Wal-Mart Is Running Out of Room to Grow. What's Next?

By Markets Fool.com

WhenWal-Mart Stores announced the sudden closure of 269 stores this January, it marked the company's first mass closing and a tacit acknowledgement of its current predicament. Profit and revenue growth have stalled, and itcannot simply build its way out of stagnation.

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During its heyday, new stores were the driving force behind its rapid sales growth, as it was adding close to 300 Supercenters a year before the recession. But the retail climate has since changed. Wal-Mart and its big-box peers are struggling, while rivals like Amazon.comand Costco Wholesalehave delivered consistent growth and grabbed share from the retail leader.

Source: Walmart

Considering the growing importance of e-commerce and a network of stores that are already within 5 miles of 70% of the U.S. population, management has realized that adding new stores will not provide the financial jolt it needs.

There is other evidence as well that the company is running out of white space, or new markets to penetrate.

In an over-stored land
Wal-Mart wasn't the only retailer to announce store closings recently. Joining it in shuttering stores following the holiday season wereMacy's,Gap,Sears, Kohl's,and several others.

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Retail analysts believe that the country is over-stored, or there are simply too many stores for the level of demand.Mall traffic is falling, and e-commerce is grabbing an increasing share of retail sales. Last year, 7.5% of overall retail sales took place through the e-commerce channel, and growth in physical retail fell to its lowest level since the recession. E-commerce accounted for two-thirds of the growth in retail last year, according to the Census Bureau, increasing by 15% while physical retail sales inched up just 0.5%.

Home Depot, one of the best-performing retailers since the recession, has resisted opening new stores, instead investing capital in improving its current stores and its e-commerce platform, which has led to blowout growth in profts and share price.

Significant shrinkage
Despite closing 269 stores earlier this year,Wal-Mart is still opening new locations, just at a much slower pace than it once did. The chart below shows the increase in square footage at its U.S. stores segment since 2002.

Wal-Mart U.S. Square Footage Growth
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As you can see, before the recession Wal-Mart's expansion was steadily accelerating as it grew its real estate footprint by about 8%-9% each year. In the current year, that number has dropped to just 1.5%, its slowest real estate growth rate this century. Its international segment has followed a similar trajectory. In fiscal 2012, it added 42 million square feet of store space, but just 9 million in fiscal 2015, the latest year for which data is available.

Instead of aggressively opening new stores, CEO Doug McMillon is implementing a number of tactics to spark sales growth, including:

  • Investing in store-level staff by increasing wages and training. Wal-Mart raised the base hourly rate to $9/hour last year, and again to $10/hour this February. The decision will cost about $3 billion, and helped cause profits to decline, but management believes it's necessary to remain competitive. Wal-Mart also claims its customer satisfaction and in-store operational execution are improving.
  • Investing in e-commerce. Wal-Mart plans to spend a record $1.1 billion on digital sales this year as it's belatedly recognized the importance of competing online. Sales growth in the category has been disappointing in recent quarters, falling to just 8% over the holiday period.
  • Similarly, it's expanded its grocery pick-up program, which allows customers to order online and pick up at a station in the store parking lot. The initiative is crucial for Wal-Mart, as grocery has been the source of all of its domestic growth since 2008, and the segment is mostly protected from Amazon.

Based on recent results, none of those strategies have taken hold so far, and Wal-Mart will probably never see the kind of growth it put up in the 2000s in the mid-to-high teens, especially with new store expansion having slowed significantly. Wal-Mart expects earnings growth to return next year as it laps the heavy investments this year, but with stiff competition and a lack of new stores, it will need either significant same-store sales growth or for its e-commerce platform, grocery or otherwise, to catch on.

The article Wal-Mart Is Running Out of Room to Grow. What's Next? originally appeared on Fool.com.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.