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For decades, Wal-Mart's growth has been fueled by a rapidly expanding store fleet that helped push its revenues higher.
But as the world's largest retailer pumps the brakes on its physical expansion, opting to shift its capital expenditures toward digital and store remodels, it will need to rely more heavily on its existing assets to drive future growth.
At its annual investor day in Bentonville, Arkansas, Wal-Mart on Thursday said it would open fewer stores in the U.S. this year than originally expected. By year's end, the company will have cut the ribbon on 130 new domestic stores, down from the 135 to 155 it originally projected.
This growth will slow more abruptly next year, when Wal-Mart said it will open just 55 stores in the U.S. The pullback applies to both its supercenters and smaller Neighborhood Market shops, which will open 35 and 20 locations, respectively.
Of the company's $11 billion in capital expenditures next year, 20 percent will be funneled toward new stores; that's a dramatic change from just four years earlier, when they accounted for almost half of Wal-Mart's $13.1 billion budget.
"This is a different Wal-Mart," Moody's analyst Charlie O'Shea said.
The timing is right for Wal-Mart to make this shift, Cowen and Company analyst Oliver Chen said. Wal-Mart's U.S. division has been building momentum over the past few quarters, including its biggest quarterly same-store sales gain in four years during the period ended July 31.
This strength has been fueled by a $2.7 billion investment in wages, which has better equipped its workers to make stores clean and more pleasant to shop. The company has also begun a multiyear project that involves spending billions of its own dollars to lower prices for consumers.
Growth in its online grocery business has likewise brought new customers into the fold, who tend to grab additional items when they pick up their orders. This capability has been rolled out to 80 markets and 500 stores, and will be in 100 markets and 600 stores by year's end, Chen said.
Because of these initiatives, the potential lift from its $3.3 billion acquisition of Jet.com and plans to give 500 of its stores a face-lift, Wal-Mart should be able to make up the revenues it forfeits by opening fewer stores, Chen said.
"There's so many physical customers that come to a Wal-Mart," he said, noting that 90 percent of the U.S. population lives within 15 minutes of a store.
The company said last year that it's targeting sales growth of 3 percent to 4 percent annually, excluding the impact of currency, which it's on track to achieve this year.
Wal-Mart's decision makes even more sense in the scope of its Jet deal, which closed last month, O'Shea said. Wal-Mart's digital sales growth accelerated in the fiscal second quarter, rising 11.8 percent, making this the first quarter that metric had picked up in more than a year.
Analysts view Jet as a critical piece of Wal-Mart's digital future. Wal-Mart has set its sights on 20 percent to 30 percent online sales growth in the second half and beyond, which O'Shea and Chen called achievable.
"You just spent $3.3 billion accruing this asset. You've got to maximize it ... and that's what they're doing," O'Shea said.
Wal-Mart on Thursday maintained its forecast for adjusted earnings per share of $4.15 to $4.35 this year. But its shares fell 3 percent as it walked back its estimates for fiscal 2018 and 2019.
Wal-Mart predicts fiscal 2018 earnings will be relatively flat with this year's adjusted figure. And in fiscal 2019, it expects earnings per share growth of 5 percent. Wal-Mart previously said it expected earnings per share in fiscal 2018 to increase modestly and then grow 5 to 10 percent in fiscal 2019.
"It's good that they've set a reasonable bar, and I think there's some upside potential," Chen said.
Both Chen and O'Shea agreed that while Wal-Mart's investments are expensive, they're necessary for the future.