Did Amazon Just Eat Walmart’s Lunch?

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Amazon upending brick and mortar retail is the worst-kept secret on Wall Street.

We all know how Jeff Bezos’ mall-crushing romp has forced investors to ditch vulnerable retail plays as the sector continues to slide.

But lately, we’ve seen signs of life from some well-established traditional retailers. The old-school stores that have successfully built their online offerings to compete with Amazon have held strong against the e-commerce king’s onslaught.

Walmart (NYSE:WMT) is one of these companies. The biggest brick and mortar retail operation in the country has maintained a healthy rivalry with Amazon over the past year. The company made all the right moves. It even bought e-commerce upstart Jet.com as part of a bigger campaign to boost its online footprint. If any retailer could go toe to toe with Amazon, it’s Walmart. The gloves were off…

Naturally, we were paying close attention as Walmart released earnings to kick off the short trading week.

The results weren’t pretty.

Walmart topped sales estimates. But the retailer shocked investors with a rare bottom-line whiff, posting earnings far below consensus estimates. The stock gapped down below $100 at the open and continued to drift lower. By the closing bell, Walmart shares had fallen more than 10%.

Before Tuesday’s drop, Walmart hadn’t gapped down 5% post-earnings since 2001, per Bespoke Investment Group. By midday, the stock was having its fourth-worst session since 1980.

The effects of Walmart’s plunge reverberated throughout the other big-box retailers. Target Corp. (NYSE:TGT) dropped 3%. Dollar General Corp. (NYSE:DG), which has mostly avoided Amazon’s wrath, also fell more than 3% on the day.

Despite yesterday’s disastrous performance, Walmart’s efforts aren’t a complete failure. The company finished the 2017 fiscal year with e-commerce sales growth of 40% — a huge boost for a massive commercial operation. But the brick and mortar retailer is now dealing with the growing pains of its online excursion.

The action we’re seeing in the stock is the result of fickle investors cashing out. They don’t want to wait around for Walmart’s plan to mature.

But I’m not ready to bury Walmart just yet. In fact, I believe the competition between Walmart and Amazon is just beginning to heat up — which should be good for shareholders of both stocks.

Just last month, we discussed how Walmart is ratcheting up its grocery operations. The mega discounter filed a new patent that looks to solve one of the biggest issues with online grocery shopping.

Walmart knows customers ordering groceries online don’t want bruised apples and wilted lettuce arriving at their homes. That’s why the company is developing a system that will allow its online customers to browse scanned images of actual fresh items and select which ones they want to buy. The venture could remove one of the biggest obstacles to the mass adoption of online grocery shopping, potentially giving Walmart a leg up over Amazon.

We’re less than a year removed from Amazon’s $14 billion Whole Foods acquisition. Yet despite slashing prices on everything from baby kale to avocados, Amazon has a lot of work ahead to integrate groceries and make them an important section of its business.

As we said back in January, Amazon’s push to make organic food more affordable at Whole Foods and their new Amazon Go location are just the first of many skirmishes to come in the grocery wars. Walmart remains hot on Amazon’s heels and isn’t going anywhere.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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