(Bloomberg) -- The reaction to a whistle-blower’s allegations of improprieties at Walmart Inc.’s online business was sharp. The stock suffered its worst intraday decline in two weeks, showing just how deep the worries are over the company’s growth engine.
The shares bounced back before the market closed on Thursday and rose on Friday. But the abrupt, initial dip was enough to signal once again that, when it comes to the bid to catch up with Amazon.com Inc. in e-commerce, the world’s largest retailer has little margin for error.
The claims of cheating leveled Thursday by a former executive “could be an alarm -- but minor,” said Sucharita Kodali, an analyst at Forrester Research Inc. “If it turns out that Walmart completely fabricated online numbers and they are way smaller than reported, that would be a problem. There’s no indication of that yet.”
The whistle-blower lawsuit, filed in federal court in San Francisco, claims Walmart issued misleading results. Tri Huynh, a former director of business development, claims he was terminated “under false pretenses” after raising concerns about an “overly aggressive push to show meteoric growth in its e-commerce business by any means possible -- even, illegitimate ones.”
Huynh claims the company failed to process customer returns, mislabeled some products and, basically, painted a rosier picture of its online growth than what was really the case.
‘Disgruntled Former Associate’
Walmart said it investigated the allegations and found they had no merit. Greg Hitt, a company spokesman, called Huynh “a disgruntled former associate.”
Over the past three years, Walmart has spent billions to revitalize its once-moribund web unit, expanding delivery options, hiring fresh talent and making acquisitions. While sales soared last year, the spending has taken a toll on profitability. When the company reported slowing online growth and disappointing margins during the critical holiday quarter, investors pummeled the stock. And the business could bleed even more red ink this year, Chief Executive Officer Doug McMillon said last month.
“The marketplace is very receptive to any story that’s negative about anyone going up against Amazon,” Scott Galloway, a marketing professor at NYU, said on Bloomberg TV.
However they play out, the allegations are an additional headache for Marc Lore, the head of Walmart’s U.S. e-commerce business, who’s trying to take the website upscale with new apparel, home decor items and a partnership with the Lord & Taylor department store. Walmart has said it will focus more of its marketing spending on Walmart.com and less on Jet.com, the urban-focused startup that Lore co-founded in 2014 and sold to Walmart in 2016. That will hamper growth at Jet, which focuses on younger, more affluent customers.
Still, Walmart has maintained its growth forecast for the online unit. One bright spot has been the online grocery business. Walmart’s existing fresh-food supply chain gives it an advantage over Amazon, which, despite its acquisition of Whole Foods Market Inc., is still better at selling batteries than bananas.
Walmart said this week that it will expand home delivery of groceries to 100 metro areas this year. It has 1,200 stores where customers can pull up and have their orders brought to their cars.
“Online grocery pickup is going very well for them,” said Laura Kennedy, an analyst at Kantar Retail LLC.
The lawsuit, along with slowing growth, could prompt increased scrutiny of all aspects of Walmart’s online business. It shows that even a retailing behemoth can experience growing pains.
“They are going at 100 miles an hour here,” said Mark Stoeckle, CEO of Adams Funds, which has $2.4 billion under management and holds Walmart shares. “Was it intentionally deceptive? Or is it that the proper controls were not in place? From our perspective, this could be something. But based on what we know currently, it isn’t something right now.”
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