MARK-TO-MARKET: What's behind Walmart's historic sell-off?

On Tuesday, retail giant Walmart reported its fourth quarter earnings, which included results from the all-important 61-day year-end retail holiday shopping season. The market’s response was quick and brutal.

By the end of the day, Walmart’s stock would close at $94.11/share, losing $10.67. It would be the worst daily price decline since Walmart became a publicly traded company back in 1970. The 10.2 percent decline, its largest percentage drop since January 1988, triggered a rash of downgrades among Wall Street analysts.

At first glance, the report didn’t look that bad. Walmart’s fourth quarter earnings-per-share was $1.33, slightly below the market’s estimate of $1.37. But fourth quarter revenues grew by 4.1 percent over the prior year, beating expectations by $1.4 billion. Existing store sales also increased by 2.6 percent from the prior quarter, its fourteenth consecutive quarter of revenue growth. However, the markets zeroed in on one key element of sales data that triggered the record selloff — its declining growth rate for online sales.

In the fourth quarter, Walmart’s online sales increased by 23 percent from the prior year. In the first three quarters of the year, online sales had grown by 63 percent, 60 percent and 50 percent, respectively. The declining pace in online sales growth serves as a sizable red flag. Though Walmart expects online sales to grow by more than 40 percent this year, analysts are left questioning the feasibility of this claim and if 40 percent is actually enough to keep pace with its competition.

Despite being the world’s largest retailer, Walmart has shown it is not immune to the industry’s challenges of transitioning from the traditional storefront to online sales. However, it has been tightening its belt, focusing time and resources on upgrading its own e-commerce platform. It continues to reduce the pace of its flagship Walmart store openings, and in January, closed 10 percent of its Sam’s Club stores.

Retail’s trend toward e-commerce is significant and continues to shift in favor of online sales. According to the U.S. Census Bureau, in 2016, 8 percent of all retail sales in the U.S. were transacted online. In 2017, the rate was 8.9 percent. Last year, total retail sales increased 4.4 percent from 2016, while total online sales grew by 16 percent.

The drive toward e-commerce is led by Amazon, the world’s largest online retailer. In 2017, Amazon controlled a massive 44 percent of all online sales, and 4 percent of all retail sales, in the U.S. According to data from Statista, last year, Amazon reported $52.8 billion in U.S. online sales, followed by Walmart with $14 billion and Apple with $6.3 billion. Amazon’s $52.8 billion in online sales was greater than the next nine largest retailers’ online revenues combined. And it continues to grow. Last year, Amazon’s earnings grew by 31 percent over the prior year. This year, their earnings are expected to grow by another 30 percent.

One of the key challenges for retailers is that Amazon serves as the gold standard for e-commerce platforms. Over 50 percent of all product searches start on Amazon, and Amazon is the king of converting those website visits to sales by leveraging its existing customer base to increase loyalty and cross-selling. It continues to develop and expand its private label brands, such as AmazonBasics and Amazon Elements, in electronics, fashion, food and household products, among others. Its premium membership, Amazon Prime, allows for free expedited delivery as well as 2-hour delivery service from grocer Whole Foods, which it acquired last year.

No, the selloff in Walmart’s stock on Tuesday wasn’t so much about what the company did or didn’t do in the fourth quarter. It wasn’t about reporting on the past, or even the present, but the future. It was a reflection of where the retail industry is heading, and Walmart’s ability to adapt.

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