The Financial & Risk business of Thomson Reuters is now Refinitiv

All names and marks owned by Thomson Reuters, including "Thomson", "Reuters" and the Kinesis logo are used under license from Thomson Reuters and its affiliated companies.

August 14, 2018

Trade Wars and Walmart Innovation

by Jharonne Martis.

There’s no doubt that the American consumer is still engaged. Consumer confidence is up, and spending has been strong in the first half of the year. There’s still uncertainty in world markets, however. For instance, will all the talk of trade wars affect retailers and the upcoming holiday season?

The Thomson Reuters SSS index is expected to see 3% growth in the first half of the year. A 3.0% SSS reflects healthy consumer spending. This strength is also expected to continue into the third quarter, which includes the key back-to-school season. Amazon’s annual Prime Day in July may have pulled “back-to-school” into the middle of summer.

Prime Day is affecting other retailers, including Walmart, Target, J.C. Penney and Kohl’s. They have rolled out deals sooner because of it. Retailers are doing a better job at targeting the consumer with timely email promotions and social media communications. As a result, back-to-school sales in Q3 are expected to be stronger than last year and rise 3.1%, compared to a 1.7% gain in Q3 2017 (Exhibit 1).

Exhibit 1: Same Store Sales Index

Source: I/B/E/S data

Fourth quarter outlook

However, the SSS index is expected to decline in the fourth quarter to a 2.4% SSS increase, telling us that retailers will have to adjust their holiday inventory orders accordingly to account for demand.

There’s also a lot of uncertainty around potential price increases towards the end of the year as tariffs on imports and products kick in. Ultimately, this will have a strong impact on how retailers prepare for the biggest shopping months of the year.

The 2018 holiday season may hinge on who will feel the effect of any price increases. Will a cost increase be passed on to suppliers/manufacturers? Or will a percentage be passed onto the consumer? Warning – today, consumers are conditioned to shop for value.

Trade wars

There is also some uncertainty around a possible trade war with China. Since most apparel bought in the U.S. is made abroad (mostly in Asia), a trade war will make buying clothes in the U.S. more expensive. U.S. customers can’t just switch to an American manufacturer – there simply aren’t many of those around anymore. So higher-cost imports will either hurt retailers’ margins, or if they pass the costs onto consumers, cut into demand.

What’s frightening is that consumer spending is robust now – in a time when retailers are still struggling and many are leaving malls, or closing stores. If a retailer can’t make it now, just image if an all-out trade war causes a recession. That would be a bigger threat to retailers than the direct impact tariffs have on consumer behavior.


Walmart reports earnings this week. In early February 2018, its stock price buckled on weaker-than-expected online sales growth. However, Walmart management is maintaining its 40% e-commerce growth target for calendar year 2018. Analysts polled by Thomson Reuters are bullish on Walmart’s revamped website — better functionality, look and feel, expansion and growth of its “click-and-connect” grocery business.

Exhibit 2: Walmart E-Commerce Sales

Source: I/B/E/S estimates

Delivery partnership

As part of this endeavor, Walmart announced a partnership with Waymo for online grocery delivery. This service has become particularly popular in suburban areas where people drive to get groceries. Walmart is also expanding the number of locations where customers can pick up their purchases — taking advantage of its supercenter locations. Since its stores are located within 10 miles of 90% of the U.S. population, it can effectively target more consumers.

Could Amazon be left behind?

Alliances with such tech companies as Waymo and Alphabet is definitely giving Walmart a competitive edge, indicating that Walmart and Alphabet are strengthening their alliance to compete against Amazon. This will definitely toughen the competition for Amazon, but the e-commerce giant probably won’t be left behind.

Amazon operates purely online and in other business segments including entertainment and online video streaming – where Walmart doesn’t currently operate. Amazon is on track to see an earnings growth rate of more than 500% for the current quarter (Exhibit 3). Amazon also has a growing Prime membership base, it recently increased its membership fee by 20% and is exclusively offering prime users free grocery pickup at Whole Foods. Walmart is also offering exclusive discounts on online groceries to orders customers who use Waymo rides. Still, Walmart continues to be the biggest player in the grocery business and is fighting to continue to secure its spot in the future.

Exhibit 3: Amazon’s Earnings Growth

Source: Eikon

Danger for Walmart’s margins?

Analysts polled by Thomson Reuters have expressed concern about whether costs associated with Walmart’s investments in e-commerce expansion and technological advancements eventually will hurt its margins. Walmart’s U.S. business contributes the biggest portion to its revenue, and continues to do well as it is on track to post 16 consecutive quarters of positive SSS (Exhibit 4).

Exhibit 4: Walmart Same Store Sales

Source: I/B/E/S data

When WMT reports later this week, we are expecting to see an 11% jump in earnings. At least for the short term, gross profit margins are expected to remain around 25%, suggesting the investments are not affecting profit margins this fiscal year.

Exhibit 5: Walmart’s Gross Profit Margin

Source: Eikon

Get In Touch


We have updated our Privacy Statement. Before you continue, please read our new Privacy Statement and familiarize yourself with the terms.×