Walmart thinking big with small formats amid soft sales

Walmart knew fourth quarter results announced Thursday morning were going to be bad and its outlook weak so it gave investors something more substantial to digest by announcing plans to double the number of small format stores it will open this year and an increased omnichannel focus.

Just four months after announcing plans to open between 120 and 150 small format stores under the banners of Walmart Neighborhood Market and Walmart Express the company upped its growth target to a range of 270 to 300 units. Walmart currently operates 346 Neighborhood Market stores and 20 Walmart Express stores which it said continue to deliver positive same store sales and traffic each quarter. Last year, comps for the Neighborhood Market format rose 4% and were driven by fresh food and pharmacy, according to the company.

The greater than expected expansion of the small formats — Walmart maintained its forecast of 115 new supercenters in 2014 — required the company to increase its capital expenditure budget for the Walmart U.S. division by $600 million to a range of $6.4 billion to $6.9 billion from a forecast provided last October that called for spending between $5.8 billion and $6.3 billion on U.S. growth.

“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,” said Walmart U.S. president and CEO Bill Simon. “Customers appreciate the broad assortment of our supercenters for their stock-up trips as well as our small store formats for fill-in trips. By unlocking this growth opportunity and further combining our supercenters and small store formats with an unlimited selection available through ecommerce, we provide our customers with anytime, anywhere access to our brand.”

Walmart has been methodical, to put it mildly, in its approach to small format expansion, considering the first Neighborhood Market stores opened in the late 90s. However, Thursday’s announcement marks the beginning of an era of accelerated growth for a format viewed as a key element in Walmart’s omnichannel approach to serving shoppers whose expectations are evolving rapidly.

“Our small store expansion, in addition to providing customers access to a wide variety of products, including fresh, pharmacy and fuel, will help us usher in the next generation of retail. This will combine thousands of points of physical access with digital retail experiences that include initiatives such as Site to Store and Pay with Cash,” Simon said. “In addition to providing best-in-class one-stop shopping at supercenters, we believe that accelerating our small store expansion will allow customers to choose where and when to shop based on their needs. Our small store expansion will also strengthen our market share and create greater efficiencies in our supply chain through a tethered approach that uses supercenters as a supply chain base, links our resources and provides a unique and connected customer experience.”

News of the small format expansion helped soften the blow of Walmart’s worst financial performance in recent memory and an inauspicious beginning to Doug McMillon’s tenure as president and CEO of Wal-Mart Stores. McMillon assumed his current responsibilities on Feb. 1 after former president and CEO Mike Duke stepped down and McMillon was elevated from his role as president and CEO of Walmart International.

Total company sales during the fourth quarter increased 1.4% to $128.8 billion, including a $1.8 billion negative impact related to foreign currency translation. Net income fell 21% to $4.4 billion while earnings per share fell 19.8% to $1.34 from $1.67 in the fourth quarter the prior year.

For the full year, Walmart’s sales increased $1.6 billion to $473.1 billion, including a $5.1 billion negative impact from foreign currency translation. Net income declined 5.7% to $16 billion and earnings per share fell 3.2% to $4.85 from $5.01 the prior year.

Those numbers, while bad, had been previously announced several weeks ago when a portion of the weakness was legitimately attributed to terrible winter weather and a greater than anticipated sales impact resulting from a reduction in the federal government’s Supplemental Nutrition Assistance Program. That left McMillon free to look forward and offer a more positive view of the future and initiatives to drive growth.

"Comp sales improvement is a key priority, and we’ll focus on being even stronger item and category merchants, delivering value and improving our service level. We’ll remain focused on our expense structure, and innovate to improve productivity and aid our ability to deliver every day low prices. Our EDLP approach earns trust with customers and helps us keep our cost structure low,” McMillon said. “We’ll invest aggressively in e-commerce and increase our small store rollout in the U.S., as we’ve done in several other countries, to deliver value and convenience. The combination of supercenters and smaller formats closer to customers’ homes, along with e-commerce and mobile commerce, will enable us to increase our relevance for the Walmart brand around the world."

In the meantime, Walmart anticipates challenging market conditions in the first quarter and year ahead which could cause profits to fall below prior year levels. Same store sales at the Walmart’s U.S. stores and Sam’s Club are expected to be flat as the new fiscal year got off to a rocky start with more bad weather.

"We expect economic factors to continue to weigh on our outlook," said Walmart CFO Charles Holley. "Some of the factors affecting our consumers include reductions in government benefits, higher taxes and tighter credit. Further, we have higher group health care costs in the U.S. These concerns, combined with investments in e-commerce, will make it difficult to achieve the goal we have of growing operating income at the same or faster rate than sales.”

He indicated a 3% to 5% increase in sales during the current fiscal year that was forecast last fall now looks overly optimistic and said the company expects to be toward the lower end of that forecast.