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Walmart Plans to Allocate Capital to High-Growth Store Formats

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Cash flow

At its management update to the investor community on June 5, Walmart (WMT) management discussed its capital allocation policies. The world’s largest retailer (XRT) (RTH) envisages higher investment over the next two years, which could result in a top line that’s higher by $10 billion to $20 billion each year.

In fiscal 2015, Walmart grew sales by $9.3 billion to a record $485.7 billion. All three Walmart segments—Walmart US, Walmart International, and Sam’s Club—posted record sales. The company generated an operating cash flow of $29 billion, also a new record for the company.

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Store formats

Walmart discussed its supercenter and neighborhood store formats at the investor update. As part of its capital optimization plan, the retailer is looking to roll out more neighborhood format stores. These would mainly be located in high-density urban areas, where it could compete with the likes of Dollar General (DG), Family Dollar Stores (FDO), and Dollar Tree (DLTR).

Smaller urban formats cost less and are quicker to get off the ground. Neighborhood stores reported comps (comparable same-store sales) growth of 7.9% in 1Q16, as compared to 1% growth in Walmart’s overall US operations.

Walmart is also bullish about its larger supercenter format, which averages 150,000 square feet in size. Citing stats from Euromonitor International, the company believes the hypermarket business can grow by $0.33 trillion over the next ten years.

The average size of the supercenter has been scaled down from 220,000. As a result, the retailer believes it’s going to be challenging to get the product selection right.

Share buybacks

Walmart management wouldn’t commit to specifics on the share buyback target for fiscal 2016. The company wants to work out its repurchase formula depending upon surplus cash flow generation and the prevailing stock price. As well, Walmart is committed to maintaining its AA debt rating, which may put a cap on the use of debt to finance share repurchases.

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