With New Grocery Delivery Services, Walmart Challenges Amazon Prime

Jonathan Ball |

November 13, 2019

Groceries and e-commerce will be big drivers of Walmart's growth.

Walmart's e-commerce sales grew 37% in the last quarter.

Walmart is challenging Amazon Prime with a new delivery service.

Walmart expects to offer same-day delivery from three times as many stores as Whole Foods.

As competition from Amazon.com (AMZN) forces retail stores to close across the nation, Walmart (WMT) is challenging the Seattle behemoth at its own game, e-commerce, and succeeding.

Year to date, Walmart's stock has jumped 28% outperforming the S&P 500 Index, which is up 25%, and the 18% rise posted by Amazon.

Walmart runs the world's largest retail chain, operating 3,570 supercenters with a grocery department, 386 discount stores, 599 Sam’s clubs and 813 neighborhood markets in the U.S. Outside the U.S. it owns 5993 foreign stores

While Walmart continues to grow revenues, profits and same-store sales, the main driver of Walmart's growth is e-commerce, the sector Amazon practically invented.

In the second quarter, the Bentonville, Ark., discount retailer reported revenues grew 1.8% year over year to $130.4 billion. Net income surged to $1.26 a share from last year's loss of 29 cents a share. Same-store sales increased by 7.3%, the strongest growth in more than 10 years. A lot of that came from e-commerce sales, which grew 37% over last year. And a lot of that came from groceries.

Targeting Amazon Prime

Specifically, Walmart is targeting Amazon Prime and it's delivery benefits to shoppers of Whole Foods Market, by building its own grocery delivery business.

According to a recent Elastic Path report, same-day delivery is the retail sector's hot new trend, with about 75% of consumers expecting all brands to offer it within the next 12 months.

Amazon Prime, which charges $119 a year, offers free two-hour delivery from Whole Foods on orders greater than $35, and one-hour delivery with a fee.

For Walmart customers who shop online, associates will shop in the store for them. Then the company offers two ways to get the groceries. Customers can get same-day pickup at the store for free, or same-day delivery. The unlimited delivery service will be $98 a year or $9.95 for a one-time delivery. At $98, Walmart's subscription is 18% cheaper than Amazon Prime and pickup is a service that Amazon can't match.

“Walmart is by far the leader with pickup of online orders—which especially drives its grocery sales—as many shoppers prefer that to home delivery,” Madison Global Partners analyst Bernard Sosnick told Barron’s.

In addition, Walmart has a substantially larger footprint than Whole Foods. There are about 500 Whole Foods stores in the U.S. Meanwhile, Walmart expects to offer grocery pickup from 3,100 stores and same-day delivery from 1,600 stores by year-end. Also Whole Foods is significantly more expensive than Walmart.

While Prime offers other features like streaming TV shows, the fact that Walmart will offer its service from six times as many stores, means some customers may end up getting both services.

Run by an e-commerce pro

The project is being run by an e-commerce pro. Marc Lore, the chief executive officer of WalMart eCommerce, comes with a wealth of experience. In 2014, he co-founded Jet.com another grocery delivery service. Walmart acquired Jet in 2016.

As the U.S. economy weakens, Walmart's reputation for offering low prices will make it the preferred destination of cost-conscious consumers. With groceries making up 56% of Walmart's U.S. sales and the fact people always need to buy food, but not books or many of the other products Amazon offers, I think online grocery sales will dominate e-commerce for years to come.

In addition to Amazon, one of Walmart's chief rivals, Target (TGT), is offering similar services. It will offer same-day pickup of items and same-day delivery for groceries, as well. For $99 a year, Target will deliver orders greater than $35 for free. Target didn't break out how many stores will be doing this. And other chains may offer same-day delivery, but few of them sell groceries.

Another factor to boost the share price is the company is buying back about $5 billion worth of stock each year. In the second quarter, it bought back $1.6 billion worth.

Walmart is a Dividend Aristocrat

Walmart is also a Dividend Aristocrat, having raised its dividend each of the last 25 years. The dividend yield is currently 1.76%, compared with the 10-year Treasury Note's 1.95% and the S&P 500's yield of 1.8%.

The company is releasing third-quarter earnings this week. It expects sales growth of 3%, earnings to be similar to last year, and e-commerce sales to grow 35%.

If it beats expectations, I expect the stock to jump. And if it can continue to roll out grocery delivery, it can take market share from Amazon. In addition, with $6.3 billion in free cash flow I also expect more stock buybacks and dividend increases.

In fiscal year 2019, the company earned $4.91 a share. Value Line forecasts the company can make $7 a share by 2022. With the stock trading at 27 times earnings, that means the stock should hit $189 by 2022, a 59% increase over the price today.

Disclosure: I am long WMT. I have no business relationship with any company whose stock is mentioned in this article.