Although Belus Capital Advisors analyst Brian Sozzi said small stores are a step in the right direction, he said it's "worrisome" that the retailer is still not addressing the problems in its larger-format locations. These issues include unproductive space and running out of stock in products such as fresh food.
Plus, with Wal-Mart's domestic fourth-quarter inventory growing 3.8 percent, its inventory is outpacing its comparable-store sales, Sozzi said.
After the retailer's lowered fourth-quarter forecast last month, Sozzi said he was hoping for Wal-Mart to announce about 100 store closings among its larger-format locations. Instead, the retailer announced plans to open 115 large stores this fiscal year.
(Read more: Time to close Wal-Mart stores? Analysts think so)
"That turning a blind eye is a recipe for long-term margin and returns pressure," he said.
Earlier this week, Credit Suisse issued a note suggesting that Wal-Mart acquire Family Dollar to jump-start its small-store effort. With more than 8,000 locations, the dollar store has a much larger presence in urban centers than Wal-Mart, including 50 locations in New York City and 82 in Chicago.
While Wal-Mart has tested small stores in the Chicago market, it has long struggled to gain a foothold in major cities. Despite a U.S. store count topping 4,200 units, the discounter has yet to break ground in New York City or Boston. And as it continues with its small-store expansion, this may be an aspect where Wal-Mart continues to slack.
Wal-Mart spokesperson Randy Hargrove told CNBC that it will expand its Express stores beyond its initial three markets (Arkansas, North Carolina and Chicago), but will continue its focus on its "core markets in rural and suburban locations."
In a call following its earnings report, Simon said that Wal-Mart always looks at opportunities to make acquisitions, but its small-store formats do between three to seven times the sales a typical dollar store would do, and maybe even more. Therefore, it's hard for the retailer to find an acquisition that fits its needs, Simon said.
David Birnbrey, chairman and CEO of The Shopping Center Group, said "there are a great deal of opportunities available to Wal-Mart for the smaller stores." He believes the retailer can accomplish its goal without an acquisition, saying in his 35 years in the business, "I've learned not to doubt Wal-Mart's ability to do anything."
Sozzi wrote that a material bump in the retailer's capital expenditures guidance for small stores put the idea of an acquisition to rest. He added the retailer protects its culture by promoting and growing from within, and typically goes against bringing outsiders into the mix.
"Moreover, a Family Dollar transaction would be an acknowledgment by Wal-Mart that its prior executives missed the small-store opportunity years ago," he said. "Wal-Mart is not one to acknowledge operating missteps."
—By CNBC's Krystina Gustafson. Follow her on Twitter