Walmart just dealt a major blow to other retailers

Brian Sozzi
·Executive Editor
4 min read
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Walmart is putting its nearly $18 billion cash hoard to good use this year, and how it's spending it should absolutely scare the heck out of most other retailers.

Somewhat getting lost in the market's maniacal focus on Walmart's fourth quarter earnings miss on Thursday are two new aspects to the retailer that could help widen its competitive moat. While investors don't seem to care much about them today (shares are down 6% post earnings), it could seriously alter Walmart's future earnings power because of that strengthened market positioning.

First is the company's aggressive $14 billion capital investment plan for 2022. If that number is hit, it would mark a roughly $4 billon year-over-year increase from 2020. It would be the most capital Walmart has invested in its business since it spent $13.5 billion in calendar year 2011, according to Bloomberg data.

For a company really no longer building U.S. super centers and going gangbusters with international store expansion, the year-over-year increase is significant and indeed stands out. The way Walmart puts it, the large sum of money will be used to take its business operations to the next level to support the future of consumption.

"Around $14 billion with a focus on supply chain, automation, customer-facing initiatives and technology," Walmart said of its 2021 capital investment plan on its earnings release.

In other words, expect Walmart to continue to expand its same-day delivery reach (now live at 3,000 U.S. stores), bolster its online operations (think more functionality and selection) and improve warehouse efficiencies. Taken together, Walmart will likely get tougher to beat on merchandise prices and speed of service (among other areas) as a result of its spending spree.

Workers sanitize items outside a Walmart that has been closed following the deaths of three people connected to the store after they were infected with the new coronavirus and at least six more employees have tested positive for COVID-19, Friday, April 24, 2020, in Aurora, Colo. (AP Photo/David Zalubowski)
Workers sanitize items outside a Walmart that has been closed following the deaths of three people connected to the store after they were infected with the new coronavirus and at least six more employees have tested positive for COVID-19, Friday, April 24, 2020, in Aurora, Colo. (AP Photo/David Zalubowski) (ASSOCIATED PRESS)

"I don’t know that I see it as a veiled threat to any one direct competitor, but rather a very strong statement that Walmart isn’t going to lose to a near-field competitor," Jefferies retail analyst Stephanie Wissink tells Yahoo Finance of the capital investment number. "And recognizing its power position — proximity to 90% of the U.S. population and THE #1 retailer for most vendors globally — it has a responsibility to be better, faster or a direct competitor could encroach upon that dominance, as we’ve seen already with Amazon and with Target."

The second item that is being overlooked by investors is Walmart's decision to hike wages for workers.

Walmart said Thursday it's raising wages for 425,000 of its nearly 1.5 million employees. Yahoo Finance's Julia LaRoche first reported that wage for Walmart’s 425,000 store associates in the digital and stocking workgroups will increase to a range of $13 to $19 per hour, depending on location and market. The pay increase will take effect on March 13.

The pay hike will weigh on Walmart's profits this year, as suggested in its below consensus earnings outlook. But for the world's largest retailer, a generally happy workforce (because of higher compensation) is a good thing to have when they are being asked to do more tasks than in prior years (servicing online orders from stores, for instance). Higher paid workers will likely stay with Walmart longer, reducing the cost of doing business over time and improving productivity.

For retailers not named Walmart, well, this pay hike sucks for them. In effect, it could raise their costs of doing business and make their operations less efficient. And that could cause them to slip behind Walmart in key areas.

"We believe that Walmart's plan to raise wages could increase the competition for labor in areas where Walmart and the dollar stores are within close proximity," warned Jefferies analyst Randal Konik in a new note.

So it begins.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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