(Bloomberg)—Wal-Mart Stores Inc. expects U.S. e-commerce sales to surge 40% in the next fiscal year as its online investments allow the retail giant to play catch-up with Amazon.com Inc.
The company, No. 3 in the Internet Retailer 2017 Top 500, also plans to add 1,000 online grocery locations—roughly double the current number of sites, which help fill orders from customers buying their food on Walmart.com. Total sales, meanwhile, are expected to grow at or above 3%, the retailer said as part of a forecast issued ahead of its shareholder meeting Tuesday.
The upbeat guidance sent Walmart shares up as much as 2.6% to $82.62 in early trading. That follows a 17% increase this year through Monday’s close.
The outlook lends evidence to the view that Walmart’s company-changing bet on e-commerce is beginning to pay off. CEO Doug McMillon has channeled more than one-third of the business’s capital spending budget into digital initiatives—like specialized e-commerce distribution centers—up from just 20% a few years ago.
“It is clear that Walmart intends to continue to turn up the heat online,” Moody’s Corp. analyst Charlie O’Shea said in a note. “We still believe Amazon’s lead in online retail is insurmountable; however, Walmart continues to widen the gap between itself and all other brick-and-mortar retailers.”
Walmart’s investments in e-commerce have already helped boost sales. The U.S. online division saw increases of at least 60% in the past two quarters, four times the growth rate of the broader e-commerce sector. Walmart has introduced a simpler way to reorder products bought frequently, free shipping on orders of $35 or more, and it’s offering discounts on thousands of items purchased online and picked up at a store.
But the online push has come at a cost: Profit margins on online orders are narrower than those for in-store sales, due to fulfillment expenses. In the second quarter, Walmart’s gross profit margin narrowed for the first time in two years.
The company also is teaming up with Google to let shoppers order by voice, and it said this week that it’s making the returns process simpler and faster for customers who use its mobile-shopping app. It also has rolled out curbside pickup of online grocery orders in about 1,000 of its U.S. stores, putting it way ahead of rival Target Corp. (No. 20 in the Top 500), which only offers the service for nonperishable items in its hometown of Minneapolis.
Walmart also announced plans to buy back $20 billion in shares in fiscal 2019, which ends around January of that year. And the company reiterated its profit target for the current year, saying earnings would be $4.18 to $4.28 a share. Earnings will climb about 5% in fiscal 2019, also in line with previous guidance, Walmart said.
“We have good momentum in the business,” McMillon said in a statement. “We’re executing our strategy and moving with speed to win with the customer, who is more connected than ever.”
Online sales still account for a small percentage of Walmart’s revenue, and no one expects it to overtake Amazon (No. 1) in e-commerce orders. That company generated the majority of its roughly $136 billion in sales from online shopping last year.
In the second quarter, 62% of all U.S. internet users visited Amazon, a “remarkably high number,” according to Wells Fargo & Co. analysts, illustrating just how deeply the company has penetrated the online market.
But Walmart’s investments should help the company maintain its lead in the grocery market, even as more customers move online, according to Moody’s O’Shea.
Walmart has “unmatched physical resources, including stores and supply chain, and in the process is providing consumers with a compelling online alternative to Amazon,” he said.