Walmart (NYSE: WMT) is betting big on artificial intelligence and robots. Specifically, the retail giant is betting that customers will voluntarily submit to behavioral science experiments with artificial intelligence (AI).
In fact, it converted a Long Island Walmart Neighborhood Market into a combination AI research lab and data center. Artificial intelligence monitors customer behavior, stock levels, and other factors through special cameras, Walmart admits in a press release.
AI in the store; or Intelligent Retail Lab (IRL), can recognize products on shelves and compare quantities to sales, Walmart claims. Moreover, the AI tells associates which products they need to restock.
“The focus will be on learning from the technology and not implementing changes to operations in haste,” Walmart writes of the IRL. Thus, Walmart is committing to AI for the long-haul.
Walmart deploys Robot Army
Artificial intelligence is not the only experimental technology Walmart is deploying in its stores.
Walmart is putting thousands of robots on its sales floors, Big Think reports. For instance, robot janitors will clean floors, while simple robots will monitor stock levels.
Walmart plans to Automate Stocking
Meanwhile, Walmart is testing the “FAST Unloaders” an automated unloading conveyor system in 1,200 stores.
The FAST Unloader is an automatic conveyor belt that moves boxes out of a truck and places them into carts. Associates take the carts to the carts to the proper location in the store. Interestingly, FAST’s manufacturer; Pulseroller, claims its system can direct merchandise to the proper location by reading a barcode.
Walmart could further automate this system by using robotic carts that take the merchandise to the right location. For instance, FAST could load a cart with toys, and the car will drive to the toy department. Once in the department, an associate will unbox the merchandise and stock the shelves.
Will Automated Stocking Add Value to Walmart?
Walmart’s management hopes to reduce labor costs, improve efficiency, speed operations, and reduce the risk of loss by automating stocking.
Robotic stocking can reduce losses by reducing human errors and the possibility of employee theft. A robot is not likely to steal TV sets and sell them to a fence, for instance.
I think automated stocking could add a lot of value to Walmart – if it works. For example, Walmart could open more stores because of reduced labor costs. In addition, Walmart could open more stores in areas with high labor costs; like cities with a $15 minimum wage.
Plus, Walmart could stock more merchandise and a greater variety of items. Importantly, Walmart could pass its saving onto customers in the form of lower prices to increase sales.
Finally, automated stocking will help Walmart compete with Amazon (NASDAQ: AMZN) by lowering prices and increasing variety and efficiency. Finally, Walmart could increase profits by doing less with more. Theoretically, Walmart could operate more stores and larger stores with fewer people with automated stocking.
Will AI Management Help Walmart Make More Money?
Stocking is not the only labor cost, Walmart is trying to cut. CNBC reports Walmart is trying to cut the size of management staffs.
Given that revelation, one goal of the IRL could be to replace store managers with algorithms or AI. To explain, instead of a manager, an AI could tell Walmart associates what to do. The AI could tell associates what it to restock and what outdated products to remove.
Walmart is taking a huge risk here because nobody knows how human associates will react to AI management. My guess is some associates could welcome AI management, after all the AI is probably smarter than many managers. Additionally, AI is unlikely to be racist, arrogant, corrupt, sexist, or nitpicking.
Will AI Replace Human Retail Managers?
Human managers often waste employees’ time with micromanagement, nick picking, needless training, and useless advice. Thus, eliminating managers could make stores more efficient and improve employee morale.
Oddly, finding or training good retailer managers is hard. I have seen signs promising a cash reward to people who refer experienced retail managers to open jobs in Dollar Tree Stores (NASDAQ: DLTR). Given the competition, Walmart wants to stop running a school for retail managers.
Finally, a smaller staff could allow Walmart to increase wages and benefits. Thus, Walmart could hire only a few highly experienced and competent associates to run its stores. Like Costco (NASDAQ: COST) Walmart could pay extra for the best associates.
Walmart’s Radical Retail Experiment
Walmart is conducting a radical retail experiment that could be as disruptive as anything Amazon is doing. Consequently, Walmart is taking a huge risk investors need to understand.
Under these circumstances, investors will ask if Walmart is making money. Generally, companies do not undertake radical experiments until management gets scared. Therefore, I think the situation scares Walmart’s management , a development that should frighten investors.
Notably, Walmart reported its quarterly revenues fell for the first time in a year on 30 April 2019. To explain, Walmart reported quarterly revenues of $128.028 billion on 31 July 2018 and $138.783 billion on 1 January 2019. Yet, Walmart reported quarterly revenues of $123.925 billion on 30 April 2019.
However, Walmart’s cost of revenues is falling which justifies the experiments with new technology. In detail, Walmart reported a $104.907 billion cost of revenue on 31 January 2019 that fell to $93.034 billion on April 30, 2019. Thus Walmart’s commitment to new technology and efficiency could pay off.
Is Walmart Making Money?
Walmart is making less money from its business. For instance, Walmart reports a quarterly gross profit of $30.891 billion April 30, 2019.
That gross profit was down from $33.886 billion on 31 January 2019 and $30.383 billion on April 30, 2018. In addition, Walmart’s gross profit fell from $5.75 billion on 30 April 2018 and $6.057 billion on 31 January 2019 to $4.945 billion on 30 April 2019.
Conversely, Walmart’s net income rose from $2.134 billion on 30 April 2018; and $3.697 billion on 31 January 2019, to $3.842 billion on 30 April 2019. Thus, Walmart is making less money, but keeping a little more of the money it makes.
Perhaps these numbers indicate Walmart is getting more efficient. On the other hand, that efficiency could be too little to reverse Walmart’s revenue slump.
Walmart’s Cash Flow is Declining
Ominously, Walmart’s business is generating less cash. Specifically, Walmart’s free cash flow fell from $3.541 billion in April 2018 to $1.4 billion in April 2019. Additionally, Walmart’s operating cash flow fell from $6.213 billion in April 2018 to $6.213 billion in April 2019.
Oddly, Walmart’s revenues grew by 1.01% in the quarter ending on 30 April 2019. I think rising revenues and a falling cash flow shows, Walmart has to spend more money to sell merchandise. Thus, Walmart’s expenses could be increasing.
The push for AI management, automated stocking, and robotics is a justifiable effort given the cash flow drop at Walmart. Simply put, Walmart needs to get far more efficient, quickly, if it wants to survive.
Can Walmart Remain Competitive?
In particular, Walmart’s management wants to maintain the company’s vast US footprint of 4,769 stores with a smaller staff. Additionally, management wants to preserve Walmart’s historically low prices; which are its greatest advantage in the retail wars.
Notably, competitors like Kroger (NYSE: KR); America’s second largest grocer, Walgreens (NASDAQ: WBA), and Amazon are enhancing their capabilities. Kroger, for example, plans to open 20 robotic fulfillment centers across the US with help from the British company Ocado Group PLC (LON: OCDO), Data Driven Investor reports.
Significantly, I recently bought a bottle of 100 Xtra Strength Bayer Aspirins that normally sells for $13 for $3.39 at Walgreens. Thus, Walgreens is mimicking Walmart’s deep-discounting strategy.
These developments could force Walmart to make expensive investments in risky technologies and new infrastructure to remain competitive. In particular, growing competition could force Walmart to open hundreds of new smaller locations with expensive automated stocking systems to counter low prices at Walgreens.
Thus, Walmart could spend vast amounts of money to remain competitive; in addition, to the billions it will need to invest in same-day delivery infrastructure. Consequently, Walmart (NYSE: WMT) could be a far riskier investment than many people think.
How Much Cash does Walmart Have?
Significantly, Walmart’s liquid assets are smaller than you might assume. On April 30, 2019, for instance, Walmart had no short-term investments. However, Walmart had $9.255 billion in cash and equivalents on that day.
On the other hand, Amazon (NASDAQ: AMZN) had $37.027 in liquid assets on 31 March 2019. Specifically, Amazon reported $23.115 billion in cash and equivalents and $13.905 billion in short-term investments at the end of March.
Walmart has a lot of cash, but its biggest competitor has nearly four times more cash. That alone will make it difficult for Walmart to compete.
Is Walmart (NYSE: WMT) Overvalued?
Given the realities, and financial numbers I think Mr. Market overvalued Walmart at $113.26 a share on 22 July 2019.
However, I concede Walmart is still a good dividend stock that will pay 53₵ a share on 3 September 2019. Moreover, Walmart’s dividend grew by 1₵ in 2019, the company a 52₵ dividend on 2 January 2019 and 53₵ on 1 April 2019.
Impressively, Walmart is continuing 44 years of dividend growth, Dividend.com reports. Plus, Walmart shares offered investors a dividend yield of 1.86%, an annualized payout of $2.12, and a payout ratio of 44.1% on 20 July 2019.
In conclusion, Walmart is still a good dividend stock, but the company is taking serious risks. Investors need to be careful with Walmart because of the bets with technology its management is making.
Originally published at https://marketmadhouse.com on July 18, 2019.