Flipkart to remain a drag on Walmart’s bottom line

Four years ago, soon after raising what was then its largest ever funding round of $1 billion, Flipkart launched an annual sales event called the Big Billion Day. Since then, the event has been stretched to span four days and by forcing competitors to come out with a similar proposition, Flipkart has created something like the ‘Singles Day’ in China, which was pioneered by Jack Ma’s Alibaba Group.

In 2018, Flipkart broke all its own records during the four-day sale as the gross merchandise value (GMV) across online e-commerce platforms rose 64% during the festive discounting period to $2.3 billion, compared with $1.4 billion last year.

However, this rapid growth in GMV is still not delivering profitability and it is not expected to do so any time soon. Flipkart, which became Walmart’s biggest acquisition in May, is expected to drag down the profitability of its parent, at least till FY20.

At the 2018 Investor Community Meeting, Walmart’s Chief Financial Officer Bret Briggs gave the revised earnings guidance for FY19 and a fresh guidance for FY20 after including Flipkart. For FY19, earnings per share (EPS) is expected to be 25 cents lower and be anywhere between $4.65 and $4.80, compared to an earlier forecast of $4.90-5.05.

While the lowering of the forecasts is in line with Walmart, the world’s largest retailer, had said in May when it acquired Flipkart for $16 billion, the revision comes after the Bentonville, Arkansas-headquartered retailer posted its best quarterly U.S. sales growth in a decade for the quarter ended July 31.

“There is no underlying change to the business excluding Flipkart. When we closed Flipkart, we noted that we expect a negative impact to FY19’s earnings per share of about 25-30 cents. This included operating loses as well as interest associated to the debt we issued to fund the acquisition,” said Briggs.

Profitability at Flipkart is not likely to come anytime soon. Giving the guidance for FY20, Briggs said that the operating income was expected to further decline in low single digit percentage figures and the EPS was also expected to decline by a similar quantum in percentage terms.

No wonder then that on top of investors’ minds was the path to profitability for Flipkart. Although under Doug McMillon, president and CEO of Walmart, the world’s largest retailer has pivoted and changed its business model to be able to compete better in a digital world, the proof of the pudding through improved financial metrics of profitability is yet to be seen.

Analysts probed McMillon and his team for some sort of a timeframe on when there would be an inflection point and the strategic shift in Walmart’s business will reflect in the bottom line. But the best answer that they could get was a plea to view the company differently.

“I want to challenge your thinking about Walmart. There is a change within the company that is related to mindset, culture, behaviour and we are inventing again. I hope that you will assess us as a company of the future and not like the company you would have thought about years ago,” he said concluding a four-hour-long presentation by Walmart’s top management which was streamed live on its website.

McMillon admitted that there is a constant pressure from the board and investor community to improve profitability but said that he would always lean towards the long-term success rather than short-term gains. And Flipkart falls right in within that ideology.

“We are in India for the long-term and we are in India to be successful,” said Judith McKenna, president and CEO of Walmart International, as she explained to the investors that there is a long-term path to profitability for Flipkart.

A key driver on that path would be Flipkart’s product category mix. McKenna explained how Flipkart and the team in India is aware about growing the business in a healthy manner. “They deliberately grew a category like apparel which helps the overall margin mix and provides healthier growth,” she said.

Grocery could become the next big category for Flipkart. With trials already being carried out in Bengaluru, the grocery business will be expanded to three cities by the end of the year according to McKenna, and that is where Flipkart can leverage the strengths of Walmart.

McKenna was also impressed by the work Flipkart was doing using data and artificial intelligence to create more efficiencies and lower costs. An example of this is the augmented reality-based shoe sizing application on Myntra which not only provides customer satisfaction but also reduces the return rate of products.

The third key pillar for future profitability will be the private labels that Flipkart and its group companies are creating. “Flipkart is committed to being competitive on pricing. One of the ways they have done that is through private brands. They understand that the Indian consumer is just as price sensitive as anywhere else in the world and they will continue to develop private brands,” said McKenna. Walmart’s reach has already started helping the private brands within the Flipkart group as Walmart Canada’s website has started selling Myntra’s products.

But despite this confidence in the long-term vision of Flipkart, Walmart was not ready to put a timeline for the initial public offering for Flipkart. And while the markets were not surprised with the lowering of the earnings guidance, they weren’t particularly happy either. Walmart’s share price closed 1.94% higher on the NYSE at $95.81. With the scrutiny on Flipkart’s performance only likely to increase in the coming quarters, the challenge is on Bengaluru to deliver the results for Walmart.