Wal-Mart’s Express Stores Could Be A Valuable Source Of Growth

Due to its existing wide reach, Wal-Mart (NYSE:WMT) has a limited scope of expansion in the U.S. It has however been experimenting with smaller format stores domestically to boost its growth, apart from international expansion. These smaller stores are called Express stores and are one-tenth the size of a typical Wal-Mart Supercenter, and offer 15,000 items in comparison to 100,000 offered at a Supercenter. ^[1]

Although the size is much smaller relatively, Express stores offer day-to-day groceries and general merchandise and so are bound to attract customers who shop regularly for their daily needs. With the market becoming saturated, changing consumer preferences and increasing space constraints, Express stores will play a significant role in Wal-Mart’s expansion strategy.

See our complete analysis for Wal-Mart

Change In Consumer Trends Favors Small Format Stores

With rising fuel prices, customers prefer to buy daily groceries and other items from a store located in their vicinity. As the Supercenters are situated quite far away from each other, customers prefer to shop locally rather than having to drive all the way to a big-box store. The Express stores are expected to fill this gap.

Moreover, customers do not like to spend a lot of time inside the stores and prefer to buy necessities quickly on their way to work or home. The smaller format offers them significant time and cost savings.

Effective Format For The Urban Market

The majority of Express stores are operational in rural regions right now with the idea of capturing market share from dollar stores and large pharmacy chains like CVS and Walgreen, which are capturing a greater share of customers buying groceries and non-pharmaceutical products. ^[1] The retailer opened its first Express stores in June 2011 and had 11 stores operational at the end of July 2012 in a to test if it could benefit from these channels. ^[1]

In addition, we believe that though Wal-Mart is popular with budget constrained shoppers, it has an opportunity to target higher income buyers in large U.S. metro areas. Many big cities have space constraints and busy schedules limit the desire of many professionals from driving to a Supercenter. The Express store format could prove to be quite effective here.

Wal-Mart’s revenue per square feet has remained stagnant for the last two years in the U.S. In fact, it has not yet reached pre-recession levels. An effective implementation of the Express store expansion strategy will have a positive impact on the revenue per square foot of its U.S. operations.

Despite the stagnant growth, the U.S. operations contribute about 54% to Wal-Mart’s value as per our estimate. Therefore, any strategy that could revive the growth in this region is likely to have a meaningful impact on the stock.

Our price estimate for Wal-Mart stands at $70, implying a discount of about 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. NC is test market for smaller Walmart Express stores, News observer, July 21 2012 [↩] [↩] [↩]