Walmart spent nearly $900 million on the coronavirus in Q1 and says it’s a ‘reasonable assumption’ that they’ll spend that much in Q2

Walmart Inc. incurred nearly $900 million in coronavirus-related expenses during the first quarter, and the retail giant says it’s likely that it will spend about the same amount in the second quarter.

Much of the spend, $755 million, went towards bonuses for the company’s workers. Walmart
WMT,
+0.42%

has another bonus slated for its associates at a cost of $390 million.

“[W]e’ve already announced a second round of special bonuses in the U.S. which that will financially hit in the second quarter,” said Brett Biggs, Walmart’s chief financial officer, on the Tuesday morning earnings call, according to a FactSet transcript.

He says some expenses, like those for additional sanitizing and cleaning the stores, will carry on. But the latest round of bonuses already puts the retail giant at about one-third of the $900 million total from last quarter.

“So if the costs were in that ballpark again in Q2, I think that would probably be a fairly reasonable assumption at this point,” he said.

One of Walmart’s biggest rivals, Amazon.com Inc.
AMZN,
+0.92%
,
has also announced huge COVID-19-related expenses in the coming quarter. In Amazon’s case, the price tag is $4 billion.

See: Amazon will spend $4 billion or more on coronavirus response, potentially wiping out Q2 profit

Despite the costs, Walmart reported earnings and sales beat expectations. In addition to monster sales in the grocery category, the company was helped by the stimulus checks paid to Americans from the U.S. Treasury which gave other items like TVs, apparel, sporting goods and toys a boost.

“Discretionary categories really popped towards the end of the quarter,” Doug McMillon, Walmart’s chief executive, said on the call.

U.S. same-store sales rose 10%, with food and consumables leading the way. And e-commerce sales skyrocketed a whopping 74% for the quarter.

“We experienced unprecedented demand in categories like paper goods, surface cleaners, and grocery staples,” McMillon said. “For many of these items, we were selling in two or three hours what we normally sell in two or three days.”

With the shift in consumer behavior, McMillon says it’s time to stop calling the pickup and delivery option “online grocery” since it spans across a wide variety of merchandise.

Read:Amazon could face renewed antitrust scrutiny due to COVID-19 sales, analyst says

“[I]t’s going to end up being that you can do kind of a really quick pickup or delivery from a store location and it will be inclusive of general merchandise which helps us with mix and also improves the customer experience,” he said. “So our language will probably evolve away from online grocery to just being pickup and delivery, and we’ll talk to you more about what that means in the future.”

For this most recent quarter, food was the most robust category, which hurt margins by more than 100 basis points.

“The reductions in margins, especially when considering at least $900 million in coronavirus-oriented spend and the explosion in higher-cost online sales, is actually fairly benign, indicating that Walmart’s online business was able to largely handle this growth surge within its existing capability,” said Charlie O’Shea, Moody’s lead Walmart analyst.

“Going forward, we would expect Walmart to leverage these experiences and look to retain new customers as well as continue to deepen and broaden all customer relationships.”

McMillon said pickup and delivery were attracting new customers, with four times the number of customers trying these services since mid-March. And the Sam’s Club division has seen increased new member signups.

“That Walmart has outperformed Amazon, at least in growth terms, underlines both the deficiencies of Amazon in grocery – which generated the bulk of sales this quarter – and Walmart’s growing power in the segment,” said Neil Saunders, managing director at GlobalData Retail.

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“Having a wide range of fulfillment options, including delivery to home, collection from store – and by using stores for fulfillment – allowed Walmart to ramp up capacity in a way that many other players struggled to do. We also believe that by using stores effectively, Walmart mitigated some of the higher costs associated with the online channel.”

Target Corp.
TGT,
-1.82%

has also talked about the positive impact of using its stores to effectively cut online fulfillment costs.

CFRA called Walmart’s results a “blowout,” alleviating concerns that increased e-commerce and grocery sales would take a toll on profit.

“Walmart remains one of our top picks, as we see it as a ‘pandemic winner’ that is likely to pick up share from the distress taking place across retail, particularly small businesses, department stores, and others levered to shopping malls,” wrote Garrett Nelson, CFRA senior equity analyst.

CFRA rates Walmart stock buy with a $145 12-month price target.

And:J.C. Penney will have to close 25% of its stores, Cowen analysts say

Still, some experts are wary.

“Gross profitability continues its multi-year decent, margin compression price of competing against more tech-adaptive enterprises,” said Ryan Giannotto, director of research at GraniteShares, which offers the GraniteShares XOUT U.S. Large Cap ETF
XOUT,
+1.18%

. Walmart is the largest stock eliminated from the ETF because GraniteShares “seeks to exclude technologically vulnerable companies.”

“The insurmountable question is, despite this one-time shock, have Walmart’s long-term prospects materially changed? Tellingly, Walmart itself refuses to answer this question by suspending guidance.”

Walmart stock closed Tuesday down 2.1%, but has rallied 24% over the past year while the Dow Jones Industrial Average
DJIA,
+1.60%

has fallen 4.3% during the period.

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