Wal-Mart Stumbles on Weak Sales: Are Neighborhood Markets the Fix?

Source: http://www.flickr.com/photos/fruitnet/

Source: http://www.flickr.com/photos/fruitnet/

When you’re the world’s largest retailer and the second-largest public corporation on the planet, Wall Street sets high expectations. Unfortunately (or fortunately, depending on which side of the fence you’re standing on), Wal-Mart Stores Inc. (NYSE:WMT) fell a little short on Thursday morning. The retailer reported net sales of $128.8 billion in the fourth quarter, up 1.4 percent on the year but falling short of analyst expectations for a 1.8 percent increase to $130.23 billion. Earnings fell 19.8 percent on the year to $1.34 per share, below the mean analyst of $1.59 per share.

The miss was a drag for investors, but Wal-Mart padded its earnings with some good news. First, the company’s board of directors approved an increase in the annual dividend to $1.92 per share from $1.88 per share, marking the 41st consecutive annual increase. Second — and much more importantly — Wal-Mart announced that it is dramatically accelerating its rollout of small-store, or “neighborhood,” shopping centers in the United States. Wal-Mart is targeting between 270 and 300 new small-store store openings during the coming fiscal year, as well as 115 new supercenters. These new additions will build on Wal-Mart’s existing fleet of 4,177 locations in the United States.

“Neighborhood Market is performing comparable or favorable to leading grocers,” said Walmart U.S. President and CEO Bill Simon. “Our small store expansion, in addition to providing customers access to a wide variety of products, including fresh, pharmacy and fuel, will help us usher in the next generation of retail. This will combine thousands of points of physical access with digital retail experiences that include initiatives such as Site to Store and Pay with Cash.”

The expansion will come at a price, as most do. Wal-Mart revised its U.S. segment capital expenditures forecast to a range between $6.4 billion and $6.9 billion from a range between $5.8 billion and $6.3 billion, an increase primarily due to the accelerated small-store rollout.

If Wal-Mart’s expansion strategy seems a little aggressive, that’s because it is. The company has suffered slow or negative sales growth in several quarters recently, including a 0.4 percent same-store sales contraction in the fourth quarter and a 0.4 percent same-store sales contraction for the full year. Comparable store traffic declined 1.7 percent in the U.S. segment, and despite a huge push into the space this past holiday season, online shopping only had a 0.3 percent positive impact.

For a little bit of context, Wal-Mart gets about 59 percent of its total revenue from the U.S. segment, about 29 percent from the international segment, and about 12 percent from Sam’s Club.

“For fiscal year 2015, the Walmart U.S. team is focusing on growth and returning to positive comps,” said Simon. “To get there, we will drive additional improvements in price investment and merchandise, test our market ecosystem and pilot our tethering concept.” Tethering is an idea that Wal-Mart began rolling out in earnest last year. The idea is that Wal-Mart’s satellite stores, such as the neighborhood markets and the few express stores in service, will share back-end logistics with nearby supercenters.

Here’s Simon on the subject: “So, imagine you’re at work, and you decide you need gas on your way home, and you know that Walmart Express store — because you go by it every single day — has fuel, and you decide what you want for dinner, and you want a rotisserie chicken, and, by the way, later that night, you decided that you’d like to play Scrabble with your spouse. I mean, go on your phone, let the store know that you want a Scrabble board, certainly something that’s not going to be carried in a 10,000 SKU assortment, and it will be there … or a sewing machine or anything that’s in the Supercenter assortment.”

Walmart Tethering

Source: Wal-Mart Stores