Wal-Mart Store Makeover Could Goose Sales

Wal-Mart (NYSE:WMT) is the world’s largest retailer, with more than $400 billion in store revenues in 2009. Major competitors include Costco (NASDAQ:COST), Target (NYSE:TGT) and Best Buy (NYSE:BBY). Wal-Mart offers consistently low prices in both its retail stores and warehouse clubs.

The retailer recently launched a store remodeling initiative called “Project Impact” that is designed to boost efficiency and sales. Wal-Mart launched Project Impact in 2008 and expects to have remodeled about 32% of its stores by the end of this year. Wal-Mar has committed to remodeling 100% of its stores by the year 2014. Below we explain how the remodeling effort is impacting Wal-Mart’s business.

Remodeling will lead to improvement in sales and increased efficiency

The remodeling effort includes updating store layouts and displays in order to highlight the most popular merchandise. Wal-Mart is trimming its product offerings to fit the new layout, resulting in reduced inventory and improved inventory turnover. These efficiency gains should reinforce Wal-Mart’s price leadership, attracting more customers and driving revenue growth.

This is especially critical because new customer data indicate that Wal-Mart is starting to attract more upscale customers with higher household incomes than in the past. Newer, more attractive stores could accelerate Wal-Mart’s penetration into higher income segments.

Unintended consequences of Project Impact

We noted above that the remodeling effort drove Wal-Mart to drop less popular products. Interestingly, the company noted that discontinuing these items resulted in additional sales reductions.

For example, if customers don’t find their favorite one-pound bag of brown rice at Wal-Mart, the retailer can lose an additional $60 to $80 over the price of the rice bag. The reason: If shoppers can’t find their favorite item in a store, they tend to buy other items elsewhere as well. As a result, Wal-Mart is bringing back several product categories that it discontinued under Project Impact.

Project Impact is showing positive results already

During a recent Bank of America Merrill Lynch Consumer Conference, Wal-Mart executives indicated that Project Impact was already yielding positive results. Wal-Mart believes that the remodeling has driven a sales boost of between 1.2% and 1.5%. Although the company’s gross margins have remained flat, inventory volume has decreased by 6% to 8%, thus improving Wal-Mart’s working capital position. Given that the company manages about $30 billion of inventory, a 6% to 8% reduction is very significant.

You can see the complete $65.14 Trefis price estimate for Wal-Mart’s stock here.