Wal-Mart Stores Inc. (NYSE:WMT) is one of the leading retail giants in the U.S. The company offers a range of products, using its multi-format stores, including supermarkets, supercenters, hypermarkets, warehouse clubs, neighborhood markets, and convenience stores. I remain bullish on the company because of its solid store expansion plan, which includes both neighborhood stores and supercentres. The management is also actively improving the store environment to enhance the customer shopping experience. The expansion in e-commerce and greater operational efficiencies in the form of efficient inventory management will continue to be an important growth driver for the company. Finally, the ongoing efforts in the Sam's club segment will channelize the company's future growth.
Store Expansion
Neighborhood Stores
The company is aggressively expanding its footprint, and thus ended its FY'15 with 511 net new units around the globe. The company reached the retail square footage by approximately 33 million. The new openings include 165 traditional format Neighborhood Markets and 68 smaller Neighborhood Markets. The neighborhood market format has been introduced a year ago, which facilitates customers in closer communities with convenient access to grocery shopping, daily use food items and health-related items in lesser time due to nearby store locations.
These nearby neighborhood markets are well appreciated by the targeted audience and reported 7.7% comps for 4Q FY'15. Moreover, to get additional penetration in existing markets, the company plans to open 180 to 200 Neighborhood Markets, out of which 10 to 15 will be based on a smaller format. In my opinion, the smaller format will help the company expand its footprint in smaller locations, which in turn helps the company cater to the needs of the surrounding population, and it will also help WMT control its administrative costs, in contrast to big box format, which is much more expensive to establish.
Supercenter Format
The company is also focusing on a one-stop shopping experience for its customers with the help of a wide range of categories under the roof of its supercenter format. In this context, the company has opened 119 additional supercenters during FY'15. And in order to expand in FY'16, the company plans to open 60 to 70 supercenters. The new supercenters will help the company achieve its retail square footage target of 15 to 16 million.
E-commerce Initiatives
The company experienced a growth of 22% in E-commerce sales in FY'15 and is keen to expand its e-commerce under its "integration of digital and physical strategy." In this context, WMT has taken several initiatives, including the automation of its order picking process to fulfill online grocery orders in Japan. It has expanded online offerings to business customers in India and intends to roll it out completely in the upcoming period. Moreover, WMT has also expanded its online function in China with the help of large investments in supply chain and promotional events to gain more traffic, which is nicely translated into growth of 40% online traffic in the Chinese market.
Additionally, the company has boosted its U.S. online offerings with its efficient services, like the support of "free shipping" and "buys online and pick up from stores." Furthermore, the company is also facilitating customers with the diversified option to access the company's products using their mobiles.
For FY'16, the company has clearly demonstrated its plan by investing approximately $0.09 per share regarding e-commerce initiatives with a major focus on online grocery pickup and delivery services in Brazil, China and the U.K. markets. Additionally, it will continue to grow its U.S. e-commerce facility and it will undertake the complete launch of its online grocery offerings in the markets of Phoenix, Huntsville and Alabama, following the success of initial testing in these markets.
Furthermore, the planned initiatives include the ongoing efforts to promote "Grab 'N Go lockers" initiative in Canada, which refers to the installation of lockers in its stores that allow people to buy online and collect later at their nearest location, but without any additional charge. This idea has been previously tested by the company by installing these lockers at 10 locations in the Toronto area during August '14. Thus, the company benefited in holidays with larger sales by giving a convenient reach to customers to support its online sales, and is likely to maintain the higher growth pace in future.
Operational Efficiencies
Supply Chain
To support its integrated efforts, the company has in place a network of new large-scale fulfillment centers, which are digitally connected with the company's distribution centers and stores. Additionally, the entire supply chain network is also linked with the company's transportation system. These initiatives will help the company to efficiently manage its inventory. Furthermore, it is key to supporting the store expansion plan and the growth of its online sales.
Pricing Strategy
The company has acknowledged the increasing competitive pressure in the retail market, and introduced a savings catcher portal for its customers. This portal allows customers to scan their purchase receipts and match the prices of the purchased item with the any other retailer. If customers find a lower advertised price at other retailers then they get a difference. This means that WMT makes sure that its customers are getting value for their money and initiatives like these will help attract traffic in future.
Other Initiatives
The management is also taking several initiatives to enhance its customers' shopping experience. This improvement refers to the simple changes to create better store environment through more clean and tidy stores, improved lighting, layout and design simplifications, and temperature adjustments within stores. In addition, the company is adding more staff to its stores and is bringing back departmental managers. It will help customer service in a more efficient and friendly manner, resultantly improving experience with the faster checkouts for customers within its store.
Sam's Club
The management has also taken some initiatives to improve the performance of Sam's Club. WMT is providing innovative services like Cash Rewards program and 5/3/1 MasterCard benefits to provide Instant Savings to its members, which are likely to be the company's focus for FY'16. Furthermore, the company is set to deliver value to its members through focus on improved assortments, specifically in health categories and consumables with improved pack sizes. The company's efforts in this area are reflected via members' loyalty, which in turn resulted in 10% membership income growth during FY'15.
Furthermore, the company is benefiting through e-commerce sales at Sam's Club with the help of online promotions e.g. the direct-to-home and Club Pickup facilities contributed nearly 40 basis points in the total comps of Sam during FY'15. To expand further, the company has a commitment to improve its online services and plans to open 9 to 12 new clubs, and remodel about 60 clubs during FY'16.
Investor highlights
During FY'15, the company has returned $7.2 billion to shareholders via dividends and share repurchases. Furthermore, for FY'16, the company has increased its annual dividend to $1.96 per share as compared to $1.92 in FY'15. This increase represents 2.08% growth, which is not a material uptick, but will help the company meet its shareholders' expectations due to the cushion for increment in dividends in the future given the modest payout ratio of 38%.
Conclusion
The concentrated efforts to expand store footprint along with online visibility through global e-commerce initiatives have earned WMT a buy rating. To support these store expansion plans and online growth, the management is also improving its supply chain network for the better management of its inventory. Additionally, Sam's Club remains a strong pillar for the company's growth with 10% growth in membership fees. Lastly, the company offers lower prices and helps customers in price comparison with other retailers under the savings catcher portal. The company has increased its dividends for FY'16 and has the potential to further increase given its modest payout ratio.
