Why Is Walmart Slowing Sam's Club's Unit Expansion?

- By Sangara Narayanan

Walmart (WMT) has been on a roll this year, returning to better-than-expected same-store sales as well as strong unit expansion planned for the year. On a constant currency basis, second quarter revenue grew by 2.8%, and the company raised its full-year adjusted EPS guidance range to $4.15 to $4.35 from the previous range of $4.00 to $4.30.


Walmart made many strategic moves this year, starting off with the closure of its small format Express stores, deciding to aggressively push its Neighborhood Market stores and buying Jet.com to provide the much-needed support for its ecommerce intiatives. But the recent initiatives also indicate Walmart's changing preference to concentrate on the Supercenter - Neighborhood Market - eCommerce strategy, which obviously leaves Sam's Club out of the picture.

The newfound thrust and focus can be clearly seen in Walmart's unit growth plan for the next three years. In fiscal 2016, Walmart added 161 small-format stores and 69 supercenters and had plans to add 70 small-format stores and 60 supercenters this year. In comparison, Walmart added only 13 Sam's Clubs in 2016 with plans to add another 11 in 2017.

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When you consider the fact that there were already 654 Sam's Club warehouses as of August, the addition of 10-plus stores might sound reasonable. But the difference is stark when you look at their historical expansion. Since 2015, unit additions for Sam's Club have slowed down considerably, and it looks that the trend will continue for the next three years.

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Just for the sake of comparison, Sam's Club's chief rival Costco (COST) opened 10 units in the fourth quarter alone, and also completed one relocation. Moreover, Costco intends to add 17 units in the U.S., seven in Canada and one each in Taiwan, Korea, Japan, Australia, Mexico, France and Iceland.

So, clearly, Walmart's move to add a small number of stores shows a basic strategic shift in Walmart's plans for the future. There's nothing wrong with that, but Walmart obviously wants to take care of the biggest threat of all, Amazon (AMZN), which has all the potential to be a huge headache for the company in the future.

Instead of fighting Costco on the one end and Amazon on the other, Walmart has chosen to go straight after Amazon by playing to its strengths - its Supercenter footprint along with the newly found strong point, the Neighborhood Market. What it's doing now is throwing an ecommerce platform under that, and Sam's Club is slowly being pushed to the background as a result.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.