Why Cheap Just Isn't Enough Anymore for Walmart

Walmart Stores (WMT) has gone from being Sam Walton's modest five-and-dime store to ruling the roost as the world's largest retailer. However, it's starting to struggle lately, and that was clearly evident in Thursday morning's quarterly report.

Walmart's net sales grew by a weaker than expected 1.4 percent, and that was solely the handiwork of the struggling discounter adding more stores. Comparable-store sales for Walmart in the U.S. shrank by 0.4 percent during the seasonally potent holiday quarter, in line with the negative comps that it posted for the entire year.

Walmart's earnings guidance for the current quarter is well short of Wall Street expectations, and that's after spending $6.7 billion over the past year to buy back stock in a move that typically inflates profitability on a per-share basis.

Something's wrong, and Walton wouldn't like it if he were still alive.

Burning the Candle at Both Ends

Clearly folks aren't shopping at Walmart the way that they used to, and Walmart is quick to fault reductions in government benefits, higher taxes and stingier banks tightening credit.

This is coming at the worst possible time. Slowing sales is one thing, but it comes as the costs of running its business are inching higher. Walmart is playing the Obamacare card, pointing out that it has higher group health care costs to pay. Despite protests for Walmart to raise its wages, it's already spending more per employee.

Walmart is also trying to beef up its online presence with big investments in e-commerce. It is also accelerating the expansion of smaller stores and Sam's Club warehouse clubs across the country.

The end result is that Walmart sees operating margins contracting in the coming year. Put another way, the discount department store operator sees sales growing faster than its operating income. That wouldn't be too bad if its registers were ringing up a lot of sales, but it's just not happening.

Falling Short at Target Practice

This should have been a great quarter for Walmart. The employment picture is improving, giving a broader array of consumers more money to spend. Then there was the Target (TGT)hacking fiasco.

Three weeks into the holiday shopping season, the "cheap chic" rival warned that customer information was compromised by a hacker that was able to swipe tens of millions of credit card transactions. The well-publicized event should have sent fearful shoppers flocking to Walmart's shelves, and things were so bad at Target that it even resorted to a 10 percent markdown during the final weekend of the Christmas shopping season.

We'll know a little more about Target's likely dreary holiday performance when it reports results later this month, but the one thing we do know is that Walmart was not much of a beneficiary.

The future isn't likely to get any better.

Back to the Future

Back in October, Walmart was forecasting net sales to climb 3 percent to 5 percent higher in the new fiscal year. Now it is warning that it will likely land toward the low end of its earlier guidance. %VIRTUAL-article-sponsoredlinks%This isn't the first time that the retailer has failed to live up to its sales growth goals lately.

Walmart has always leaned on low prices as its selling point. Being the world's largest retailer leads to economies of scale and purchasing advantages that it passes on to customers.

Technology is big at Walmart. It crunches data on sales and shopping trends, all in an effort to keep costs low by stocking what folks are buying and turning over inventory as many times as possible.

Unfortunately, being cheap isn't enough. There were plenty of retailers posting negative comps this season, but there also several big chains that were able to grow in this climate.

Walmart's reputation for being cheap could be more a liability than an asset these days as folks with a little more money in their pockets upgrade to more traditional stores. Walmart can point to a list of factors that have weighed on comps during this economic recovery, but it ultimately leads to the retailer needing to refresh its image with consumers if it wants to win shoppers back.

Walmart can't discount its way to greatness anymore. Customers are demanding more than cheap prices, and Walmart is going to have to find a way to figure that out before it's too late.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.