Please ensure Javascript is enabled for purposes of website accessibility

Wal-Mart Is Running Out of Room to Grow. What's Next?

By Jeremy Bowman - Apr 2, 2016 at 11:41AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The retail giant has put the brakes on new stores. Here's what that means for its overall strategy.

When Wal-Mart Stores (WMT 1.25%) announced the sudden closure of 269 stores this January, it marked the company's first mass closing and a tacit acknowledgement of its current predicament. Profit and revenue growth have stalled, and it cannot simply build its way out of stagnation.

During its heyday, new stores were the driving force behind its rapid sales growth, as it was adding close to 300 Supercenters a year before the recession. But the retail climate has since changed. Wal-Mart and its big-box peers are struggling, while rivals like Amazon.com and Costco Wholesale have delivered consistent growth and grabbed share from the retail leader. 

Source: Walmart

Considering the growing importance of e-commerce and a network of stores that are already within 5 miles of 70% of the U.S. population, management has realized that adding new stores will not provide the financial jolt it needs.

There is other evidence as well that the company is running out of white space, or new markets to penetrate.

In an over-stored land
Wal-Mart wasn't the only retailer to announce store closings recently. Joining it in shuttering stores following the holiday season were Macy'sGapSears, Kohl's, and several others. 

Retail analysts believe that the country is over-stored, or there are simply too many stores for the level of demand. Mall traffic is falling, and e-commerce is grabbing an increasing share of retail sales. Last year, 7.5% of overall retail sales took place through the e-commerce channel, and growth in physical retail fell to its lowest level since the recession. E-commerce accounted for two-thirds of the growth in retail last year, according to the Census Bureau, increasing by 15% while physical retail sales inched up just 0.5%.

Home Depot (HD 0.66%), one of the best-performing retailers since the recession, has resisted opening new stores, instead investing capital in improving its current stores and its e-commerce platform, which has led to blowout growth in profts and share price.

Significant shrinkage
Despite closing 269 stores earlier this year, Wal-Mart is still opening new locations, just at a much slower pace than it once did. The chart below shows the increase in square footage at its U.S. stores segment since 2002.

As you can see, before the recession Wal-Mart's expansion was steadily accelerating as it grew its real estate footprint by about 8%-9% each year. In the current year, that number has dropped to just 1.5%, its slowest real estate growth rate this century. Its international segment has followed a similar trajectory. In fiscal 2012, it added 42 million square feet of store space, but just 9 million in fiscal 2015, the latest year for which data is available.

Instead of aggressively opening new stores, CEO Doug McMillon is implementing a number of tactics to spark sales growth, including:

  • Investing in store-level staff by increasing wages and training. Wal-Mart raised the base hourly rate to $9/hour last year, and again to $10/hour this February. The decision will cost about $3 billion, and helped cause profits to decline, but management believes it's necessary to remain competitive. Wal-Mart also claims its customer satisfaction and in-store operational execution are improving.
  • Investing in e-commerce. Wal-Mart plans to spend a record $1.1 billion on digital sales this year as it's belatedly recognized the importance of competing online. Sales growth in the category has been disappointing in recent quarters, falling to just 8% over the holiday period. 
  • Similarly, it's expanded its grocery pick-up program, which allows customers to order online and pick up at a station in the store parking lot. The initiative is crucial for Wal-Mart, as grocery has been the source of all of its domestic growth since 2008, and the segment is mostly protected from Amazon. 

Based on recent results, none of those strategies have taken hold so far, and Wal-Mart will probably never see the kind of growth it put up in the 2000s in the mid-to-high teens, especially with new store expansion having slowed significantly.  Wal-Mart expects earnings growth to return next year as it laps the heavy investments this year, but with stiff competition and a lack of new stores, it will need either significant same-store sales growth or for its e-commerce platform, grocery or otherwise, to catch on.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$124.13 (1.25%) $1.53
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$287.92 (0.66%) $1.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.