If you’re thinking of becoming a Walmart (WMT) investor, you might be deterred by stalled same-store sales growth of late and lackluster returns from WMT stock.
Indeed, Walmart’s store traffic and sales have been stuck in the doldrums, down a half a percent for all of fiscal 2014, amid a cash-strapped consumer and heightened competition from dollar stores and others.
Well, what would you think if I told you that the way WMT plans to fix the problem is not by tightening its belt, but by opening more stores?
Don’t worry. It’s not how it sounds.
A Bigger, Smaller Walmart
Walmart has amassed 4,835 locations — including supercenters, discount stores, small-format stores and clubs — across the U.S. The majority of those are supercenter locations that consumers use to stock up on groceries and shop for consumer electronics and more.
WMT also operates more than 400 and growing smaller-format stores, including Neighborhood Market locations, which rival dollar stores in size, and which consumers have come to prefer on what the company characterizes as “quick trips.”
It’s these smaller-box stores that could hold the keys to unlocking greater shareholder value ahead.
Indeed, the current year is a milestone for Walmart in that it is the maiden year that small-box-format store openings will outpace those of traditional supercenters, according to Bill Simon, chief executive of Walmart U.S., in an interview on CNBC.
Between Neighborhood Market and Walmart Express — the latter of which are similarly smaller-box stores but situated in rural neighborhoods — the expansion plans are robust. From Walmart’s fiscal 2014 annual report:
“Overall, we’ll add between 21 and 23 million retail square feet, representing between 385 and 415 units in fiscal 2015.”
It’s no small wonder why. In the company’s FY 15 first quarter, Neighborhood Market comp sales advanced 5%, while comp sales across Walmart U.S. fell by 8 basis points.
Let’s take a look further back. Walmart sums it up in its fiscal 2014 annual report:
“Comparable store and club sales in the U.S., including fuel, decreased 0.5% in fiscal 2014 and increased 2.4% in fiscal 2013, when compared to the previous fiscal year.”
There have been a host of headwinds suppressing sales of late, not the least of which has been a cash-strapped consumer — a macroeconomic condition over which Walmart has little control. With the latest jobs figures showing signs of improvement, you might think the worst is over and that consumer discretionary spending levels will be on the rise.
No so fast, Simon said on CNBC.
While on the surface the jobs report hows some improvement, those numbers are murky and don’t reflect the fact that some people have stopped looking for work altogether. He said to expect volatile employment data over the course of the next six months to one year.
Thankfully, Walmart has its Neighborhood Market stores, which while leading the expansion charge might cause you to question whether the strategy will have a cannibalizing effect on the retailer’s supercenters. Analysts have wondered the same thing and have pushed WMT management on the matter, most recently at the Jefferies 2014 Global Consumer Conference.
While Walmart is watchful of this scenario — evidenced by its strategy to position Neighborhood Market stores no less than a mile or two away from its nearest supercenters — it believes it has the right formula. In fact, management says Neighborhood Market stores are taking market share from other retailers — not Walmart’s supercenters.
What Does It All Mean for Shareholders?
If Walmart is right, and expanding its small-box store footprint attracts more foot traffic, leading to higher sales, this is good news for WMT stock, which has been underwhelming, declining close to 3% year-to-date vs. a 6%-plus gain for the S&P 500.
At a forward P/E ratio of barely 14, WMT stock certainly is priced right. The question becomes whether the company can jump-start its sales, which based on anecdotal evidence seems possible.
If you believe the worst is over for the consumer, Walmart shares could have nowhere to go but up.
For such a large retailer, having generated $473 billion in consolidated net sales in fiscal 2014, it would be easy for Walmart to get stuck in a rut. One can argue that this is precisely what has kept same-store sales suppressed in recent quarters.
But for its impressive size, Walmart is responding to an evolving consumer, evidenced not only by its growing small-box store footprint push but in other areas as well, including e-commerce (which has been a bright spot for sales but which has weighed on profitability as the company continues to invest in its e-commerce platform).
The question becomes will this be enough to turn things around for the company and the share price, and the answer remains to be seen.
At the very least, you can use WMT’s 2.5% dividend yield as a little backside padding while you wait for Walmart to recapture its former glory.
As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.