Wal-Mart Stores Inc. will not open as many new stores across the U.S as it has in previous years, shifting more of its investment toward e-commerce, technology and remodeling existing stores as the company continues moving through what Chief Executive Officer Doug McMillon described Thursday as a "transformative period."
McMillon and other Wal-Mart leaders unveiled the retailer's plans during an annual meeting with investors Thursday. They told the group at the retailer's headquarters in Bentonville that they projected to open 130 stores in the U.S. during this fiscal year and 55 in fiscal 2018. By comparison, the company opened 230 stores in fiscal 2016.
While Wal-Mart will continue to rely on its physical stores for sales, McMillon said, it must sharpen its efforts in other areas to keep up with the changes in retail. Efforts include further plans to grow its e-commerce business that produced about $14 billion in revenue during fiscal 2016.
"This company is going to look more like an e-commerce company," McMillon said. "We'll still run great stores. We know how to do that. Customers want a seamless relationship, and that's in our favor. But we've got to build this e-commerce business in this country and in others to be there in the future."
Wal-Mart's e-commerce sales represent a small fraction of its $482.1 billion in revenue during fiscal 2016, but the retailer has continued to spend heavily on infrastructure, technology and acquisitions to keep pace with competitors like Amazon.com.
Wal-Mart recently spent $3.3 billion to acquire online retailer Jet.com. It also increased its stake in Chinese online retailer JD.com from 5.9 percent to 10.8 percent, according to a Wednesday filing with the Securities and Exchange Commission. McMillon said Thursday that Wal-Mart has continued the rapid expansion of its online marketplace, as well, which now has about 20 million items.
Wal-Mart reported e-commerce sales growth of 11.8 percent during the second quarter of this fiscal year, which ended a long period of deceleration. Chief Financial Officer Brett Biggs said Wal-Mart expects global e-commerce sales to grow between 20 percent and 30 percent the last half of this fiscal year.
Biggs also said Thursday that Wal-Mart plans to spend about $11 billion in capital expenditures during fiscal 2018, which falls in line with the current fiscal year. But only about 20 percent of the capital expenditures will go toward opening new stores.
"They're clearly investing capital in the nontraditional retail models so that they can remain competitive," said Bob Williams, senior vice president at Simmons First Investment Group in Little Rock. "How they execute remains to be seen. But at least they're committing capital."
Brian Gilmartin, a portfolio manager with Trinity Asset Management, said it's clear that Wal-Mart is doing what it must to remain competitive with Amazon.com.
But Gilmartin said Wal-Mart remains "late to the game" in terms of e-commerce and will continue to face challenges as the company undergoes a transformation.
"Don't count them out," Gilmartin said. "But I think it's going to be a much tougher transition than they realize. They're essentially changing their business model completely."
Wal-Mart's investments in e-commerce and technology -- along with its $2.7 billion investment in its employees over the past couple of years -- will continue to weigh on profits.
Biggs said Thursday that the retailer is maintaining its $4.15 to $4.35 adjusted earnings per share outlook for the current fiscal year, but expects fiscal 2018 earnings to be flat compared with the current fiscal year, which ends in January. Earnings per share growth in fiscal 2019 are projected at 5 percent.
That forecast led shares of Wal-Mart stock to fall more than 3 percent during the investor conference, but the drop was minimal compared with last year's event when the retailer's projection for sagging profits led to a 10 percent drop.
Wal-Mart shares closed Thursday trading at $69.36, down $2.31.
"Investors like that they're investing in stores less," said Brian Yarbrough, a retail analyst with Edward Jones. "That's more cash for buybacks and dividend increases. But the problem is, they're taking that and spending more on e-commerce. That's why you're probably seeing some weakness in the stock."
Yarbrough said McMillon's statement that Wal-Mart will look more like an e-commerce company in the future is another indication that the retailer is "all in" on efforts to transform the company. Yarbrough said he's not sure there will be a need for the retailer to maintain 4,600 stores in the U.S.
"The biggest question to me becomes when do you start closing stores?" Yarbrough said. "I get they're profitable today. But if e-commerce continues to become a bigger part of the business, I can't imagine as big as Wal-Mart is and as much as they want to grow their e-commerce, they're going to be able to bring in that much additional revenue that supports current stores and e-commerce."
Wal-Mart officials believe they are on the right path in efforts to marry stores with online capabilities through initiatives like Wal-Mart Pay and the retailer's grocery pickup service, which U.S. stores chief Greg Foran said would be expanded to 600 of its 4,600 stores by the end of the calendar year. The company also has said its efforts to clean up and improve how it runs existing stores have helped drive store traffic and sales.
McMillon closed the conference by saying his team is going to find a way to make sure the company remains healthy and positioned to "be here 50 years from now."
"It's a great time to be in retail because so much is going to happen, and we get to architect some of that future," McMillon said. "We have all of these resources. If we're just smart about some of the choices we make and execute well, we can help define the future and not just react to it."
A Section on 10/07/2016