a positive earnings report in future quarters if it can focus its efforts and master one thing:

E-commerce.

Consumers are steadily increasing their preference for online convenience shopping, and the rise of the use of smartphones has led to a boom in the e-commerce industry. As a result, the market share for the retail industry is switching from physical stores to online store sites. E-commerce sales in the United States have continued to increase in proportion to the total amount of online retail sales, from 4.2 percent in the first quarter of 2010 to 6.2 percent in the first quarter of this year. Online retail sales in general are rising at a annual growth rate of 15 percent, which is faster than the growth rate of traditional brick and mortar stores.

Today’s consumers do not want to waste time searching for their desired item in physical stores. They would rather have a quicker, easier, and more pleasant shopping experience. Smartphones have provided this service to consumers and met this need. In fact, annual sales from smartphones to end users increased by 42.3 percent to 968 million units in 2013. The large sales growth of smartphones translates to a higher number of potential online shoppers, which in turn means more potential customers for online businesses. Currently, smartphone sales make up 53.6 percent of all cellphone sales.

Disruption of Retailer Strategies

The act of shopping online rather than at a physical store may reduce the customer’s tendency to make impulse buys – an important point for retailers to drive sales.

Additionally, online retailers cannot make use of in-store promotional activities. While they can execute marketing campaigns online, it typically does not have the same impact as in-store promotions.

Consumers who shop online are also more aware of prices of competitors. Therefore, online retailers cannot take advantage of the consumer’s lack of knowledge. This transparency in pricing further chips away at margins and sales.

How Wal-Mart Should Use E-commerce

While the shift of the market towards e-commerce is a eminent threat for smaller stores, it is actually a great opportunity for large nation-wide retailers like Wal-Mart. Wal-Mart has the resources to invest in and develop its online business. For the past few quarters, Wal-Mart has been experiencing a continuous drop in its comparable store sales with no sign of improvement for future quarters. If the discount retailer can expand its online business, e-commerce can prove to be a huge driver of revenue for the company.

Wal-Mart currently holds more than $6 billion in cash and has over $23 billion in cash flows a year from operations. This liquidity gives the retailer the option to make significant investments in its e-commerce business and fight for more market share from smaller retailers. Additionally, Wal-Mart’s huge global network of stores and its strong relationships with vendors give the company a leg up against other competitors in the e-commerce space.

Wal-Mart has already made a name for itself for selling products at reduced prices. Consumers will likely return to Wal-Mart once consumer staples are available on its online stores at the low prices the customers expect.

The Arkansas-based company has already made efforts to expand its online business. While revenue from online sales make up just fewer than 3 percent of the company’s total revenue, its contribution will likely continue to rise because of high growth. Last quarter, Wal-Mart’s online sales increase by 27 percent year over year.

Additionally, Wal-Mart’s “buy online, pick up in store” strategy enables customers to retrieve the goods they ordered online from a nearby store. This gives the customer another chance to buy more items once they’re inside the store.

Challenge Wal-Mart Could Face

Wal-Mart faces competition from leaders in the e-commerce space, namely Amazon.com Inc (NASDAQ: AMZN) and eBay Inc (NASDAQ: EBAY). These businesses already have a diverse and expansive customer base and provide a huge variety of products across various categories. Amazon also offers its premium service, Amazon Prime, which features one day shipping to customers.

Amazon has proven to be Wal-Mart’s biggest threat, mainly due to its size, expansiveness of products, pricing, and prompt delivery system to customers. Amazon has also entered the grocery space, and offers customers a sizeable discount for back to school offerings. Such features prove to be challenge for Wal-Mart to compete against.