How Wal-Mart's new US head can right the business

Newly appointed Wal-Mart U.S. CEO Greg Foran won't have much time to celebrate his big promotion.

After being tapped by the retailer to fill the role of exiting U.S. Chief Bill Simon, analysts said there's much work to be done at Wal-Mart, which has posted negative domestic same-stores sales for the past five quarters.

Dragging on the world's largest retailer is a lower-income consumer that has struggled to recover; dollar stores that have stolen many of shoppers' weekly fill-in trips; and price transparency that has spread consumer spending to other low-cost stores.

"He certainly has a significant challenge ahead of him," said Ken Perkins, president of Retail Metrics.

CEO of Wal-Mart China, Greg Foran, attends a news conference in Beijing. He will take over the reins of Wal-Mart U.S. on Aug. 9.
Kim Kyung-Hoon | Reuters

The biggest step in righting the ship at Wal-Mart, Perkins said, is to continue growing the small-store footprint. These include its Neighborhood Market stores, which average about 38,000 square feet, and its Wal-Mart Express stores, which average about 15,000 square feet.

These stores fill a void in the big-box retailer's supercenter focus, which tend to be located away from city centers and require a larger time commitment from shoppers. Their location is one reason that dollar stores have stolen away some share, as consumers don't need to use as much gas for their mid-week fill-in trips. Wal-Mart's smaller stores should recapture some of this missing revenue and also attract a new, more urban customer base, Perkins said.

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The segment has been a bright spot for the U.S. division. In the most recent quarter, Neighborhood Markets posted a 5 percent comparable-store sales gain. At the company's annual meeting in June, McMillon said the company foresees 2,000 Neighborhood Market stores down the line, a significant expansion from its current total of less than 400 stores.

But there's also danger in growing these stores, Belus Capital Advisors analyst Brian Sozzi said. Because these locations carry many of the same products as a Wal-Mart supercenter, they eliminate customers' need to visit larger stores and potentially make additional, higher-price impulse purchases.

"There's no need to drive the extra five miles," he said.

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Foran's appointment is an opportunity for Wal-Mart to "start reimagining what Wal-Mart U.S. should look like," Sozzi said. In his opinion, this vision should include closing hundreds of underperforming stores and potentially halving the size of its supercenters by selling certain products exclusively on the web. (In the company's most recent earnings call, Simon said that about 10 percent of its supercenters are underperforming.)

Deutsche Bank analyst Paul Trussell said closing stores is on the table for Wal-Mart U.S. Foran joined Wal-Mart in 2011 and most recently served as president and CEO of Wal-Mart China. Under Foran's leadership, the China division shuttered stores.

"Perhaps [CEO Doug McMillon] is unhappy with the U.S. team's inability to maybe act quicker to take more aggressive steps like that," Trussell said. "It certainly is a telling sign that he skipped over all the lieutenants under Bill Simon."

Financial health of Walmart shoppers
Financial health of Walmart shoppers

Another area Sozzi said the retailer needs to improve on is its inventory levels, which are more in line with what he'd expect prior to the recession. He said the company is investing billions of dollars to offer low prices on items that remain on shelves for weeks at a time, causing further markdowns.

Along the lines of pricing, Perkins said Wal-Mart has made strides to bring consumers the lowest prices, but it may not have gotten there fast enough. For example, a recent study by retail price intelligence company 360pi found that Amazon and Sears edged out Wal-Mart on electronics pricing during June.

If Wal-Mart doesn't offer its target customer base the lowest prices, it will lose that sale, Perkins said.

"If they can get it elsewhere [for cheaper] then obviously they do that," he said.

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Credit Suisse analyst Michael Exstein said in a recent note that the retailer also has more opportunity on the general merchandise side of the business. One example is the recent revamping of its consumer electronics section, which was completed in June. Trussell also pointed to the company's acknowledgement that it needs to offer low-price private-label goods, as well as branded items.

On the plus side, Sozzi commended the retailer for taking strides in its digital offerings. He said it's been doing a good job leveraging social media and integrating its online offerings with the in-store experience.

The retailer's @WalmartLabs division is also looking to beef up this integration, and has made about a dozen acquisitions over the past three years. For the critical back-to-school selling season, will offer more than 75,000 items around the event—an increase of about 30 percent from the prior year.

Despite all of these initiatives, certain things remain out of management's control. Although the economy has added jobs, many lower-income consumers have struggled to find full-time work, Trussell said. On top of that, many were stuck with higher utility bills and are paying more for health care, which is taking more money out of their wallets. This bifurcated recovery led to Simon and Family Dollar CEO Howard Levine, earlier this month, making comments about the struggles their consumer bases face.

The National Retail Federation also mentioned the struggles of low-income consumers when it slashed its retail sales forecast for 2014 on Wednesday.

"Their ability to drive sales and earnings in-line relies on a household [with an income around] $25,000," Sozzi said. "That's a big burden to place on your investor base."

Foran will take over the reins of Wal-Mart U.S. on Aug. 9, a crucial time for the retailer's back-to-school push and not too far ahead the winter holidays.

Wal-Mart will announce its second-quarter earnings results on Aug. 14. The company expects diluted earnings per share between $1.15 to $1.25, compared with $1.24 last year. Consensus estimates from Thomson Reuters are calling for earnings per share of $1.21 with domestic same-store sales coming in 0.03 percent higher.

—By CNBC's Krystina Gustafson