Profit predictions might have been downgraded, but behind Walmart’s forecast is solid investment in its etail buisness. Here Planet Retail analyses the numbers.

Walmart has warned that 2016 profits will decrease by between 6% and 12% on the back of investment aimed at improving its core US networks and ecommerce operations. The company also downgraded its net sales growth forecasts for this year to be “relatively flat”.

The previously expected 1% to 2% guidance announced in February was itself a decrease from the 2% to 4% projected for 2015 last October.

Currency fluctuations

The heavier than expected currency exchange rate fluctuations are playing a bit part in the impact on sales growth internationally, with Planet Retail forecasting sales declines in US dollar terms in key international markets such as the UK, Canada and Mexico. With these three markets alone accounting for more than 60% of Walmart International’s banner sales, the current strength of the US dollar will have a significant impact on group results.

Currency issues aside, it is also true that the performance of other key international markets, primarily the UK (accounting for a quarter of all International banner sales), has deteriorated.

The lowered profit forecast for next year is the result of heavy investment, partly in wages ($1.2bn this year and $1.5bn in 2016), but, crucially, in improving the instore and online experience.

Walmart pledged $2bn investment in ecommerce over two years ($900m this year followed by $1.1bn next year), up significantly from the $700m put into the channel last year.

Online grocery expansion

The news coincided with the announcement that Walmart is expanding its online grocery shopping service to 10 additional markets across the US, taking the total to more than 20 markets nationwide. Earlier this year, Amazon ousted Walmart’s as the world’s largest retailer by market capitalisation, so ramping up ecommerce investment clearly shows where Walmart sees it needs to win the battle with its future closest competitor.

Walmart may still dwarf Amazon in terms of total sales but in terms of online sales the tables are reversed.

Meanwhile new store growth is slowing. This year, the expectation is to open up to 252 stores in the US, down from the previous forecast of up to 282. For next year, the guidance is for up to 165 new store openings.

With investment being pumped into ecommerce and the rate of new store openings declining, Walmart is attempting to realign itself at the expense of short-term profitability.

  • Robert Gregory is the global research director at Planet Retail