Wal-Mart to open fewer stores, focus on e-commerce, with flat earnings expected next year

Wal-Mart Stores CEO Doug McMillon told Wall Street analysts gathered in Bentonville Thursday (Oct. 6) the company is going through a transformation period, the most he’s witnessed in his 32 years with the retailer.

The world’s largest retailer, according to McMillon, is investing for the future as it slows new store growth which has been the basis for much of its revenue growth historically. Capital can then be redirected to e-commerce, with talent like Jet.com founder Marc Lore – who came with Wal-Mart’s $3.3 billion acquisition of Jet.com – leading the ecommerce push.

And while Wal-Mart management is excited about the change, the moves are somewhat scary to Wall Street as investors sold off shares Thursday (Oct. 6) in response to the retailers’ flat growth forecast for next year. Wal-Mart shares (NYSE: WMT) slid to $69.36, down $2.28 per share as the retailer tempered its profit forecast over the next two years.

The retail giant expects flat earnings for fiscal 2018 that will begin Jan. 31, 2017, while capital expenditures will be trimmed to $11 billion. For the back half of this year Wal-Mart reiterated earnings per share between $4.15 and $4.35 per share, and said it’s gaining momentum in e-commerce as the giant U.S. store business is in a stronger position than a year ago.

“We have to make sure this company is here 50 years from now,” McMillon said of the myriad changes the company is making to grow its business and respond to online retail growth.

STORE REDUCTION PLAN
Last year Wal-Mart opened 69 supercenters, with just 60 planned for this year and 35 the following fiscal year. Neighborhood Market expansion is being trimmed from 161 new stores in the previous fiscal year to just 20 new stores next year. Overall. the new store count is down from 230 last year to just 55 next year.

This is a concern for suppliers and investors because roughly 70% of Wal-Mart’s revenue growth has come from new stores. McMillon said comp sales and e-commerce sales which now comprise the other 30% will grow. Wal-Mart is betting heavily on its investments in e-commerce including the $3.3 billion acquisition of Jet.com and the increased stake in JD.com in China to be catalyst for the this change.

McMillon said China holds huge growth potential and the best way to tap that market was to partner with JD.com because it would have been too expensive to scale Yihaodian.

In the U.S., McMillon said the play to acquire Jet.com made perfect sense. He said a mutual friend introduced Jet.com founder Marc Lore to him a few months ago and the two immediately began to talk about the possibilities of scaling e-commerce in the U.S. and what a marriage of the two companies might look like. Jet.com ships 100,000 packages a week with more than 5 million users, up from zero users just 14 months ago.

REDUCING SHIPPING COSTS
McMillon said Lore and his team cracked the code on how to win in e-commerce by giving the customer transparency into the costs of an online transaction and building baskets online, versus shipping individual items. The average basket on Jet.com includes 7.9 items, which they believe is a more effective way to ship product.

Lore, who was in Bentonville for the analyst meetings, said a customer who wants to buy dog food online has the choice of paying for shipping, getting a better price if they use debit pay versus credit, and if they add a dog leash to the basket they find more value. The choices and push for a consumer to add more to an online order improves the margin. Lore said Wal-Mart has a good foundation with new distribution network and its vast store fleet which gives them an advantage in lowering shipping costs to roughly $1 per order if all the distribution nodes are efficiently used.

McMillon said sharing knowledge and infrastructure with Jet should net exciting growth. Jet appeals to the urban shopper and Wal-Mart has the suburbs covered. Together the two retailers have 35 million items they will sell in their online platforms.

Lore, CEO of Walmart Global eCommerce, has been on the job for 27 days and McMillon said he’s learned what a great item merchant Lore is at heart as the two recently walked Walmart stores and Lore kept being distracted by items he wanted to sell online.

“If Marc can be Marc with this company then great things are going to happen,” McMillon said.