Walmart Express Stores a Surprise Success

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In a conference presentation earlier this week, Bill Simon, the CEO of US operations for Wal-Mart Stores Inc. (NYSE: WMT), made some comments about the 10 Walmart Express stores the company now operates. These are 12,000-15,000 square foot stores that Simon describes as “hybrid between a food, pharmacy and convenience; some have gas, some don’t; most have a pharmacy, but some don’t.”

Simon goes on to say:

What we were really trying to do was [prove] the top line, and what we’re finding is that inside of 12 months they are actually delivering a positive bottom line as well. … Now, the next phase for us is about how big could this be. And I think that’s important in that we’re moving into a phase where we are going to work on the construction costs and we’re going to work on the distribution costs. Again, already profitable, but we want to get them up to what would be the fleet average, or hopefully beyond that. And we’re also going to work on density, like how many can you build in a market and to what point do you have to get you for this to matter on our large base.

So you will see us in the back half of this year go to a market and build them out very densely so that we can understand their interaction with the rest of the market, including us.

In answer to a question, Simon emphasized that the top line is driving the stores profitability. The company’s massive supercenters maintain 70% of Walmart’s inventory. These small stores don’t have the space for that, so store employees have to pick apart deliveries just as they would if they worked in a mom-and-pop store. That costs money, but the higher revenues Walmart is getting are the result of the “convenience” aspect of the stores, and could make the concept profitable provided the company comes up with a reasonably low-cost distribution scheme.

Walmart’s shares closed at $65.07 yesterday, slightly down from a new 52-week high of $65.18. The low end of the range is $48.31.

Shares are less than $5 from an all-time high and less than $0.25 from analysts’ consensus target price. Walmart may not be a value play in the retail sector, as we noted in our review of retail stocks yesterday, but the share price has jumped 9% since the beginning of the year and nearly 18% in the past 12 months. That’s not bad for a behemoth like Walmart.

An edited transcript of Simon’s presentation is available here and the slides are here.

Paul Ausick