Walmart just showed it's being even more aggressive to take on Amazon

Walmart's latest quarterly earnings report just revealed how the biggest retailer in the world is being even more aggressive in order to take on Amazon.

In the midst of a trade war between the U.S. and China, and in the wake of two deadly shootings at Walmart stores, everyone is tuned in to what Walmart has to say about tariffs and firearms. And while those are two important issues, there's also something to be said about how Walmart is accelerating online.

Walmart's e-commerce sales during the fiscal second quarter were up 37%, in line with what it delivered in the prior period. Walmart is still calling for online sales to be up 35% for the year, slightly less than what it logged in 2018.

This follows a report in late July that Walmart's online team was facing pressures internally as cash was being thrown at money-losing efforts, like acquiring digitally native brands that still aren't profitable. According to estimates from Morgan Stanley, Walmart's online business in the U.S. could lose about $1.7 billion this year, up from $1.4 billion in 2018.

Still, to keep pace with Amazon, Walmart sees some of these losses as a necessary evil.

The retailer on Thursday hinted at some investments it's making to remain competitive online. It said it already achieved its goal of reaching 75% of the U.S. population with a next-day delivery option, something it was previously hoping to do before the year was over. It only just announced the initiative in May. On Thursday, CEO Doug McMillon said in prepared remarks that Walmart is now "working to expand it even further," including by expanding the number of items available for next-day shipping.

"Customers are responding well, and we're improving our economics by having inventory close to the customer which helps us reduce split shipments and the use of air freight," McMillon explained.

Furthermore, Walmart hinted it's looking to grow its third-party marketplace, something it hasn't been as vocal about in the past. It has been more vocal about curating its own brands and creating marketplaces on its website with partners such as Lord & Taylor for high-end dresses and Fanatics for fan gear. Walmart's marketplace for third parties still pales in comparison with that of Amazon.

"We've quickly grown this piece of the business in recent years, and I know we can do even more as we look ahead," McMillon said.

Walmart also this summer said it would begin merging workers at Jet.com, the e-commerce platform it acquired in 2016, with its own.

"The organizational changes we made in the U.S. during the quarter in areas like supply chain and finance are a critical step in our journey," McMillon said on Thursday. "We've maintained some separation in merchandising for stores and e-commerce to keep the focus on our goals and enable speed."

'A North Star'

"The headline should read: 'Walmart gets digital,' and every move they've made for the last year shows that," said Jon Reily, vice president of global commerce strategy at Publicis Sapient, a firm that specializes in helping retailers run their online businesses.

"Two straight quarters of nearly 40% growth in their e-commerce programs, and same-store sales growth at a time when many retailers are struggling to find their footing in both the physical world as well as the digital one?" he said. "Outstanding. That's the only way to say it."

Reily expects Walmart to benefit from Amazon and FedEx parting ways. FedEx earlier this month said it won't be renewing its ground-delivery contract with Amazon at the end of August.

"Walmart would love to have all that next day air capacity to combat Amazon's one-day Prime shipping nationwide program," Reily said. "This is win-win for FedEx and Walmart."

During a call with members of the media on Thursday morning, Marc Lore, the head of Walmart's e-commerce business in the U.S., said Walmart added more than 1,200 brands to its website so far this year, including Michael Kors. He said the company is seeing growth in "important margin-enhancing categories."

Online grocery continues to drive sales, Lore said, as Walmart has been building its network of stores capable of delivering groceries same day and preparing orders for in-person pickup.

Stepping back from grocery, there are three ways Walmart can position its digital business to improve margins overall, according to GlobalData Retail Managing Director Neil Saunders.

One is to increase the average shopper's order size, "something which seems to be happening naturally over time as customers familiarize themselves with the website and apps," he said. Two is to use stores as more of a distribution network, "thereby reducing the need for air freight and split shipments." Three is to make operations more streamlined, hopefully eliminating overlap between the stores and online teams, Saunders explained.

"Bottom line: Walmart should be singing from the rooftops, and other retailers should use them as a North Star for how to do digital right," Reily said about the results.

Walmart shares, valued at $317.7 billion, were up more than 5% Thursday morning. Amazon shares, valued at $878.3 billion, were up about 0.6%.

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