Wal-Mart Sneezes, but Nobody Else Catches the Cold

Are Wal-Mart Stores' problems about to become everyone else's?

Probably not, and that may be the most telling statement about where Wal-Mart is at this moment in time.

Walmart Stores
Source: Walmart
Walmart Stores

It used to be, if Wal-Mart wanted to be more aggressive, other retailers needed to look out.

But recent missteps in strategy have compounded its problems, putting Wal-Mart in the position where it appears more likely to steal winning concepts from its rivals, rather than it—the world's largest retailer—setting the tone.

After seven straight quarters of declining U.S. same-store sales, Wal-Mart is looking to new leadership to turn things around, but the company expects it will be a while before these efforts bear fruit.

The retailer also is acknowledging that it may have gone too far in cutting its inventory and it will be putting some items back on the shelves.

"The trouble is you are layering negative on top of negative," said Brian Sozzi, a retail industry analyst at Wall Street Securities.

Sozzi rates Wal-Mart shares a "sell." Despite Tuesday's steep decline, he expects the shares could go even lower—he has a $50 price target on the stock—as there is an argument to be made that the stock is not cheap enough relative to Target and other stronger-positioned competitors, chiefly dollar stores.

Dollar stores such as Dollar General and Family Dollar have been expanding aggressively and consumers are finding it very convenient to pop in and grab an item or two.

Part of Wal-Mart's four-point strategy will be to pull more of these convenience items to the front of the store, making it easier for customers to make a quick stop if they wish.

However, as Sozzi notes, it will be tough to coax these customers back into the store.

"They will have to get out and market this stuff," Sozzi said.

The other prongs of the strategy involve price leadership and improving the efficiency of its store remodel.

Sozzi said he would like the company to improve its apparel offerings, and get creative like Sears did when it announced a partnership with youth-oriented Forever 21 clothing stores.

Whether these strategies will work is debatable, but at best it will take awhile for these efforts to gain traction—a point Wal-Mart's chief executive was frank about.

"Some of the pricing and merchandising issues in Walmart ran deeper than we initially expected, and they require a response that will take time to see results," CEO Mike Duke said in the company's earnings release.

And unfortunately, Wal-Mart will still have headwinds to fight. Gasoline prices are rising, and its lower-income customers are particularly sensitive to these fluctuations. And with rising costs for cotton and other materials, it may be difficult to keep prices low and still eke out a solid profit margin.

Add that to still-high unemployment, and it is clear it will be a big challenge for Wal-Mart.

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