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Retail Lessons from Walmart

Stocks struggled to find their footing, ending the week in slightly negative territory. Much of the news surrounded tax legislation, with the U.S. House of Representatives successfully passing its overhaul bill, and moving it through to the Senate, which has been working on its own version. All is still uncertain, but there were more similarities between the two bills than differences, which could potentially increase the likelihood that something gets passed.

Weekly Returns:
S&P 500: 2,579 (-0.1)
FTSE All-World ex-US: (-0.2%)
US 10 Year Treasury Yield: 2.34% (-0.06%)
Gold: $1,294 (+1.4%)
EUR/USD: $1.179 (+1.1%)

Major Events:

  • Monday – Private-equity firm Roark Capital made a bid for Buffalo Wild Wings valued at more than $2.3 billion.
  • Wednesday – Russia agreed to restructure $3 billion worth of Venezuelan debt to alleviate pressure on the cash-strapped nation.
  • Thursday – Wal-Mart posted better-than-expected quarterly results, sending shares of the retailer sharply higher.
  • Thursday – U.S. inflation readings came in soft, with the price index for personal consumption expenditures flat in June over the prior month.
  • Thursday – The U.S. House of Representatives voted 227-205 in favor of its new tax bill, which now moves to the Senate.

Our take:
It’s not often you see a stock like Walmart move more than 10% in a single day. In fact, there have been only two such instances in the last 20 years. But the retailer did just that on Thursday following better-than-expected third quarter results. This included a 4.2% increase in total revenue and roughly 2% growth in adjusted earnings per share, primarily on the back of higher in-store traffic and a double-digit increase in online sales.

But why would these results drive such an outsized stock move? It all boils down to Amazon. There’s been a growing sense of fear that the Seattle-based tech giant will drive virtually all retailers out of business, particularly those with brick-and-mortar stores. And in some cases this is actually happening.

But Walmart’s results demonstrate it’s not all doom and gloom for traditional retailers. The company has found success changing its long-standing business model, focusing more heavily on its online presence and reducing the expansion of physical stores.

Of course it’s far too early to declare victory over Amazon, but clearly it’s possible for other firms to compete. Walmart understands its predicament—the competitive environment has changed, and if it hopes to stay relevant it must adapt accordingly. It’s a lesson many retailers will need to learn.

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