Wal-Mart's first-ever sales drop marks the end of an era

By Shelly Banjo

Wal-Mart is clearly having trouble adapting its gigantic stores to the Internet age. Photo / Getty Images
Wal-Mart is clearly having trouble adapting its gigantic stores to the Internet age. Photo / Getty Images

Not every milestone is worth celebrating.

For the first time ever -- or at least since the company went public some 45 years ago -- Wal-Mart's revenues shrank from the year before, according to its annual financial filing released Wednesday.

Wal-Mart is clearly having trouble adapting its gigantic stores to the Internet age. To be sure, it is a retail juggernaut that brings in half a trillion dollars (yes, that's right, trillion) in sales every year. And with more than 11,500 stores in 28 countries, there's no way it will disappear anytime soon.

Still, Wal-Mart might have just hit its growth limit.

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And the sales dip comes despite the fact that Wal-Mart spent $11.5 billion (roughly matching what J.C. Penney made in sales last year) to build more than 400 new stores, remodel old locations, and revamp its website and other technology to better serve its customers.

Though Wal-Mart shares were a safe haven in the rocky start of 2016, investors are pricing in more weakness. The stock has fallen behind retail competitors and the broader market.

In February, Wal-Mart lowered its annual net sales growth forecast to "relatively flat," from earlier guidance that called for an increase of as much as 4 percent (the company has pointed out that previous guidance didn't account for currency changes, which have stung the global retailer).

Wednesday's filing attributes part of the 2015 sales drop to currency impacts and a decrease in fuel sales due to lower gas prices. Sales have also suffered from ongoing store closures, including the shuttering of its entire fleet of smaller, "Express" stores.

But Wal-Mart also acknowledged it has shifted the way it runs the company, dropping a long-time focus on growing net sales and cutting operating expenses as a percentage of sales. Its aim now is on making "strategic investments" to support the "long-term health of the company." While that's happening, Wal-Mart warned, it may not be able to deliver the kind of steady net sales and profit growth investors have grown accustomed to seeing. (Though it notes it will continue to build new stores and e-commerce capabilities and grow sales at established stores.)

While jarring, these changes aren't necessarily bad. Wal-Mart remains a massive retail force, and investors shouldn't discount the muscle behind any decision it makes. This can already be seen in its fast-growing mobile app and its rapidly expanding and seemingly successful grocery pick-up program, which lets shoppers order groceries online and then swing through a Wal-Mart drive-through to pick them up.

It's also pretty amazing that executives are finally willing to take poor results on the chin and veer away from precedent in order to morph the company from a mostly brick-and-mortar operation into one that serves customers the way they want to shop -- whether in stores, the web, on mobile, or a mix of all three. And if these investments work, they could position the company for another half-century of retail dominance.

But what Wal-Mart doesn't have is an unlimited amount of time. Reporting declining sales might be okay for a year or two, but at some point a turnaround plan could become a failed strategy. Its first revenue decline should serve as a wake-up call.

- Bloomberg.

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