Citi analysts: Walmart 'emerging as a true challenger to Amazon'

Dive Brief:

Citi Research analysts raised their rating for Walmart from neutral to buy in light of the retail giant’s rising e-commerce sales, which they said proves the company can compete with Amazon, according to multiple media outlets.
Walmart’s "aggressive omnichannel strategy will continue to drive significant sales growth and WMT's e-commerce operations are emerging as a true challenger to Amazon, both factors that could fuel further multiple expansion," analyst Kate McShane wrote in a note to clients cited by CNBC.
But Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates Inc., isn't so optimistic. "I think [Walmart is] sitting on one of the biggest liabilities in retail history — excess space of an unprecedented amount — and it’s not being dealt with," he told Retail Dive in an interview.

Dive Insight:

Walmart's third quarter — when net sales online surged 50% and gross merchandise volume rose 54% — marked a year since the $3.3 billion acquisition of Jet.com. The world’s most efficient brick-and-mortar retail stalwart is departing from its strategy of lean operations to move the needle on online sales.

Citi expects Walmart to report fourth quarter earnings of $1.38 per share and to beat same-store sales estimates with 2.5% growth, according to a report on its note from U.S. News and World Report.

At Walmart's annual Investment Community Meeting last year, executives detailed plans to pivot toward e-commerce, earmarking $11 billion in capital spending to boosting online sales while drastically slowing down the number of new physical stores the company opens. That slowdown means just 35 new supercenters will open in fiscal 2018 — half as many as the 69 it opened last year — and will open just 20 new Neighborhood Market stores in the same period, way down from the 161 it opened last year.

But that may not be enough, Davidowitz said. "All across the country we have too many stores, we’re dramatically over-stored, stores are being downsized. Who has the most floor space by a multiple of anybody in the United States? Walmart!” he said. "There are companies out there trying to do something about this problem, but Walmart’s answer to the store space problem is to leave everything they way it is."

Walmart has argued that its stores are an asset, and Davidowtiz agrees with that — to a point.

Because consumers want convenience, however, not enough will trudge to stores to pick up their online orders to make so many large stores worth running. Plus, the growth in Walmart’s online sales are continuing to make the stores less relevant, he added. "This business of picking up in stores is a peanut thing. If you ask anybody in this business, the name of the game is delivery," he said.

That's indeed an area where Walmart is expanding. In addition to in-store pick-up, the company is enlisting store workers to delivery packages on their way home and has partnered with Deliv and August Home in Silicon Valley to deliver groceries to customers’ refrigerators — a service resembling Amazon’s more widely implemented “Key” program.

While Citi analysts are optimistic that Walmart's e-commerce growth is gaining on Amazon, it's not an even comparison, Davidowitz noted. "Amazon is working on totally different metrics," he said. "Amazon basically says, 'We’re the leader in cloud computing in the world, we’re the leader in gadgets, we are the future. Therefore you don’t judge us on earnings.' I don’t believe Walmart’s earnings are going to go up."