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This Simple Chart Shows Why Wal-Mart Is in Trouble

After revolutionizing and then dominating retail for over five decades, Wal-Mart (NYSE: WMT  ) may finally be succumbing to the same fate as former retailing legends such as Woolworth's and Montgomery Ward.

While it's too early to make a definitive prediction, there's nevertheless one indisputable reason to believe that Wal-Mart's best days are behind it: Same-store sales at the retail giant have dropped in 14 out of the last 21 quarters.

Why same-store sales matter
The importance of this metric -- also referred to as comparable sales or "comps" -- can't be denied. By measuring revenue at existing locations on a year-over-year basis, comps allow investors to determine whether a retail chain is growing because of an increase in popularity among consumers or rather because it's building more stores.

In this way, same-store sales serve as proxy for customers' perception of a brand. If they're shopping there less frequently or spending a smaller amount each time they do, then the resulting negative comps would serve as strong evidence that something is amiss.

Moreover, among the largest costs for a company like Wal-Mart are capital expenditures to build and maintain physical locations, many of which are more than 200,000 square feet in size. After these are in place, in turn, the objective is to leverage the locations to the greatest extent possible with progressively higher sales per unit.

Finally, even if comps are only marginally positive, the reality is that a retailer would still be contracting in size on a unit-by-unit basis. This is because inflation will typically offset between 1% and 3% in otherwise positive organic sales growth.

In the first quarter of this year, for instance, consumer prices increased by 1.05%, according to data from the Federal Reserve. Thus, to combat erosion in profits, Wal-Mart's comps would need to increase by at least that amount.

That they haven't is evident in the Arkansas-based company's gross margin, which represents the difference between Wal-Mart's sales and cost of goods sold. Since 2009, this figure has dropped by approximately 100 basis points, from roughly 25.6% in 2009 down to 24.57% today.

The implications for Wal-Mart
So, what are investors and consumers to make of this?

On one hand, betting against Wal-Mart still seems like a (small "f") fool's errand, given the size and efficiency of its distribution network as well as the experience of its leadership team.

On the other hand, for arguably the first time in the last few decades, Wal-Mart is facing legitimate (some might even say "superior") competition from the likes of Amazon.com and Costco.

And along these lines, it's also worth noting that Wal-Mart hasn't done itself any favors. Over the past few years, it's continued to foster a reputation for exploiting workers, gotten bogged down in a bribery scandal in Mexico, and has even struggled to keep its shelves stocked with merchandise.

Whether these struggles are enough to tip the inevitable scales of progress and innovation against it remains to be seen. But things certainly don't look good.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On June 29, 2014, at 10:16 AM, oldpapajerry wrote:

    Having spent forty plus years in retail, one truth that will always remain is "innovate or die".

    The idea of "leading from behind" as is happening with the Obama administration is a prime example.

    Once your competition moves ahead it is nearly impossible for any large organization to pivot and catch up.

    Walmart, has grown to be to big to succeed, and it's same store sales indicate that. To unwieldy to navigate the fast changing digital marketplace, without striking the obstacles along the way.

    The marketplace is littered with such examples, Sears, K-mart, Gemco, White Front and J.C. Penney are just a few examples.

    Each in their time, the "perfect" retailer, but their time passed them by, while the executives sat in their massive offices and gloated over their successes.

    People on the bottom of the ladder could see the writing on the wall, and tried to tell them, but alas, the execs and their "yes" men and women could not see it.

    No, they were content to sit, as the executive board of Walmart has been doing, navel gazing, and adding more lines to their golden parachutes.

    Like our government, without consequences to their actions, people will continue to do the same thing over and over again until their retire or the project is cancelled.

    It is time for a new board at Walmart, not a bunch of retread board members from other failed or failing companies, or politicians whose past votes in favor of the corporations have gained them their positions.

    New Blood, New Ideas... Old Ideas brought forth in new ways.

    Look at the "New" methods of marketing employed by AliBaba. This Chinese company was non existent ten years ago, yet has moved into the marketplace, just as Walmart did thirty years ago.

    This is, or soon will be the single company with the largest market cap in the world.

    This is not a M/C based on "Blue Sky" like the dot coms, it is based on international sales.

    Do they have problems with quality and intellectual property theft, you bet.

    Are they working to address them, absolutely, because the Chinese people and government don't look at tomorrow, they think generationally, three and four generations down the line.

    Another step would be to "Lease" out some of the departments, Automotive, and Electronics, Jewelry, allow companies with the knowledge and expertise to run them properly, do so and the grocery department, get someone who knows what they are doing.

    IF Walmart were smart, they would embrace the online experience, and incorporate it into the already overstocked stores.

    As an example, get rid of the MC Donnalds in the stores, hire someone creative to develop a moderately priced food court, add to that an online shopping experience, right in the stores.

    One where the customer can sit down at a nice table with comfortable chairs and browse and shop online while enjoying a "nice" sandwich and salad, with their kids.

    This will encourage buying and bring people into the Walmart for more than just some "cheap, poor quality products".

    Next, improve the quality, having been in retail for a long time, and more particularly the grocery side, i can tell you the produce that Wallmart brags about in the latest TV ads is what we used to call "CULLS".

    As my father used to say, "the bitterness of low quality will remain, long after the sweet taste of low prices dissipates".

    There will always be that segment of the population who for economic reasons, need to buy the lowest possible priced items, regardless of the poor quality.

    But basing your business model on these individuals, is the same as the government looking to the poor to pay the lion's share of taxes, they just don't have it.

    To summarize, smaller stores, better quality, clean up the aisles, get rid of McDonnalds and consider department leasing.

    Make Walmart what it can be instead of what it once was.

    OPJ

  • Report this Comment On June 29, 2014, at 11:05 AM, mathari wrote:

    The problem is people are cutting back and only buying absolute essentials in the US because of income inequality that is worse than most third world countries. WMT's strategy appears to be to open a whole bunch of mini Walmart grocery stores throughout the country and to take over that business - competing with the likes of Kroger and Safeway - but this is a mistake as Walmart cannot be as nimble as they guys.

    Another strategy appears to be to increase international sales so it reaches 50% of sales. Already, 40% of Walmart's workforce is outside the US. In the US, there are ~5000 stores providing net sales of $340B. Outside the US, there are 6,100 smaller boutique style stores in 26 countries (not named Walmart) with net sales of $136B. This expansion is in Latin America, Asia, UK, Canada and Africa.

    Operating profits are a problem for Walmart when it comes to international growth. Domestically, profits are around $ 20B and internationally only $6B displaying a much lower profit margin on the international side.

    Another problem is Amazon (AMZN) which is slowly eliminating brick and mortar competition in general and starting to provide free local delivery in bigger cities.

    A third problem is the growth of alternative fresh and organic product stores like WFM and TFM in upper class areas which are stealing the rich consumer from Walmart using pesticide free, organic, and chemical free alternatives.

  • Report this Comment On August 19, 2015, at 6:52 AM, MarketingRefail wrote:

    It's worse then you would think, speaking as a Walmart Marketing Employee. Of course I cannot be specific as we employ investigators to locate serious information leak infringements, however, there's been a shift in our companies focus away from the customer/member sales experience to a merchandiser model. Walmart is now stressing a focus on getting products onto the floor asap, cutting staff that can do this & hiring management from failed companies/careers. It's unavoidable in regards to management, since we pay a comparably low wage/salary to our associates. We cannot continue to support the labor as of 2014 and are cutting hours heavily. The ability to get capable employees and train the incapable is highly impaired due to budget tightening across the chain. I have been told many times, "We cannot afford to store-use items that are critical to basic functions of our stores. I am actually leaving Walmart after many years due to the absolute micro-management techniques introduced approx. 2012-2015. I have seen a massive morale drop in valued employees and a direct disciplinary methodology against our veteran associates. My comments are directly flying in the face of the so-called "Associate Appreciation" Campaigns that are actually too late. In fact insiders at Walmart would likely state the management appears to be nervous about their own future and one could say they are "Circling the Wagons" as of 2015 stock slides.

    I myself was watching the stock hoping for one more split, but knowing this is likely to not happen anytime soon. I knew we were in trouble years ago with the implementation of memo's stating we would be cutting hundreds of hours weekly to meet our staff goals. This included numerous dept. liquidations & management terminations/restructurings. If you work at Sam's Club this has been a vicious assault on long-term employees, including various disciplinary measure to insure associates are influenced to leave or step down in some cases, all in the hopes they might simply quit so we can replace them with low pay new associates.

    In a nutshell...once we started to remove the employees with experience and removed hours from our budget for them to earn a decent wage - we effectively began a downward spiral. Despite the Social/Online attempts of @walmartlabs to effect a positive social networking experience...customers realize they cannot find assistance and knowledgeable employees in a large percentage of the entire company. Effectively, Walmart has shot itself inh the foot & the management is looking for a way to get out at some point down the road with a "Golden Parachute".

    Sam Walton would never of allowed the disconnection to his staff the like of which exists now. The strikes of Walmart Associates in the news was a direct response to our new policies of hostile labor cuts. They were actually warning the Executives, the company is 'sick' & customers don't buy technology & high end products from places where help cannot be found & the associates are miserable.

    I tried the best I could to mediate these influences, but one things is for absolute sure...Orders only travel ONE WAY at Walmart & that's DOWN from Bentonville, period. This is the major problem & why Costco, Target & Smart and Final have begun to eat at their markets in major cities. Walmart is in trouble and many of inside have seen this coming, but we are not allowed to comment in a 'functional' matter that will have any impact. (I have chosen my wording carefully as many people would argue my points saying they have rolled out a new "Employee Appreciation" Campaign, but that too is very hollow to most of us up the chain. I wish they would have listened to or at least acted on the labor issues earlier. I do not think this post will remain up, so my hope is a few may see my concerns as a legitimate call for serious changes in Walmart. Take care of your customers & staff, build up your knowledge base to compete in todays market or fall apart like so many other big super chains. Thanks for reading this far if you have ;)

  • Report this Comment On August 19, 2015, at 6:56 AM, MarketingRefail wrote:

    sorry about the typos, but you get the point hopefully.

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John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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