The Pandemic Boost Is Over for This Retail King

Editor's note: Investors expect this company to keep picking up steam... But according to Rob Spivey, director of research at our corporate affiliate Altimetry, those expectations aren't in line with reality. In this piece, adapted from an April 27 Altimetry Daily Authority article, he explains why pandemic-era shopping trends are on their way out... and why that spells trouble for one retail giant.

It took a pandemic to turbocharge Walmart's (WMT) e-commerce business...

For nearly a decade, the retail giant tried to use a dual strategy. It invested primarily in physical supercenters... but kept a toe in a fledgling online business.

Unfortunately for Walmart, not many people were rushing to use its website back in 2010. And its e-commerce experience was subpar. Instead, consumers flocked to competitors like online retail titan Amazon (AMZN).

Walmart's profitability dropped – for years. Its Uniform return on assets ("ROA") went from nearly 14% in 2010 to just above 8% by 2019.

Then, as you've undoubtedly heard many times before... COVID-19 changed everything.

By 2020, thanks to the pandemic, Walmart went full-bore into online ordering. And since consumers were stuck at home with plenty of stimulus money, they got comfortable buying from the company online.

Investors noticed the shift. From the beginning of 2019 until the end of 2022, Walmart's stock jumped 63%... much better than Amazon's 12% stock return in that time frame. Walmart was starting to make up lost ground.

But as I'll explain today, it looks like the "at-home revolution" tailwinds are petering out...

Consumers are getting back to their old spending habits. They're moving on from the rush toward online shopping back to physical stores... Yet Walmart's investors don't seem to have caught on.

E-commerce went into overdrive during COVID-19...

Walmart poured a ton of money into that side of the business – and reaped the benefits. Revenue rose 20%, increasing from $514 billion in fiscal 2019 to $611 billion in fiscal 2023.

The company's ROA had been falling for nearly a decade. But by beefing up its online offerings, Walmart was able to buck that trend. Uniform ROA rose from 8% in 2019 to 11% by 2021. Take a look...

By 2021, Walmart had hit $75 billion in online sales. The company was growing its e-commerce segment five times faster than Amazon. At that growth rate, Walmart's e-commerce sales were projected to overtake Amazon's total retail sales in less than four years.

That higher revenue benefited Walmart's physical stores as well. Customers liked the convenience of paying for items online and picking them up in person. For all of Amazon's incredible reach, it couldn't match that service.

Investors were impressed by these changes and bought in aggressively. But now, cracks are starting to form in Walmart's bold e-commerce bet...

Last month, the company announced 2,000 job cuts at its U.S. e-commerce fulfillment centers. Walmart is getting hit by the same e-commerce slowdown that has hurt Amazon and other peers.

Walmart has suggested that the laid-off workers could find jobs in other parts of the business. But we don't think that's likely. The economy is cooling off... And we wouldn't be surprised if Walmart has to make even more cuts.

But investors are blindly hoping that things won't get worse. We can see this through our Embedded Expectations Analysis ("EEA") framework...

The EEA starts by looking at a company's current stock price. From there, we can calculate what the market expects from the company's future cash flows. We then compare that figure with our own cash-flow projections.

In short, this measure tells us how well a company has to perform in the future to be worth what the market is paying for it today.

We know Uniform ROA didn't bounce back until the pandemic hit. Walmart reversed its downtrend in 2020... and pulled off a stellar 2021, booking its highest returns since 2015.

But returns already started to roll over last year. Wall Street analysts forecast a further step back in 2023 and 2024. Yet investors, in all their blissful ignorance, still think Uniform ROA will jump to decade-high levels by 2027. Take a look...

Walmart is sliding back from e-commerce. If the online business slows down – or even if the physical stores follow suit – its Uniform ROA might slip, too.

Again, profits were in a steady decline before the e-commerce business took off. Investors are hoping that Walmart's adventure into e-commerce will bring it back to the "good old days." But this story has already played out... The company is spiraling down to the returns of the late 2010s.

Walmart's stock is up 7% so far in 2023. But don't get attached... Once investors recognize the company's plunging prospects, its stock will likely head south.


Rob Spivey

Editor's note: Popular stocks aren't immune to trouble. One change that's coming in a matter of weeks could set off a huge wave of market volatility... with impacts on household names like Amazon, Tesla, and Apple. But in events like these, Wall Street has a secret way to rake in billions of dollars – all while mainstream investors settle for single-digit returns, or even losses. And if you understand it, you can position yourself to profit, too... Get the details here.

Further Reading

"Nobody could have predicted the pandemic in advance and been totally prepared," Rob writes. These unforeseen events are called "black swans." But another set of catalysts could be just as important to your wealth in the next few years – even when everybody sees them coming... Read more here.

"You've got to keep a close eye on the trend... because every trend eventually reverses," Brett Eversole says. Many of the sectors that did best in 2022 have changed course this year, while last year's losers are taking the lead... Learn more here.