Wal-Mart Stores (NYSE: WMT) is likely to see future growth via smaller-format stores and technological advancements. Let's first focus on smaller-format stores, and then see what retailer's strategy Wal-Mart is copying. Wal-Mart may be on the ropes as of late but it is definitely not down for the count - and may just have a few tricks up its sleeve.
Finding growth in small places
While Walmart Supercenters average 182,000 square feet, Walmart Neighborhood Markets are only 38,000 square feet and don't have the typical warehouse feel.
The average Walmart Neighborhood Market sells groceries, household supplies, and contains a pharmacy. If you're an investor, then you likely want to know how this small-format store is performing ... regardless of what it sells.
The information below is likely to impress you, and it's a key reason why those souring on Wal-Mart due to its recent quarterly report might be overlooking an important long-term trend and strategy shift for the largest retailer in the world.
Small-format stores represent growth opportunities
Wal-Mart recently reported that domestic comps slid 0.4% in the fourth quarter, with Walmart U.S. and Sam's Club suffering 0.4% and 0.1% declines, respectively. On the other hand, comps for Walmart Neighborhood Market increased 5%.
For the larger stores, Wal-Mart attributed the poor performance to reduced government benefits, higher taxes, tighter credit, and increased health-insurance costs. However, despite all of these headwinds, Walmart Neighborhood Market showed growth. Since there are only 346 Walmart Neighborhood Markets in existence right now, investors might not pay too much attention to the strong comps performance, but put simply, it's a growth brand.
Thanks to the small-format stores' success, Wal-Mart plans on opening 270-300 new locations for the fiscal year, considerably higher than the previous expectation of 120-150. This shows that Wal-Mart is highly confident in the concept. Wal-Mart also stated that its Neighborhood Markets are performing either in-line or favorably versus leading grocers.
Wal-Mart's other small-format store, Walmart Express, only has 20 locations, but it's now moving out of the pilot stage due to successful testing. Both small-format stores will use supercenters as a supply chain base, which will help minimize costs.
Looking ahead to fiscal-year 2014, Wal-Mart expects its Neighborhood Markets to deliver a comps improvement of 4%.
Wal-Mart is being highly strategic with these small-format stores, and it's copying the game plan of another retailer than has seen recent success in regards to technological advancements.
Winners and losers
First consider a quote from Wal-Mart U.S. President and CEO, Bill Simon: "Customers' needs and expectations are changing. They want to shop when they want and how they want, and we are transforming our business to meet their expectations." Now combine that with the fact that Wal-Mart just announced that it will increase its investments in e-commerce.The "shop when they want and how they want" is very reminiscent of Macy's (NYSE: M).
Macy's is a department store opposed to a discount retailer. However, Macy's might be playing a role in Wal-Mart's game-planning. Back in 2010, Macy's invested heavily in technology. The company's goal was to integrate in-store, online, and mobile shopping so customers would have an opportunity to shop where, when, and how they wanted. Sound familiar?
This initiative helped lead to Macy's outperforming its peers, especially Sears Holdings (NASDAQOTH:SHLDQ) and J.C. Penney. It also puts Macy's in a strong position going forward, as it's on-trend with today's technologically savvy consumer. For instance, for November/December, comps improved 3.6% year over year -- difficult to achieve in today's consumer environment. Macy's also expects second-half fiscal-year comps growth of 2.8%-2.9%.
The most important point here is that Wal-Mart is setting itself up to be more in-line with today's consumer while expanding two successful growth brands. Therefore, while investors aren't likely to see substantial growth from Wal-Mart, this should lead to continued massive cash flow generation and capital returns to shareholders in the form of stock buybacks and dividends. If Walmart Neighborhood Market and Walmart Express take off, then those capital returns could become more generous.
Wal-Mart was wise to embark on this plan all the way back in 1998. Thanks to this move, Wal-Mart still has growth potential. Not all large retailers had this foresight. Consider Sears as an example. For its fourth quarter through Jan. 6, comps declined 7.4%, with Sears domestic and Kmart comps sliding 9.2% and 5.7%, respectively.
Sears was once a dominant force in retail. Due to a lack of innovation, it's now a dying company. It's possible that Wal-Mart saw what happened to Sears and used it as motivation not to suffer the same fate.
The Foolish takeaway
Wal-Mart isn't the top retail investment in the world today. But if you're a Wal-Mart investor, then you might not want to panic due to company's recent quarterly results. Wal-Mart's small-format stores and technological advancements are likely to lead to future revenue growth and cash flow generation. This could eventually offset weakness at its larger stores, and it will allow Wal-Mart to return capital to its shareholders in generous ways. Please do your own research prior to making any investment decisions.