Flipkart acquisition continues to hit Walmart's profit margins

This is the first complete financial year where Walmart’s consolidated quarterly results will include Flipkart’s books as well, and till now the Indian e-commerce company has already cost Walmart dearly in its gross and operating profit margins.

In Q1 FY20 the operating profits for Walmart had tumbled down by 38% to $720 million. In the quarter ended July 2019, the dip was albeit controlled to 29.6% taking the figure to $893 million.

International net sales fell from $29.45 billion in Q2 FY19 to $29.13 billion in the corresponding quarter in the current fiscal. The consolidated gross profit margin declined by 46 basis points.

It’s worth noting that Walmart’s financial calendar runs from February to January.

Where the International business made progress with respect to expense management with 36 basis points in leverage, according to the statement given by Walmart’s EVP and CFO Brett Biggs to Financial Express, the 29.6% fall in operating income was on a reporting basis.

The decline in the figure on the basis of constant currency was 27.3%.

Contrastingly, in the US, net sales increased by 2.9% to $85.2 billion and the operating income grew by 4% to $4.65 billion for the quarter. In the international markets the opposite performance is powered by Flipkart as the showrunner.

The continuous decline in gross profit margins and operating income counts Flipkart’s inclusion in the US retail giant’s books.

However, as per Walmart’s statement last year, the company had claimed to be expecting a loss of around $1.8 billion in FY20, which means $0.60 worth loss per share. This statement was made right after the acquisition of Flipkart in 2018.

A few pertinent questions that these losses still raise are that given Walmart is a public company and is subject to volatile share prices, market capitalization and share, how long can it afford to bear the costs that Flipkart’s losses bring to its books.

Especially considering the changes in FDI policy that were enforced in February this year by the Indian government became a major setback in Waltmart’s plans with Flipkart.

And now, another draft e-commerce policy is in the works that would regulate foreign exchange in the segment. If this policy is not in favour of Walmart's plans and expectations with the Indian economy, Flipkart's future would be at risk.

This is factoring in how Doug McMillan, the CEO and President of Walmart, has repeatedly expressed his excitement over the opportunities that Indian market presents for the firm, with expectations that the new policy will be for the better of all parties, unlike the last one.

The company has specifically been hopeful about its future in India with the recent figures achieved by Myntra in its recent sale with a maximum of 7,000 orders per minute and used the network of kirana stores to deliver majority (70%) of its 8.5 million orders. PhonePe's consistent growth in MAUs to 50 million and in the market share around UPI transactions.

It has even strengthened its investment portfolio in India by committing $50 million to agritech startup NinjaCart.