- Retailer is reviewing its portfolio after weak profit forecast
- Analysts see Brazilian business is a potential place to cut
Wal-Mart Stores Inc. may look to shutter some of its massive U.S. stores and exit poor-performing markets overseas to help revive growth after the retailer warned of an unprecedented decline in earnings next year.
Chief Executive Officer Doug McMillon told investors this week that he is reviewing the company’s portfolio across the globe and will “close stores that should be closed.” The retailer has already been selling off businesses that aren’t core to its operations, such as a restaurant chain in Mexico and a property company in Chile.
The question now is how aggressive McMillon will get, analysts said on Thursday. The company could start by shutting some of its underperforming supercenters, but it could look to exit whole businesses and countries. That includes Brazil, where the retail chain has struggled. Its warehouse-style Sam’s Club chain is another option, said Ken Perkins, a Chicago-based analyst at Morningstar Inc.
“Sam’s is an interesting one," he said. "I wouldn’t be surprised to see them spinning it off."
Wal-Mart is under pressure from investors to trim costs after forecasting that earnings will decrease 6 percent to 12 percent next year. Sales aren’t growing fast enough to offset the billions of dollars that Wal-Mart is spending on higher wages for its workers and improvements to its website. The outlook sent the shares down 10 percent, their worst one-day decline since 1988. The stock fell an additional 1.2 percent on Thursday.
‘Large and Broad’
"No doubt, our business has become both large and broad -- it’s more important now than ever that we evaluate our portfolio," McMillon said earlier this week. "We won’t let the breadth of our business distract us from our most important priorities."
With the bulk of its business in the U.S. and growth there slowing, Wal-Mart’s roughly 4,600 stores would be a likely area for cuts, analysts say. In particular, the company might target the one-third of stores that aren’t meeting its standards of being "clean, fast and friendly," said Leon Nicholas, an analyst at Kantar Retail.
"I’d speculate that they may shut down some of their stores to reduce their operating costs," Nicholas said. "It doesn’t mean it will happen, but that certainly would be a way to take costs out."
As consumers look for faster, more convenient ways to shop, Wal-Mart’s supercenters -- hulking buildings that sell everything from fresh food to sporting equipment -- are falling out of fashion, said Craig Johnson, president of Customer Growth Partners. While supercenters shouldn’t go away, the numbers could be reduced, he said. Wal-Mart’s focus should instead be on its smaller-format Neighborhood Markets and e-commerce business, Johnson said.
"The younger women who are moms now -- the supercenter concept isn’t as relevant to them as it was to their mothers," he said. "Who has time to navigate a 200,000-square-foot Wal-Mart?"
Wal-Mart is the largest private employer in the U.S. -- with some 1.3 million employees -- and losing stores could be a blow to some local economies. One of its supercenters can employ about 500 people.
For now, the Bentonville, Arkansas-based company is still adding new stores, though at a slower rate. It said on Wednesday it plans to open 50 to 60 supercenters next year, which includes relocations and expansions, compared with 115 in 2014.
Sam’s Club stores, meanwhile, has been dragging on Wal-Mart’s earnings, and some investors think the company could perform better as a stand-alone business. Earlier this year, Sam’s Club posted its worst first-quarter sales in years. While the chain improved in the most recent quarter, investors aren’t convinced the company can get back on track in the face of stiff competition from Costco Wholesale Corp.
But a spinoff of Sam’s Club would be a move so drastic, it would require the approval of the board, which is controlled by the founding Walton clan. It could be a tough sell to the family, Johnson said, especially considering it bears the name of patriarch Sam Walton.
Wal-Mart also may get out of some overseas markets that have failed to gain traction, Charles Grom, an analyst at Sterne Agee & Leach Inc., said in a note to clients. The retailer hasn’t shied away from exiting markets in the past. It sold its German and South Korean units in 2006 after years of disappointing results. In all, Wal-Mart has operations in 28 countries.
One country that’s probably on the table is Brazil, Johnson said. Wal-Mart has been struggling to make a profit in Brazil for years, hurt by competition from French chains Carrefour SA and Casino Guichard-Perrachon SA, as well as a generally sluggish economy. Wal-Mart opened its first Brazil location in 1995 and today operates supercenters, supermarkets, warehouse stores, bodegas and gas stations under various brand names.
During a conference call with analysts in August, McMillon pointed to Brazil and the U.K. as two markets that have been "challenging.”
"If they are going to be doing a portfolio review internationally, Brazil will definitely be one of the countries looked at very closely," Johnson said.