Wal-Mart's Online Sales Get Some Jet Fuel

Image source: Wal-Mart.

Wal-Mart Stores'(NYSE: WMT) e-commerce sales accelerated for the second straight quarter thanks to the help of Jet.com. The company reported growth in e-commerce sales and gross merchandise volume (GMV) of 20.6% and 16.8%, respectively. Those numbers represent a dramatic improvement in Wal-Mart's e-commerce sales growth of 7% in the first quarter this year.

While Wal-Mart benefited from six weeks of Jet.com sales, its growth was offset by the divestment of Yihaodian, its Chinese e-commerce site. Wal-Mart says GMV growth excluding Yihaodian was 28.6%. If you exclude both Yihaodian and Jet.com's contributions, GMV growth was still above 20%, but management wouldn't provide exact figures.

Wal-Mart brought in Jet.com's management to run its e-commerce operations and continues to invest heavily in online sales. The investments are coming at the cost of profit growth, which management says it doesn't expect to see until fiscal 2019. Will Wal-Mart's Amazon.com-like (NASDAQ: AMZN)approach work?

A big investment in Jet.com

CEO Doug McMillon explained the company's reasoning behind the $3.3 billion Jet.com acquisition.

Additionally, Wal-Mart is seeing benefits from combining fulfillment networks and leveraging its scale to improve Jet.com's costs.

Most importantly, Jet.com CEO Marc Lore is taking over as head of Wal-Mart's U.S. e-commerce division. Lore co-founded Quidsi, the parent company of the family of websites including diapers.com and soap.com. Amazon bought that company in 2011. Suffice it to say, Lore has successfully grown e-commerce operations in the past.

Even though Wal-Mart isn't providing exact details about Jet.com's contribution to its e-commerce growth, the step up in sales and gross merchandise volume is a clear indication that it will play a major role in Wal-Mart's continued e-commerce growth.

Online grocery orders

Another strong growth driver for Wal-Mart is its online grocery order business. Groceries accounted for over half of Wal-Mart's U.S. sales last year.Wal-Mart benefits greatly from the convenience its Supercenter stores provide as a one-stop shopping destination. But with more commerce moving online, Wal-Mart's grocery business may come under pressure as shoppers opt for more convenient grocery stores.

As such, Wal-Mart's online order and pickup for groceries is an important part of its overall business, not just traditional e-commerce -- ordering online for home delivery. Last quarter, the company expanded the program's reach to 100 U.S. markets. During the third-quarter call, Wal-Mart CFO Brett Briggs said, "Customer count and basket size continue to outperform our expectations."

Though a nascent area of the industry, competition in online grocery shopping is fierce. Amazon now offers its AmazonFresh grocery-delivery service in nine U.S. metro areas as well as London. Additionally, Amazon recently lowered the price of its service to $14.99 per month for Prime members. Previously, customers paid $299 per year for grocery delivery. While Amazon doesn't have the same distribution and storage footprint as Wal-Mart, its prowess in e-commerce gives it an edge in capturing online shoppers' attention as it slowly expands to new markets.

Billions in investments

Wal-Mart is rapidly accelerating its investment in e-commerce. Spending on e-commerce initiatives (not including acquisitions) climbed from $300 in 2013 to $1.1 billion this year.Much of that money is earmarked for fulfillment centers in order to compete with Amazon Prime's two-day shipping.

Continued growth in investments is the only way for Wal-Mart to keep up with Amazon. The e-commerce giant continues to take share of online sales despite being far and away the largest online retailer in the country. The addition of Jet.com and Marc Lore should help Wal-Mart, as will expanding its online grocery order system.

The biggest hurdle for Wal-Mart to overcome in e-commerce is getting people to think of it as a destination for online shopping. That could show up in Wal-Mart's marketing expense, as it's now pushing both Walmart.com and Jet.com.

Ultimately, all the spending will make profit growth nonexistent. But management has already set expectations low, and the impact of Jet.com and its other efforts are already showing up in its top line. Online sales accounted for its highest-ever contribution to U.S. same-store sales growth last quarter -- 50 basis points. Watch for that trend to continue as Wal-Mart continues to invest.

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