Wal-Mart Cuts Its Growth Forecasts And Slows Store Expansion

Amid an uncertain retail environment hindered by sluggish consumer spending, store giant Wal-Mart (NYSE:WMT) has cut its growth forecast for the current fiscal year. During an investor day presentation last week, the retailer lowered its sales growth forecast for fiscal 2015 to 2%-3%, down from its previous guidance of 5%. ^[1] The company hasn’t seen positive comparable sales growth for almost six quarters now and its recent forecast suggests that this will continue in the next two quarters. The weakness in Wal-Mart’s comparable sales growth can be gauged from the fact that it expects only a marginal increase in its revenues despite the aggressive roll-out of Neighborhood markets. The company plans to open a total of 240 small stores during the year along with 120 Supercenters.

The Big-Box format in the U.S. has almost run its course and the future of retailing lies in the small store arena. Being the biggest retailer in the country, Wal-Mart has been at the forefront of this change. Although the company has expanded its small store network aggressively so far, it has surprisingly reduced the number of new store openings for the next year. Wal-Mart plans to open just 200 Neighborhood markets in fiscal 2016, while analysts at Janney Montgomery Scott LLC were predicting the figure to be around 500. ^[1] Even though 200 looks a decent figure for store openings in a single year, it is almost insignificant in the context of the small store industry. ^[2]

Wal-Mart’s bigger stores have been struggling with lower store traffic for the past couple of years now. This can be attributed to the fact that U.S. buyers have been gradually shifting to online and small store shopping. However, CEO Doug McMillon believes that there are a couple of more reasons responsible for the slump in foot traffic. He stated that in-stock levels in several stores aren’t up to the mark and the checkout lines are too long, which is discouraging buyers from visiting Supercenters. Understandably, the retailer has significantly reduced its Supercenter roll-out for the next year to just 60-70 outlets. ^[2]

With the pullback in expansion plans, Wal-Mart projected its capital expenditure for the next year at $11.6 billion, down from its earlier forecast of $12.9 billion. However, it will invest close to $1.5 billion in e-commerce projects next year, 50% more than what it plans to do this year. ^[2] To bolster its comparable sales growth, Wal-Mart needs to have a sound e-commerce platform, for which its has to take giant strides. E-commerce retail industry is going through a tremendous growth phase, and the retail giant should make the most of it. It is likely that sometime in the future, online retailing’s honeymoon period will come to an end. Wal-Mart needs to transform its e-commerce channel into a significant revenue contributor long before that happens.

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Neighborhood Markets’ Expansion should have been More Aggressive

Over the years, Wal-Mart has shifted its focus from big-box expansion to small store expansion in the wake of growing concerns of self-cannibalization. The company has been aggressively opening Neighborhood markets and Express stores in under-penetrated urban markets to continue its domestic expansion and present better competition to dollar chains, who have been nibbling Wal-Mart’s low end customer base. In October last year, the retailer unveiled plans to open 120-150 small stores, and 115 Supercenters in fiscal 2015. Soon after, it uplifted its expansion plans to about 270-300 small stores in the U.S in fiscal 2015. However in its recent update, Wal-Mart lowered its fiscal 2015 target slightly to 240 stores and it plans to open even fewer small stores next year. ^[2] This move is somewhat surprising as many expected Wal-Mart to step up its small store expansion following the bidding war for Family Dollar, which was considered as a potential acquisition option for the retail giant.

Family Dollar is all set to complete its merger will Dollar Tree for $8.5 billion, after rejecting two previous offers from Dollar General due to antitrust concerns. Dollar General has uplifted its latest offer to $80 per share, and is also trying to get FTC approval for the deal, that will eliminate antitrust issues. ^[3] Both Dollar Tree and Dollar General are trying to get a hold of Family Dollar to gain scale in targeting the shoppers to which Wal-Mart caters with a more focused and accommodating array of merchandise.  With its recent decision to not expand Neighborhood markets as aggressively, the retail giant can lag behind dollar chains in the small store race.

Slowdown in Supercenter Roll-Out Makes Sense

Wal-Mart operates a vast network of 4,200 stores in the U.S., out of which around 3,300 stores are Supercenters, with average size of close to 180,000 square feet. These stores are usually located on the outskirts of a city, and hence there are a limited number of locations in the U.S. where such large stores can be opened. With limited space and a vast Supercenter network, Wal-Mart is nearing saturation in the country and is even facing issues of self-cannibalization. Moreover, foot traffic in Supercenters has been declining consistently as more buyers are now shopping at conveniently located small stores and e-commerce websites. There seems to be a permanent change in U.S. consumers’ shopping behavior, and retailers such as Wal-Mart will have to adapt to the changing shopping habits.

It is evident that the retail giant needs to focus on small store expansion and online growth, givien this new environment. Smaller formats will ndividually contribute less to Wal-Mart’s revenues, but will put a greater pressure on its bottomline growth. This year, Wal-Mart plans to open around 120 Supercenters in the country, which is less than its last five years’ average. For the next year, the retailer plans to add just 60-70 Supercenters, which represents a significant slowdown in the format’s roll-out. We are eager to clarify the extent to which this represents both the optimal market penetration of this mammoth format, and the need to more intensively serve under-addressed urban and online shoppers.

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1. Wal-Mart Cuts Annual Sales Forecast As Supercenters Struggle, Bloomberg, Oct 17 2014 [↩] [↩]
2. Walmart will accelerate investments in e-commerce and moderate global square footage growth, Walmart, Oct 15 2014 [↩] [↩] [↩] [↩]
3. Family Dollar preps for vote on $8.5B Dollar Tree merger, Business Journal, Oct 20 2014 [↩]