Published By | January 19, 2016
Written By Zacks Equity Research,


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The largest global retailer Wal-Mart Stores Inc. (WMT) has been facing severe challenges since the last few quarters and showing signs of acute weakness. Amid the weak scenario, the retailer plans to close 269 stores, as it abandons its small-format Express outlets and looks to streamline the chain.


The move includes closure of 154 stores in the U.S., which includes 102 Wal-Mart Express stores. The company will also close 23 neighborhood markets, 12 supercenters, seven stores in Puerto Rico, six discount centers and four Sam’s Club locations.


The company had introduced these small format stores – Walmart Express in 2011 with the aim to attract shoppers who didn’t want to go far for daily items. These stores were well received by consumers and the company even announced plans to open an additional 90 Express stores owing to their sales growth.


However, as per reports, the company projects slower growth in new stores. Price competition is one of the reasons for the slower growth. Wal-Mart is finding it difficult to compete with local grocers in some markets, which compelled it to scale back expansion plans for smaller stores. The decision also ended the company’s pilot Wal-Mart Express program, which was an effort to create a network of small corner stores to compete with dollar-store chains and drugstores.


The Bentonville, AR-based company now plans to focus on the mid-sized neighborhood markets, which are about the size of a grocery store, and its supercenters. Further, Wal-Mart will continue its larger-size neighborhood markets and will continue to expand its footprint in the U.S. and overseas. The company reportedly plans to open 142 to 165 stores in the United States in fiscal 2017 and 200 to 240 stores overseas in the coming year.


Per media reports, the move will affect about 10,000 jobs domestically at 154 locations and will eliminate 6,000 jobs overseas. This will affect less than 1% of its total square footage and revenue. Moreover, the shutdowns will reduce earnings from continuing operations by about 20 – 22 cents per share, with as much as 20 cents of that coming in the fourth quarter fiscal 2016.


We note that in Oct 2015, Wal-Mart laid off 450 workers at its headquarters in Arkansas in order to keep its pricing competitive and reduce expenses as it has already invested heavily in its e-commerce business and is paying higher wages.


Wal-Mart has been struggling to control its expenses after giving a gloomy profit forecast for fiscal 2017 ending January. Earnings are expected to decrease 6%to 12% in the year due to higher wages and increased spending on e-commerce activities.


Wal-Mart expects to incur huge e-commerce expenses over the near term. In an effort to compete with the biggest online retailer (AMZN) and to improve customer service, Wal-Mart is aggressively investing in its e-commerce business. Wal-Mart’s focus on e-commerce will in turn lower profit margin potential, given shipping costs and price competition involved in it.


Wal-Mart has also pledged to spend $1.5 billion to raise employees’ wages and give them extra training in fiscal 2017. The initiative of paying higher wages is expected to help reduce turnover and increase retention. It will also improve its customer service and ultimately that will encourage shoppers to spend more. But it will further raise the expense burden on the retailer. We note that Wal-Mart had increased its minimum wage to $9 an hour in April, and expects to increase it to $10 per hour in Feb 2016. Higher labor costs along with the company’s efforts to overhaul its stores and invest in its online operations will weigh on its earnings.


Not only is the company under pressure on the expense side, it has been posting disappointing results for the past several quarters due to sluggish U.S. sales. Wal-Mart is facing intense competition on all fronts, ranging from dollar stores to the traditional grocery store chains and online business. It is also trying to keep pace with the rapidly changing behavior of shoppers.


Wal-Mart currently carries a Zacks Rank #3 (Hold).

Some better-ranked retailers include Etablissements Delhaize (DEG) and The Kroger Co. (KR), both sporting a Zacks Rank #2 (Buy).

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