Wal-Mart Stores Inc., facing a sustained drop in store traffic, said it would accelerate its spending on its online presence and smaller-format stores meant to be more convenient for short shopping trips.
The company booked nearly half a trillion dollars in sales for its just-completed financial year. But Wal-Mart's big-box formula for success is under strain because of a change in shopper habits, as consumers increasingly go online to buy clothes and electronics, while heading to dollar stores and pharmacy chains to refill on basics.
The ramped-up spending on smaller stores and the Internet comes three weeks into the tenure of Chief Executive Douglas McMillon, who took the reins of the big-box retailer on Feb. 1. Mr. McMillon faces the challenge of turning around a streak of weak sales results in the U.S., as well as falling store traffic in key international markets such as China and Mexico.
The pressure was evident in Wal-Mart's financial results Thursday, when the world's largest retailer by revenue posted its fourth-straight decline in quarterly U.S. sales. The company's profit for its fiscal fourth quarter ended Jan. 31 fell 21% to $4.4 billion from $5.6 billion a year earlier, as revenue rose 1.5% to $129.7 billion. Sales for the full year rose to $476.3 billion.
To counter the reduced store traffic at Wal-Mart's signature superstores and win back shoppers from dollar chains and drugstores, the company plans to build more smaller-format stores that cater to customers making quick trips for food, prescriptions and gasoline. Customers also will be able to use the stores as pickup points for bulkier items such as televisions or trampolines they order online.
"The customer is coming to us for large shopping occasions," said Wal-Mart U.S. President Bill Simon. "Where we've slipped in traffic is the fill-in occasion, the midweek or smaller-basket-size trip, because of increased competition and the availability of products at our competitors."
While U.S. sales fell 0.6% in the year ended Jan. 31, excluding newly opened or closed stores, sales at the company's smaller, neighborhood markets rose 5%.
Wal-Mart also disclosed its online sales for the first time Thursday, saying they rose 30% to $10 billion last year, including acquisitions. "While it's small in comparison to total revenue, it's the fastest-growing part of our business," Wal-Mart Chief Financial Officer Charles Holley said.
The Bentonville, Ark., retailer said it would double the number of small stores it plans to open this year to about 300, bringing the total number of its small-format stores in the U.S. to roughly 650. Still that would account for just 14% of Wal-Mart's planned total U.S. store count of 4,500, and would remain well behind competitors such as Dollar General Corp., which has 11,000 U.S. stores, and Family Dollar Stores Inc., which has 7,000.
Addressing speculation that Wal-Mart could acquire one of the dollar chains and achieve scale more quickly, Mr. Simon said the company currently doesn't see a suitable target. "While we always look at opportunities to acquire, it's hard to find what we need," he said.
Many of the dollar stores aren't equipped with gas stations, pharmacies or the ability to sell fresh and frozen food. "We would have to pay a premium for locations that aren't perfect and plow cash into retrofitting," he said.
Wal-Mart's smaller stores bring in anywhere from four to seven times the sales that dollar stores do, he said, so "we're able to build the sales with fewer physical footprints."
The move to focus on small stores and online sales marks a significant change in strategy by the retailer, which remained wedded to its 100,000- to 200,000-square-foot supercenters over the past decade even as dollar stores proliferated and shoppers' dollars shifted to online rivals such as Amazon.com Inc.
On Mr. McMillon's first earnings call with investors as CEO, he pledged to "invest aggressively in e-commerce" and urged Wal-Mart to be "more nimble and flexible as we operate our businesses to adapt to changes."
Wal-Mart said the investments will weigh on its profit this year. The retailer offered a weaker-than-expected profit forecast and said sales would increase 3%, at the low end of the retailer's earlier projections, because of numerous economic factors including reductions in government benefits, higher taxes, increased health-care costs and tighter credit.
One factor is the company, with 1.3 million U.S. workers, now expects to incur an additional $330 million in benefits costs during this fiscal year as the country's health-care overhaul has caused an influx of workers to sign up for its company health plan.
The CEO also will oversee a continuing internal investigation into possible violations of the U.S. Foreign Corrupt Practices Act in company operations in Mexico, China, India and Brazil. Wal-Mart expects expenses related to federal investigations into alleged violations of the antibribery law, as well as to an overhaul of its compliance systems, to surpass half a billion dollars by year-end.
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