Third-quarter earnings reports from Walmart and Target couldn’t have had a wider shift in tone—and the retail giants’ supply chain cost management and corresponding ability to maneuver the East and Gulf Coast port strikes may have made the difference.
The three-day work stoppage impacted both mass merchants’ bottom lines, with Walmart CEO Doug McMillon saying the strike lifted its sales growth “by a small amount and negatively affected operating income growth by a larger amount.”
McMillon noted that inventory is in “very good shape” in the wake of the strike, with a 0.6 percent year-over-year decline on more than 5 percent sales growth in the U.S.
Target gave more detail into the impact of the port strike, with CEO Brian Cornell saying that the strike ultimately led to “higher-than-expected” supply chain costs and more inventory that normal.
“In order to protect our in-stocks and ensure we’re ready for Q4, our team changed the timing of certain shipments and directed a portion of our receipts to other ports,” Cornell said. “Receipt timing changes and the impact of softer-than-expected sales in discretionary categories resulted in elevated levels of inventory earlier than in a typical year, leading to higher-than-expected costs in our supply chain.”
The company rerouted select shipments to West Coast ports to protect key seasonal programs for the fourth quarter, which added to the supply chain costs.
Cornell admitted “we weren’t pleased with this cost pressure,” but expressed confidence that the actions protected third quarter in-stocks while supporting the retailer’s holiday merchandising plans.
Target’s inventory at the end of the quarter was 2.9 percent higher than the year prior, outpacing total sales increases of 0.9 percent.
Margins tell the story
Cost management across the supply chain appears to what currently sets Walmart and Target apart.
Walmart’s supply chain initiatives are continuing to drive down costs for the retail giant, narrowing losses in its rapidly growing e-commerce department and helping expand gross margins by 0.2 percentage points to 24.2 percent.
Target saw the opposite effect, with gross margin contracting at the same 0.2-percentage-point rate to 27.2 percent. The retailer said digital fulfillment and supply chain costs were the biggest factors in dragging down the margins by 0.9 percentage points. This is due to the cost of managing the higher inventory levels, increased digital sales volume and new supply chain facilities coming online.
The disparity comes even as Walmart is feeling the brunt of the pressure from increased online orders moving through its supply chain, which traditionally depresses retail margins. While Walmart saw its global e-commerce net sales soar 27 percent in the quarter, Target’s digital comparable sales jumped just 10.8 percent.
For Walmart, like top online competitor Amazon, the tone has been set by a major decline in delivery costs. John David Rainey, executive vice president and chief financial officer at Walmart, said these factors contributed to the third consecutive quarter of approximately 40 percent reduction in U.S. net delivery costs per order.
Walmart has been able to accomplish the cost cuts by leveraging its U.S. network of stores, with 4,600 offering in-store pickup and 4,500 enabling delivery.
Store-fulfilled delivery increased nearly 50 percent year over year in the quarter, surpassing $2.5 billion monthly run rate. That marks 12 consecutive months of deliveries above $2 billion, according to Rainey.
“As we scale our store-fulfilled delivery business and expand our catchment areas, we’ve seen significant improvement in batch density with orders per delivery up 20 percent,” said Rainey in the Tuesday earnings call. “In addition, the popularity of expedited delivery has resulted in more than 30 percent of orders coming from customers and members that elected to pay a convenience fee to receive their delivery in less than one hour or less than three hours.”
More than 50 percent of the retail giant’s e-commerce fulfillment center volume is now automated, “which is twice as much at this point last year,” according to Rainey. As of August, roughly 1,800 stores received some level of freight from 15 regional distribution centers that are in varying stages of automation implementation.
Target may have had a rough go compared to Walmart, but that’s not to say the retailer hasn’t made efficiency improvements within its own fulfillment network, with the company’s 11 last-mile sortation centers handling 25 percent more packages than last year.
On Wednesday’s earnings call, Michael Fiddelke said the sortation centers have saved the company “tens of millions of dollars” in last-mile delivery costs in 2024, compared to other fulfillment options.
“As of Q3, average shipping times across our network are nearly a day faster than this time a year ago,” said Target chief operating officer Michael Fiddelke on Wednesday’s earnings call. “We’ve also implemented changes to reduce split shipments, driving an increase in units fulfilled per package, eliminating a source of friction for our guests and reducing last mile delivery costs as well.”
The retailer saw nearly 20 percent growth in same-day delivery and double-digit growth in its Drive Up curbside pickup option.
