Walmart International Q2 operating income declines 29.6% due to Flipkart

But the US retail giant is building a collection of strong businesses through Flipkart, says CEO Doug McMillon

Walmart International, the segment which consists of the retail giant’s operations outside US including retail websites, on Thursday posted 29.6 per cent decline in operational income on a reported basis and 27.3 per cent decline in constant currency, primarily due to Indian e-commerce firm Flipkart.

The Bentonville-based company (in Arkansas) is locked in a battle with US rival Amazon for dominance in India’s online retail market through Flipkart, which it acquired for $16 billion last year in May.

“Walmart International continued to make progress on managing costs and delivered 36 basis points of expense leverage in the quarter. However, operating income declined 27.3 percent in constant currency and 29.6 percent on a reported basis due primarily to the expected dilution from Flipkart as well as the overall gross margin pressure,” said Brett Biggs, executive vice-president and chief financial officer of Walmart Inc.

In May, Walmart had said its reported international operating income in the Q1 declined 41.7 per cent and went down 37.5 per cent in constant-currency terms was on account of Flipkart.

Doug McMillon, president and chief executive, Walmart Inc., said the ecosystem the company is building through Flipkart is impressive and comprises strong businesses. For example, he said Myntra, a leading online fashion destination, recently concluded their largest sale event of the year – the End of Reason sale – where more than two million customers shopped during the four-day period with 7,000 plus orders per minute at peak. To help fulfill these orders, the Flipkart team partnered with almost 11,000 local Kirana stores to support last mile delivery, said McMillon. This Kirana partner network helped deliver approximately 70 percent of the 8.5 million packages that were fulfilled during the event, he said.

Flipkart also recently launched their co-branded credit card, which has received positive initial feedback from customers. In addition, “our digital payments platform, PhonePe,” recently crossed the milestone of two billion transactions with 50 million monthly active users, said McMillon.

The company had solid top-line growth in this quarter as total constant currency revenue grew 2.9 per cent to $131.7 billion, with currency having a negative effect of approximately $1.3 billion, said Biggs of Walmart.  Both Walmart US and Sam’s Club delivered strong sales growth and Walmart International’s overall sales were solid despite some softness in certain markets including the UK and Canada, he said.

Consolidated gross profit margin declined 46 basis points on both reported and constant currency basis.  “While the inclusion of Flipkart in this year’s results contributed to the decline, we also continue to make strategic price investments in various markets, including the US, which pressured year-over-year comparisons,” said Biggs.

Operating income of Walmart was better than the company expected, down 2.9 per cent  on a reported basis and 2.4 per cent on a constant currency basis. Strong results from physical stores drove Walmart US operating income up 4 per cent, the fifth consecutive quarter of growth, while Sam’s Club delivered strong profitability with operating income up more than 19 per cent. 

“This improvement was offset by the expected dilution from Flipkart, as well as softer gross margin rates in the UK The deconsolidation of Brazil somewhat benefitted second quarter results versus last year,” said Biggs. “As expected, net interest expense increased 16.3 per cent due primarily to the company’s previous bond issuance related to the Flipkart transaction,” said Biggs.

Walmart is also betting big on China. The company  launched new Walmart Daojia delivery app in China. It announced plans to invest $1.2 billion to upgrade logistics network in China.The company also unveiled blockchain traceability platform for Walmart China.