Driven: Walmart's roadmap for growth revealed in Northwest Arkansas
Walmart has been on a building boom in Northwest Arkansas. Small-format Express stores have been open now for several years, the new convenience concept Walmart To Go opened earlier this year and the latest development is a hybrid concept that allows online grocery orders to be picked up at a dedicated drive-through facility.
A new Walmart supercenter recently opened, along with multiple Neighborhood Market stores, and a new Sam’s Club is in the works. Tying the extensive physical network together are increasingly robust mobile, social and online capabilities that allow shoppers to engage digitally with Walmart when, how and where they choose.
Walmart has always dominated its home markets of Benton and Washington counties, and it took that dominance to a new level this year. The assortment of options now available to the region’s roughly 450,000 residents is unrivaled and serves as a road map for the rest of the nation as Walmart looks to drive an omnichannel growth agenda that blends physical and digital. The finer points of the company’s strategy will be in focus next month when Walmart hosts is 21st annual fall investor conference, where president and CEO Doug McMillon and his top lieutenants share insights into holiday merchandising and marketing initiatives, store expansion plans and e-commerce growth.
Much is known about Walmart’s approach, and McMillon is certainly no stranger to investors, having served as president and CEO of the International and Sam’s Club divisions before assuming the top job from former CEO Mike Duke in February. However, the McMillon era is off to a rocky start, and investors want answers and a deeper understanding of the new CEO’s vision for driving growth in the short and long term. There were plenty of generalities shared during the company’s shareholder’s meeting in June about accelerating the pace of change and being customer-focused, but when financial results are deteriorating as they have been this year, investors become more demanding regarding specific strategies.
Total sales during the first six months are up about 1.8% to $233.5 billion; however, expenses grew 2.6%, causing operating income and net income to decline 2.1% to $12.9 billion and $7.7 billion respectively. Earnings per share of $2.37 for the six months ended July 31 were a penny below the prior year level. There were legitimate reasons for the weakness — increased healthcare costs and utilization, and a surge in weather-related operating costs — but top-line growth has proven challenging for the past 18 months. Comps have been flat or negative for the past six quarters at U.S. stores and are projected to be flat again in the third quarter.
In addition, Walmart has grown stingier with returning cash to shareholders. The company in February increased its annual dividend by just 2.1% to $1.92. It also has curtailed share repurchase activity from earlier levels, spending $933 million to buy back 12.3 million of its own shares during the first six months of 2014, compared to nearly $4.1 billion spent during the first six months of 2013 to buy back 55 million shares.
Against a backdrop of deteriorating financial results, McMillon and his senior leadership team, which includes several fresh faces in key roles, will have an opportunity to share a vision and specific strategies to define the trajectory of Walmart’s U.S. business for the coming decade. Among the topics and key initiatives that will be making headlines during the meeting are:
The holiday outlook: Walmart is going to have a record-setting Christmas this year thanks to a combination of increased square footage, e-commerce growth and what is likely to be a modest increase in same-store sales. The company’s core customers are under less duress as gas prices have fallen; there is an extra day between Thanksgiving and Christmas; and prior year comparisons are easy. Same-store sales declined 0.4% in the fourth quarter of last year and increased 1% in the fourth quarter of 2012. Expect to hear plenty about layaway and an in-stock guarantee, which helps minimize the lunacy of Black Friday. Walmart merchants are sure to share details related to offering tremendous values on the hottest products; operators will talk about increased staffing commitments to improve the store experience; and the e-commerce folks will talk about leveraging technology to engage with shoppers, activate purchase behavior and promptly fulfill orders. The recently rolled out Savings Catcher price comparison mobile app is an example of a digital innovation that will be a holiday season difference-maker.
Small-format expansion: Walmart ended the second quarter with 381 Neighborhood Market stores and 21 Walmart Express locations. It will share a big number regarding the 2015 growth plans for both concepts in October, with 500 to 600 new units within the realm of possibilities. Recall, last October Walmart committed to opening between 120 and 150 small stores in 2014, but just four months later increased that range to 270 to 300 units. Roughly 180 to 200 of those stores will be Neighborhood Markets with the remainder being the more recently developed and smaller Express concept. Then in June, former U.S. CEO Bill Simon said the company sees an opportunity to go much faster with Neighborhood Market, noting it has a clear pathway to 2,000 units, if not more.
Another indication of an imminent accelerated rollout is the fact that Walmart routinely highlights the same-store sales growth of Neighborhood Market, some of which is coming at the expense of sales and traffic at supercenters. If shoppers want more convenient alternatives, Walmart needs to give it to them and potentially cannibalize its existing business, or other retailers will.
The outlook for the Express format is less clear and testing remains underway. Simon indicated in June that the company would soon know whether the returns generated warrant a possible 5,000 to 10,000 units over time. (A deterimination on this issue was made after this article appeared in printed and it was decided Express stores would be rebranded as Neighborhood Market).
The end of an era: With 3,348 supercenters on the street already throughout the United States, a multi-decade expansion cycle is drawing to a close for the most dominant format the retail industry has ever seen. New site development opportunities are dwindling, as are discount store conversion opportunities. But even if that weren’t the case, the rapid ascent of e-commerce would argue against sinking billions more dollars into large-format stores that already encompass 600 million sq. ft. of selling space.
E-commerce: Speaking of e-commerce, look for Walmart to increase its forecast for 2014 e-commerce sales from the $13 billion estimate it provided last October. Global eCommerce president and CEO Neil Ashe will talk about the new capabilities the Global eCommerce team has developed, but an update to a year-old sales estimate would seem to be in order to justify the huge costs incurred in recent years. The company has made more than a dozen digital acquisitions the past few years and, between its Bentonville IT operations and Silicon Valley Global eCommerce headquarters, there are thousands of technologists at work inventing the future.
Ashe has asserted that Walmart is one of the world’s largest, most dynamic and fastest-growing e-commerce organizations and, combined with the assets of the world’s largest retailer, is uniquely positioned to win at the interaction of physical and digital. It will be hugely disappointing to investors if Walmart doesn’t quantif