Wal-Mart Neighborhood Markets have consistently outperformed the retailer's other bricks-and-mortar stores over the past two years.
Customers across the country have shown an interest in the smaller-format stores that offer grocery, pharmacy and limited general merchandise. Since the fourth quarter of fiscal 2014 the Neighborhood Markets report same-store sales growth between 5 percent and 7.9 percent.
Still, executives with the company are planning to scale back construction on the popular stores, something they revealed this week when reporting second-quarter earnings. Building forecasts have been trimmed as much as 20 percent for the current fiscal year as Wal-Mart officials cite the need for "quality" versus "quantity."
"We have a better understanding of what customers value most, from the choice of location, to the size of the box, to the product offerings," Wal-Mart U.S. CEO Greg Foran said Tuesday. "Based on these learnings, we've decided not to pursue a number of potential locations, as they would not provide the type of quality experience customers expect from a Neighborhood Market. We are thoughtfully evaluating every decision and use of company resources as we go through the back half of the year. But we are confident in the direction we are headed."
Wal-Mart has opened more than 350 Neighborhood Markets over the past two years and now operates close to 650 of the stores, which range in size between 12,000 square feet and 42,000 square feet. The company opened 22 Neighborhood Markets during the second quarter and as of Wednesday had added 51 for the year.
Fewer than 120 will be added in the remainder of the year. Initial forecasts called for as many as 200 new Neighborhood Markets.
Reaction from the investment community was mixed when analysts were asked about the retailer's decision. Some view it as Wal-Mart acknowledging the newer, smaller stores are attracting business at the expense of the larger, traditional supercenters. Others point to the idea that Wal-Mart executives are carefully plotting their next steps and don't want to rush growth.
"I think there's an argument to be made that Neighborhood Markets are cannibalizing supercenters," Edward Jones retail analyst Brian Yarbrough said. "I think they were nervous about some of the markets they were getting into, how it could affect other stores and they're wanting to take a look at how to grow long-term. Can you afford to have one format performing so well at the expense of another?"
Same-store sales at Neighborhood Markets increased 7.3 percent for the second quarter of fiscal 2016. That's down from the nearly 8 percent growth Wal-Mart reported for the formats in the first quarter, but still far ahead of the 1.5 percent growth reported for Wal-Mart U.S. overall. During the fourth quarter of 2015 (Wal-Mart's fiscal year begins Feb. 1) the company reported sales growth of 7.7 percent at Neighborhood Markets.
Overall sales in the U.S. have been far less robust. Shoppers also continue to turn their attention online. E-commerce sales have consistently produced 15 percent-20 percent gains in recent quarters.
Wal-Mart hasn't posted consecutive years of same-store sales growth above 2 percent since 2005-2006.
"They're trying to optimize e-commerce versus supercenters versus Neighborhood Markets," Ken Perkins with Morningstar said.
Wal-Mart has heavily invested in its e-commerce division, while cutting the number of stores in the U.S. It's a far cry from 2013 when Wal-Mart grew its total of Neighborhood Markets by 50 percent and executives boasted of opening 12 of the stores in a single day.
Scaling back doesn't appear to be a decision related to cash flow, said Bob Williams, senior vice president and managing director of Simmons First Investment Group Inc. in Little Rock. Wal-Mart has committed up to $1.5 billion for e-commerce investments this year, but Williams doesn't see that expense as having any effect on how many stores the retailer builds this year.
"They've got plenty of cash to deploy," Williams said. "I don't think they're at a point where it's a choice between expanding Neighborhood Markets or e-commerce. They have the cash flow to do both. It sounds like they're wanting to really emphasize quality."
Improving the quality of in-store experience for customers has been a focal point for the company this year. Wal-Mart has invested in wages and improved training for employees, while also adding labor back into stores.
Executives are banking that stores focused on being "fast, clean and friendly" will help improve their standing with customers.
As Wal-Mart continues to look for the right mix of online and bricks-and-mortar sales, experiments with grocery delivery and pickup, the slowdown in building Neighborhood Markets make sense, Stephens retail analyst Ben Bienvenu said. Instead of sticking to traditional building plans or other road maps for success that might have worked for Wal-Mart in the past, company leaders seem intent on shaking things up.
"This new management team is challenging every assumption that's been made about the business," Bienvenu said. "Before they hit the gas on any one particular aspect of the business, they want to make sure it's the right decision. I feel like it's too early to say Neighborhood Markets are not part of the future. It seems like they're challenging every pre-existing assumption that's been made."
Business on 08/22/2015