Wal-Mart Stores, Inc. (NYSE:WMT) is out to prove that bigger isn't always better.
The world's largest retailer issued its yearly capital expenditure plans last week, and they reveal a stark slowdown in new store additions. In fiscal 2018, which begins next February, the company will add just 55 Wal-Mart locations in the U.S, marking its slowest store growth in more than 20 years.
Of those new locations, 35 will be Supercenters and 20 will be Neighborhood Markets, down from 60 Supercenters and 70 Neighborhood Markets this year and 69 and 161, respectively, last year. The retailer will also open just 4 new Sam's Clubs next year, down from 11 this year and 13 in fiscal 2016. Internationally, the company's expansion will continue at the recent pace with about 200 new stores to be opened.
In the same report, Wal-Mart said earnings would be flat next year, sending the stock down 3%.
The times are a-changing
While the market seemed to greet the company's strategic shift with skepticism, there are several reasons why slowing down new store openings seems like the right decision.
Since taking the helm in 2014, CEO Doug McMillon has repeatedly said that the company needs to invest to improve performance at current stores and boost its e-commerce capabilities. Over the last two years, the company has done just that, raising minimum wage to $10/hour and spending money to clean up stores, eliminate out-of-stocks, and bring back greeters. As a result, customer satisfaction scores are up and comparable sales have increased for eight quarters in a row. In the most recent period, comps improved 1.6%, its fastest pace in several years.
Wal-Mart is dialing down its capital expenditures in the U.S. from to $6.8 billion last year to $6.4 billion this year to $6.1 billion in fiscal 2018. Instead of spending to open new stores, the company is "increasing investments in e-commerce, technology, store remodels, and other customer initiatives."
With overall e-commerce sales increasing by about 15% a year in the U.S., Wal-Mart has recognized that it's better off leveraging its current store base rather than opening new stores as its real estate is not nearly as crucial in the e-commerce era, especially when the company already has stores within five miles of 70% of the U.S. population.
Having already saturated the country with stores, investing in remodels and e-commerce is the best use of the retailer's investment dollars.
Wal-Mart made noise earlier this year with its $3.3 billion acquisition of Jet.com, ramping up its e-commerce position, but making its stores more appealing is just as much a key to its strategy. As McMillon said, "Our customers want us to run great stores, provide a great e-commerce experience and find ways to save them money and time seamlessly." Over the last 18 months, the company has been testing components such as layouts, signage, and front ends, and it's planning on remodeling 500 of its stores next year and adding online grocery pickup to another 500.
Wal-Mart's online grocery pickup program has been perhaps the company's most successful innovation in recent years. The retailer now allows customers to order groceries online and pick up them up at kiosks in store parking lots at scheduled times for no extra charge. The program, now offered in hundreds of stores and dozens of markets, has proven exceedingly popular and is a hybrid of physical and e-commerce retail that Wal-Mart is best positioned to offer. By the end of next year, it will have online grocery pick-up in more than 1,000 stores, or about a quarter of its national footprint.
So called click-and-collect has been successful enough to prompt Amazon.com to launch its own chain of convenience stores, according to reports from the Wall Street Journal this week.
The bottom line for Wal-Mart is that with a comparable store base of more than 4,000 locations, the company is better off driving profitability by increasing comparable sales and building out its e-commerce channel. With about $300 billion in sales from its U.S. stores, just a 1% swing in comparable sales would add $3 billion in revenue and $750 million gross profit. The average supercenter generates about $80 million in annual revenue, meaning the company would have to open 38 new stores just to equal the effect of a 1% uptick on comps on revenue -- and many more to match the effect on gross profit -- as comparable sales are a much more efficient way to increase profitability.
Wal-Mart investors may be disappointed to see flat earnings growth once again next year, but the company is making the right moves to position itself for continued growth into the future. With a massive store footprint, improving its in-store experience and enhancing e-commerce will allow it to grow profits in fiscal 2019 and beyond.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.