Wal-Mart’s turnaround vision hinges on store execution in U.S. market

by The City Wire staff ([email protected]) 281 views 

Wal-Mart executives believe improved execution at U.S. stores and technology innovations are the main ingredients needed to boost income and allow the retailer to maintain market strength in the midst of dynamic consumer shifts. The investment world is waiting and watching.

Grocery is a big part of the turnaround directed by Walmart U.S. CEO Greg Foran, who is a store operator at heart. He believes the supercenter is still a viable format worth preserving. In recent years, the retailer cannabilized supercenter sales by building several hundred Neighborhood Market grocery stores near flagship supercenter locations.

But, Wal-Mart recently told retail analysts it was pulling back on the number of new stores it builds next year. Foran said it should open around 55 supercenters which included relocations, with about 90 new Neighborhood Market locations. The new store count is down from previous years as the retailer said it is being more thoughtful about locations.

In Wal-Mart’s hometown of Bentonville, the retailer saturated the market with four new Neighborhood Market grocery stores built over the past 18 months. Each of the new stores, including the downtown square location opening next month, is within two miles of the Wal-Mart Supercenter Store 100, the only supercenter in the town of 35,000. A second supercenter is planned on the Bentonville-Bella Vista line which is four miles from Store No. 100.

A retired Wal-Mart executive officer recently told The City Wire that the Bentonville market has been a litmus test to see what the tolerance level is for the store density.

“Wal-Mart knows locals will support these stores, but I don’t expect Wal-Mart to continue that level of store saturation elsewhere. It does impact the profitability level of nearby supercenters,” he said.

The expert said a well run supercenter has the potential to do five times the sales volume of a smaller Neighborhood Market in the same region. His comment was based on inside knowledge from his years of management prior to his retirement.

Wal-Mart does not break out individual format data regarding gross sales, but former Walmart U.S. CEO Bill Simon said in 2013 that a Neighborhood Market had the potential with pharmacy and fuel to drive the sales of 10 Dollar General Stores in the same region. The smaller the box the lower the profit potential, as the smallest of the former Walmart Express stores could do the sales of between three to five Dollar Stores, according to Simon.

The expert said a supercenter has more ability to mix up the margins because of the diverse offerings that it carries. He said this helps the overall profitability level of the supercenter compared to a smaller, mostly grocery format. 

Ben Bienvenu, a retail analyst with Stephens Inc., said supercenters are the proverbial cash cow for Wal-Mart. He said the retailer has no choice but to try and spruce up the format and he agrees with the strategy.

“It’s the lowest hanging fruit and management recognizes at the core this is an opportunity. In past years Wal-Mart has grown profits through leveraging expenses, but sales have continued to see slow growth. It’s critical for Wal-Mart to maintain its store fleet and invest in e-commerce. It’s the right thing for the long term,” Bienvenu said.

Foran said sprucing up the nearly 5,000 stores is the only way the retailer can operate at its full potential. That means every story has to pass his “Fast, Clean and Friendly” analysis. He said last week 67% stores have now achieved a passing grade, but there is more work to do. His urgent agenda items include things like cleaner restrooms, less cluttered aisles as shoppers enter the store, fresher produce, clean floors, faster check-out times and of course low prices with plenty of variety.

"Customers are beginning to like what they see. … we have made good progress. In February, only 16% were at their initial goal. We're now at 67%. I want to be clear; we've still got lots of room to improve and we have already put another line in the sand and we have raised the bar higher for where we now expect them to get to. The good news is that we've found a really good correlation between the higher your score is in clean, fast, and friendly, the higher your sales, the more traffic you get in, and the more satisfied customers," Foran said during the investor meeting.

In the past two weeks the retailer has shown off a newly revamped supercenter in Rogers and a new Neighborhood Market store near downtown Rogers. Each of these stores capture the changes Foran is trying to make in U.S. stores. Such changes include more floor space dedicated to baby items, and more sales people working in produce regularly rotating fruits and vegetables which are visible when first entering stores.

A clearly marked pickup counter located at the front of stores also saves steps for those picking up groceries or other items ordered online. High velocity checkouts for full basket loads are being tested in the Rogers supercenter store located at Pleasant Grove Road. Scan and Go is being tested at this location. Other changes include an expanded fresh seafood department, more self checkouts, and a business waiting area near the auto service department for those who want to work online while their car is being serviced.

The new Neighborhood Markets feature split aisles, top shelving for inventory control, fresh pizza made to order and other community vendors selling in the store like Shirley’s Flowers and Rick’s Bakery.

Foran said turning the ship will take time and much attention to detail, and the results won’t be measured in the next quarter or two.

Bienvenu recently downgraded Wal-Mart shares to a “hold” position based on the lower earnings projected for next year. He said the stark outlook for what the incremental level of wage increases and continued e-commerce investments are going to cost took any near-term price appreciation off the table for investors. He favors the efforts being put in place by Wal-Mart’s top management. He said if they can pull it off, there will likely be a reward to shareholders who have the patience to wait it out.

“I like the management team and their plan, now they just have to prove it,” Bienvenu said.

Debt analysts with Fitch expect operating earnings to decline 10% next year, after falling an expected 9% this year. Fitch also views the company's expectation that cash flow growth will accelerate to about $80 billion over the next three years, up from $75 billion three-year prior, as optimistic given that strategic investments will have to provide a sustainable sales and operating income lift.

Fitch also expects that comp growth above 2% could be a challenge given Wal-Mart's significant market penetration and heightened competition from dollar stores, supermarkets, and on-line retailers.

While comparable store sales have been positive for four straight quarters; rising 1.5% in the quarter ended July 31, 2015, due mainly to traffic being up 1.3%. Experts agree anything above 2% comps is not likely.