While it would be an overstatement to say it’s the beginning of the end for Wal-Mart Stores, Inc. (WMT), it wouldn’t be wrong for owners of Walmart stock to start asking — and answering — some tough questions about its future. Namely, WMT stock owners may want to ask themselves if the company has finally reached the point of saturation in all the markets it can competitively address.
The red flag? Last week, the ubiquitous retailer announced it would be shuttering 269 stores, with most of them closing their doors for good by the end of the month.
Only a little more than half of those to-be-closed stores are in the United States, and of them, most are Walmart Express stores … smaller stores (usually around 12,000 square feet) which were intended to compete with dollar stores such as Family Dollar Stores, Inc (FDO) and Dollar General Corp. (DG).
Another significant swath of the U.S. store closure list includes the company’s so-called Neighborhood Markets, which were supposed to serious threats to the likes of The Kroger Co (KR) by virtue of their small, localized footprints combined with a solid array of grocery choices and basic household consumables.
The non-U.S. closures will mostly be seen in Latin America and Brazil … markets that were a bit tough for Walmart from the beginning.
Truth be told, with nearly 11,600 units worldwide (and more than 5,000 total units in the U.S. alone), the absence of 269 of them won’t be terribly noticeable to Walmart stock beyond the 20- to 22-cents-per-share profit drag the closures should incur for the quarter ending this month.
Yet, with such a sweeping, decisive degree of bait-cutting, it wouldn’t be a stretch to say Walmart simply missed the mark on some concepts it felt quite confident about just a few years ago. It’s a concern because, just a few years ago, these new concepts were being tried as the whole supercenter shtick looked like it had reached its peak potential.
What Went Wrong for WMT Stock?
In its defense, even against a backdrop of store closures, investors of Walmart stock can take some solace in the fact that the world’s biggest retailer still plans to open more than 400 new ones this year … at least half of which will be overseas units.
Point being, there’s still potential for growth.
On the other hand, Walmart felt there was potential in Brazil too, and that division has been struggling to turn any profit at all. There’s no absolute assurance the company will hit the nail on the head where it’s expanding.
As it learned (the hard way) in Brazil, Mexico and China, the concepts of “one-stop shopping” and “everyday low prices” imply something else to foreign consumers than the slogans do to U.S. consumers. Walmart may understand what doesn’t work now, but that still doesn’t mean they completely understand what does work overseas.
That said, it’s not as if Walmart is hitting home runs domestically either.
To its credit, the retailer recently logged its fifth straight quarter of U.S. sales growth; if things went will during last year’s holiday shopping season, it could report a sixth consecutive quarter. That sales growth has been measly, though, and up only because of declining U.S. sales between 2010 and 2014; the bar was set pretty low.
For that weakness, there’s little doubt that Amazon.com, Inc. (AMZN) is the culprit. While it has been a competitor to Walmart for years now, it has been a fierce competitor since right around the time Walmart’s U.S. division stopped growing and started shrinking.
Walmart has fought back with some admittedly impressive e-commerce strides. As an example, it recently announced it was combining its IT division and its e-commerce divisions as a means of rolling out new initiatives at a faster pace. It’s also committed to spending $2 billion over the next couple of years to further beef up its online business. It’s already miles behind Amazon on that front, however.
As for the answer to the question “what happened?”, the shortcoming on the e-commerce front as well as the miscues on the bricks-and-mortar front both ultimately say the same thing … the retailer erroneously assumed that what worked in the 80’s, 90’s, and even the early 2000’s in the U.S. would continue working, here and abroad.
The company was wrong.
The knee-jerk solution of smaller, local stores was also mostly wrong (the small grocery store concept is getting a little traction), because though those units were designed to take on the Dollar Generals and Family Dollars, they remained a little too Walmart-ish, as the company didn’t understand how to do much outside of its “supercenter” mindset.
Bottom Line for WMT Stock
None of this is to say Walmart can’t survive or that WMT stocks is en route to zero. Indeed, the company slowly seems to be fixing what it can, and cutting free of ideas it knows it can never make work well. It’s going to be a slow process, though, as philosophical change takes time.
In the meantime, the fact that it’s closing 18 supercenters and regular Walmart stores in the U.S. underscores the notion that the old “divide and conquer” strategy isn’t even a bulletproof domestic plan any longer.
WMT stock isn’t out of the woods yet.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.