Dive Brief:

• Increased omnichannel sales brought on by the COVID-19 pandemic are accelerating efforts to improve Walmart's e-commerce profitability, but stockouts continue to hamper online and in stores sales, executives said on an earnings call Tuesday.
• Walmart's U.S. e-commerce sales were up 97% year over year (YoY) in the second quarter, leading to reduced losses in the channel. CEO Doug McMillon said on the call the company's move to ship e-commerce orders from 2,500 stores would be permanent.
• Stockouts continue to be an issue in essential and nonessential categories, as vendor supply chains experience disruptions related to the virus, and shifts in consumer habits create unseasonable demand. The CEO named beef and pork as two supply chains that continue to experience stress.

Dive Insight:

Omnichannel execution has resulted in palpable benefits to Walmart's e-commerce business, even as the pandemic has thrown the company many curveballs. Adjusted operating income increased 16.7% in the quarter and gross profit increased 42 basis points.

"The fact that margins actually expanded despite this massive increase in volume and significant COVID-19 costs provides validation that online-oriented operating costs are beginning to be rationalized, as well as an indication that there was some favorable mix shift away from lower-margin consumables and toward higher-margin general merchandise categories," said Moody’s VP and senior credit officer Charlie O’Shea in emailed comments.

But the retailer's in-stock status stands in the way of gains across channels — from essential to non-essential products related to certain hobbies, such as sewing and fishing, which have seen a surge in demand during the pandemic.

McMillon also said consumers briefly returned to the stock-up behaviors they displayed early in the pandemic, as COVID-19 cases spiked in pockets of the country.

"If you've been in some stores with us early in the second quarter, we could use inventory everywhere. I saw some scores that were remarkably light ... It was deeply concerning, and the team was obviously scrambling," McMillon said.

In-stock status is improving, he said, but some categories remain a challenge. Total inventory was down 4.6% YoY in the U.S. in Q2, due to higher-than-normal stockouts. But this is a smaller drop than the 6.1% YoY drop reported in the previous quarter.

Executives declined to offer any sense of what the future holds for peak season or beyond, continuing to withhold guidance. But they said Walmart's omnichannel model is likely to continue to improve, despite continued uncertainty surrounding the virus and a second round of economic stimulus payments in the U.S.