When Wal-Mart Stores Inc. said it was shuttering 269 stores last week, investors took to financial message boards to figure out what it meant.
Were more closings looming? Were the number of closures too much? Or not enough? But equity analysts quickly weighed in, and essentially said this was the right dose of medicine needed to stabilize the retail giant.
Wal-Mart said of the 269 stores closing globally, 154 locations are in the U.S. The closures were a follow-up to a promise made in October when Wal-Mart said it was reviewing its portfolio to make sure “assets were aligned with strategy.”
The decision on store closures, including the exit of its Wal-Mart Express pilot, completes the review of almost 11,600 stores worldwide. The company said factors taken into consideration in deciding which sites to close include financial performance, as well as strategic alignment with long-term plans. The focus moving forward will be on Neighborhood Markets and Supercenters.
Moody’s lead retail analyst Charlie O’Shea said Wal-Mart’s decision was based more on where it thinks the business needs to be strategically going forward.
“Wal-Mart hasn’t been closing that many stores over the last several years, even as other retailers have been pruning and culling their store base,” O’Shea said. He noted that it’s normal for a retailer to shutter some early-generation stores due to demographic changes, traffic trending patterns, or a shift in the retailer’s strategy.
Joseph Feldman, analyst at Telsey Advisory Group, said Wal-Mart “has always pruned underperforming stores, but this more aggressive action leads us to believe that we could see more store closings over the next few years, as well as more moderate store growth.”
Regarding the closing of the Wal-Mart Express units, Feldman said “strategically, this makes sense to us given Wal-Mart’s focus on e-commerce and changes in consumer’s shopping behavior. Recall, the small-format Wal-Mart Express stores are in mostly rural areas that are more challenging to ship to and leverage the stores as a pick up point for digital sales.”
Feldman said the closures “should improve profitability,” and he reiterated a “market perform” rating on the stock.
Wal-Mart said it plans to open 50 to 60 Supercenters and 85 to 95 Neighborhood Markets in fiscal 2017, which begins on Feb. 1. During the same period, Sam’s Club, its warehouse format, plans to open in seven to 10 new locations. Internationally, the company plans to open between 200 and 240 stores during fiscal 2017.
O’Shea noted that the retailer “has been moving more online, and is working on what is its best integration of the strategy between online and brick-and-mortar. We view the expansion of the Neighborhood Markets a positive.”
Doug McMillon, president and chief executive officer, Wal-Mart Stores Inc., said the company is “actively managing our portfolio of assets is essential to maintaining a healthy business.”
McMillon said while closing stores is never easy, the closures are “necessary to keep the company strong and positioned for the future. It’s important to remember that we’ll open well more than 300 stores around the world next year. So we are committed to growing, but we are being disciplined about it.” He added that the company invested considerable time assessing its stores and clubs and are “supporting” the associates impacted with “extra pay and support, and we will take all appropriate steps to ensure they are treated well.”
Given the lackluster holiday sales season just passed, it might be easy to conclude that the store closures are a reflection of the economy. According to data from the U.S. Commerce Department on Friday, department stores posted a slight uptick in retail sales for the month and specialty chains and general merchandise stores registered declines. And with more consumers shopping online, the discounter is also facing tough competition from Amazon.com.
O’Shea said consumers now can head to the Supercenters once a month for general merchandise, and head more frequently to the Neighborhood Markets for their groceries, with Wal-Mart getting sales from both points of distribution instead of giving up grocery sales to a local supermarket.
Statistically, “consumers buy food 75 times a year, and general merchandise just 15 times during the year,” and having more Neighborhood Markets gives consumer “more options to buy online and pick up at the store,” the analyst said.
Robert Drbul of Nomura Securities, said that the closures are “in line with the company’s strategic plan to focus on most important, long-term assets in the portfolio. While the magnitude of closures in certainly more aggressive than we have seen in years past, we are not surprised by the timing or size.”
Drbul called the plan “logical.”
So far, a number of retailers have disclosed plans to shutter stores. Earlier this month Macy’s Inc. said it plans to close 37 stores. J.C. Penney Co. Inc. said it would shutter seven stores, and Sears Holdings Corp. said it plans to close some Kmart and Sears nameplates. Sears hasn’t provided an official store closure count, but reportedly is closing about two dozen Kmarts and a handful of Sears stores.
For Wal-Mart, the store closures “represent less than 1 percent of both global square footage and revenue,” the company said. While that seems small, the number of store associates impacted – at 16,000 – is significant. Of that number, the majority of associates – about 10,000 – are located in the U.S.
Wal-Mart said more than 95 percent of the sites to be shuttered are “within 10 miles on average of another Wal-Mart, and the hope is that these associates will be placed in nearby locations.” The company said it will provide 60 days of pay and, if eligible, severance, as well as résumé and interview skill training for those not continuing their employment at Wal-Mart.
Internationally, 115 stores are slated to be closed, which includes the 60 recently closed, loss-making stores in Brazil. The discounter said the stores closed in Brazil represent just 5 percent of sales in that market, and that it has already been able to relocate many associates to other stores. The balance of the 55 stores are located mostly in small, loss-making stores in other Latin American markets, the company said.
Wal-Mart said the closures would cost between 20 cents and 22 cents of diluted earnings per share from continuing operations, with about 19 cents to 20 cents recorded in the fourth quarter of fiscal 2016. The balance of the charge would be posted during the first half of fiscal 2017. The discounter said 75 percent of the impact pertains to the U.S. store closings. The company said it plans to report fiscal 2016 fourth-quarter and full-year results on Feb. 18.
McMillon said to Wall Street in August, “We all know that retail has changed and will continue to change at an accelerating pace.” He added that what the company has done in the past “wouldn’t by itself be enough to win with customers. Competition is strengthening. Pure e-commerce businesses move fast, innovate well and run on lower margins. Hard discounters run on lower levels of profitability and they’re growing quickly. We know there’s a lot more change to come and we’re motivated by it.”