Big spending in e-commerce pushed Q4 online growth to 23%.

In the first full fiscal year after the Jet.com acquisition, Walmart posted a 44% increase in e-commerce sales to $11.5 billion across all its U.S. sites. However, web sales grew only 23% in the fourth quarter as problems managing inventory resulted in some items being unavailable to online shoppers.

Walmart, No. 3 in the Internet Retailer 2017 Top 500, also announced a 47% year-over-year rise in gross merchandise value—the value of all goods sold on its e-commerce sites, a figure that includes merchandise sold by other merchants on Walmart.com and Jet.com. Overall, the company’s revenues were up 3.0% year over year, a $14.5 billion rise to $500.3 billion.

The company’s 23% online growth in the fourth quarter was down from last quarter, which saw a 50% increase, and Q4 last year, during which online sales grew 29%. Part, but not all, of the decrease is related to the timing of the Jet acquisition, which closed in September 2016. As a result, Walmart’s recent third quarter results compared online sales to a quarter that mostly did not include Jet.com revenue, whereas the Q4 results are compared to last year’s fourth quarter when Jet.com was included in Walmart’s earnings.

“The majority of this slowdown was expected as we fully lapped the Jet acquisition, as well as creating a healthier long-term foundation for holiday,” said CEO Doug McMillon on the investor call, according to a transcript from Seeking Alpha. “A smaller portion of the slowdown was unexpected, as we experienced some operational challenges that negatively impacted growth. Overall, we finished the year with e-commerce sales growth of more than 40%. So, we feel better about the year than the quarter.”

McMillon said the rush of seasonal items like electronics, toys and gifts into fulfillment centers “harmed our in-stock on more everyday items, and our basic in-stock for e-commerce suffered as a result. So we’re learning how to deal with higher volumes and learning how to deal with a higher peak than what we had previously. But again, that was the minority of the issue. Most of this was planned and in our numbers.”

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While online sales grew, the company’s e-commerce business also weighed down the company’s bottom line. Restructuring costs, including closing part of its Brazilian e-commerce operations and plans to turn shuttered U.S. Sam’s Club warehouse stores into e-commerce fulfillment centers, contributed to bringing down Q4 income 28%, with 2017 operating income down 10% to $20.4 billion. Without those costs, Walmart estimates quarterly operational income would have been down just 1% and year-over-year income would have been flat.

Part of the yearly revenue growth in e-commerce is due to the acquisitions of online brands ModCloth (No. 198) and Bonobos (No. 232), which added to the stable of e-commerce brands Walmart has purchased since the August 2016 Jet.com acquisition.

Jet.com also helped boost revenues, but Walmart plans to pull back on marketing the brand this year.

“The Jet brand over-indexed with higher-income, urban, millennial customers when we made the acquisition, and we intend to build on that strength going forward,” McMillon said on the investor call. “We’ve been investing more in Walmart.com on a national basis and reducing marketing investment in Jet, except in certain urban markets. Due to this change, Jet will not grow as quickly as it did in early days but it will be well positioned where we’ve chosen to focus the brand.”

Walmart has been investing heavily in e-commerce as big competitor Amazon.com Inc. (No. 1) moves into physical retail with its acquisition last year of grocery chain Whole Foods Market. While Walmart’s acquisitions helped it grow online revenue faster than Amazon grew for much of  the last year, Amazon overtook Walmart’s e-commerce growth in the fourth quarter.

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But Walmart keeps upping its online game. The retailer recently announced free shipping for top-tier Sam’s Club members and continues to boost investments in growing e-commerce markets, including a proposed 20% stake in India’s Flipkart.

However, Walmart will have to work harder to attract loyal Amazon shoppers, GlobalData Retail analyst Neil Saunders tells Bloomberg News.

“Walmart has more work to do to widen its e-commerce customer base,” Saunders says. “There are many demographics, especially younger and professional segments, for whom Walmart is not the destination of choice online.”

For the fourth quarter that ended on Jan. 31, Walmart reported:

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  • Net revenue of $136.267 billion, up 4.1% year over year from $130.936 billion.
  • Net income of $4.467 billion, down 28.0% from $6.205 billion last year.
  • E-commerce gross merchandise value rose 24%.

For fiscal year 2018:

  • Net revenue up 3.0% to $500.343 billion from $485.873 billion in the previous fiscal year.
  • Net income of $20.437, down 10.2% from $22.764 billion last year.

Internet Retailer estimates Walmart’s total e-commerce revenue for 2016 at $15.820 billion.

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