2015 has been a woeful year for Wal-Mart Stores (NYSE:WMT). The company's plan to jump-start growth has encountered more setbacks than investors had expected. In October, the stock fell more in a single session that it had in a generation when the company said profits would fall next year as it raise wages in the U.S. to $10/hour from $9 currently.
But the world's largest retailer got some much-needed redemption points earlier this week after its third-quarter earnings report came out. Shares rose 3% as the company topped earnings estimates and comparable sales improved 1.5% on a 1.7% increase in traffic, the biggest jump in that category in years.
The traffic improvement seems to be the result of Wal-Mart's execution on its store improvement plan. On the third-quarter earnings call, Wal-Mart's President of U.S. stores, Greg Foran, said that 70% of its domestic stores are now up to par according to guidelines it set at the beginning of the year, which is a vast improvement from just 16% in February.
The importance of store-level execution
Though Wal-Mart's stock has gotten hammered in recent months, the company is not without growth avenues. Its small-format Neighborhood Market stores continue to put up comps in the high-single-digit range, with 8% growth last quarter, and e-commerce also continues to be a promising growth path.
However, the company's supercenters remain the core component of its business, delivering more than half of its total revenue. Therefore, the company's future performance is most closely tied to the ability of its supercenters to grow.
For the last few years, Wal-Mart has regularly been ranked among the worst retailers in the U.S. in customer satisfaction surveys. 2014 represented a nadir in its performance on the American Customer Satisfaction Index with a score of 68 against an average of 77. Among complaints from customers were that shelves were often incorrectly stocked or out of stock, checkout lines were long, and employees were hard to find or not helpful.
CEO Doug McMillion, who took the helm in early 2014, has made turning around Wal-Mart's customer service his biggest priority. It's why the company reorganized is store level management structure and raised minimum wages to $9/hour this April and will again to $10/hour next February. That decision will have an outsized impact on the bottom line next year, which is why the market punished the stock, but the improving traffic and store execution results seem to indicate that it was the right move.
Borrowing a page from Amazon's playbook
Wal-Mart's recent strategy calls to mind that of its upstart online rival Amazon.com (NASDAQ:AMZN), which surpassed Wal-Mart in market value this year despite having less than a quarter of its sales. Amazon CEO Jeff Bezos has long promised investors he would run his company differently than others, sacrificing profits in order to invest in the long term. That strategy has paid off, of course, and now it seems Wal-Mart is doing the same in order to improve its competitive position.
As online shopping has become more popular, and competition from warehouse retailers like Costco Wholesale has increased, Wal-Mart has lost its advantage as the low-price operator. McMillion recognizes that the company must spruce up its stores in order to compete in today's market, and like Amazon, that may mean sacrificing short-term profits for long-term growth.
Though the market was disappointed at a second straight year of falling profits, satisfied customers and well-run stores are Wal-Mart's best chance to drive long-term growth both on the bottom line and in the stock price. It's too soon to call it a turnaround, but as the improvements in customer traffic and store execution indicate, the company is finally taking steps in the right direction.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. 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.