When Wal-Mart sneezes, the whole world gets wet.

Sluggish sales growth at the retail giant's domestic stores has fueled questions about everything from its merchandising mix to its expansion strategy. Older stores are looking, well, old, and Wal-Mart is having a tough time breaking into markets where it has historically not had a presence — notably the Northeast, the West and traditional union towns where organized labor and community activists have been fighting to keep the behemoth from Bentonville out. Moreover, years of bad press and ongoing litigation, including the largest civil rights class-action lawsuit in U.S. history, alleging widespread discrimination against female employees, haven't helped.

Through it all, Wal-Mart's stock has held steady, rising 3.6 percent over the last 12 months. Still, this price growth is pokey compared to its more nimble peers. Target Corp., for example, is up 15.9 percent over last year. For Wal-Mart's stock to gain any momentum, observers say, the company is going to have to do better.

So, should landlords be worried about the biggest player on the block?

“I think it's fair to say Wal-Mart is stumbling. I think they are vulnerable…to various niche retailers,” says Joseph Beaulieu, a stock analyst with Morningstar Inc. in Chicago. “But as of now there's no one that can stand up to them in terms of scale, pricing power and influence over vendors.”

And that is the biggest reason why whatever troubles Wal-Mart is having, no one is predicting doom for the world's largest retailer anytime soon. Moreover, aside from a few missteps in Germany and South Korea, Wal-Mart has enjoyed immense success overseas, which has boosted the company's total sales growth even as its U.S. stores wheezed.

How big should this behemoth get?

After the furious growth enjoyed by Wal-Mart over the last two decades, signs of maturity are to be expected. But the company, which recently boosted its annual dividend 31 percent to 88 cents per share, up from 67 cents, is still spending up to 80 percent of its operating cash flow on opening new stores. Wal-Mart operates more than 4,000 stores in the United States, including 2,257 mammoth-sized Supercenters, up from 721 in 2000. This reflects a shift away from Wal-Mart's smaller traditional discount stores, which currently number 1,074, down from 1,801 in 2000. The company is also continuing to build its food-focused neighborhood markets, a relatively new concept, and its Sam's Club warehouse chain.

Impressive as it is, some analysts and investors say the pace of growth needs to slow down. Wal-Mart's domestic square footage growth has averaged about 8 percent a year for the past several years, even while its sales growth has declined, Credit Suisse analyst Michael Exstein observed in a recent research note. U.S. comparable sales were up 2.1 percent for 2006, the slowest pace in nearly a decade. By comparison, 2006 same-store sales for the industry were up 3.7 percent.

“Increased size is creating all sorts of problems for the organization,” Exstein wrote, “including higher cannibalization, less consistent store standards, spreading management talent thin resulting in weaker execution, and media and activist scrutiny, which is getting larger by the day…or the store count.”

And where is all this growth coming from? Exstein and others have observed that Wal-Mart is not so much taking sales away from other retailers as it is cannibalizing its own stores. “The company itself has indicated that in some markets, 50 percent of a new store's first year sales come from neighboring Wal-Mart stores,” he noted.

The idea of Wal-Mart slowing its domestic expansion might come as good news to some landlords, particularly owners of so-called “shadow-anchored” strips — anchorless properties that use adjacent big boxes or shopping centers to drive traffic — says Joseph French, national director of retail for Irvine, Calif.-based Sperry Van Ness. In many markets, the location of the Wal-Mart dictates where commerce takes place, French says.

“Basically, all the landlords that owned a smaller Wal-Mart lived in fear that Wal-Mart would all of the sudden come to their area and build a new Super Wal-Mart in another part of town, and close the old store even if it has 10 years left on the lease,” French says.

Wal-Mart did not return calls for this article, and several landlords either declined comment or did not return calls.

Where to next? (not Manhattan)

To mitigate the cannibalization problem, Wal-Mart will have to make a greater push into communities where it doesn't already have a presence, observers say. Instead of new construction “in the middle of nowhere,” French said, Wal-Mart is now looking for ways to wedge itself into already settled commercial zones — in sometimes hostile territory. But success in these urban environments will require a different approach than the one that has worked so well in rural markets where costs are lower. The question is, how many of its old rules is Wal-Mart willing to break?

An initiative launched last year may help boost Wal-Mart's image in certain urban areas. Through its Jobs and Opportunity Zone program, 10 stores around the country will work with local businesses, suppliers and community groups to help spur economic development in the surrounding neighborhoods. The goal, Wal-Mart says, is to help small businesses “capitalize on the benefits of having a Wal-Mart in their community.”

The first Zone was in Chicago, currently the largest city where Wal-Mart operates. It opened its first Windy City store last year, but only after the defeat of a union-driven ordinance requiring big-box retailers to pay higher wages. The company has expressed interest in opening as many as 20 stores in Chicago. Other Zones are planned in Cleveland, Richmond, Calif., and Landover Hills, Md., where the first Wal-Mart inside the Capital Beltway opened in March.

A Wal-Mart that opened last year in White Plains, N.Y., was heralded as an “urban model” for future construction in the tri-state area, where the company currently has only a handful of stores. The 180,000-square-foot store is split into two levels underneath a parking garage. Wal-Mart has also operated a three-story concept to great success at the Crenshaw Baldwin Hills Plaza in South Los Angeles for the past five years.

Whether Wal-Mart will plant its flag in New York City itself remains to be seen. So far, attempts to open stores in Queens and Staten Island have failed amid staunch community and union resistance. And the economics of income versus expense make a Manhattan Wal-Mart unlikely; CEO Lee Scott told the New York Times in early April he didn't think it was worth the effort.

It's in the (merchandising) mix

With $345 billion in total sales and more than 6,700 stores and 1.8 million employees around the world, no retailer comes close to Wal-Mart in terms of size. That said, the most oft-mentioned domestic competitor is Target. The Minneapolis-based discounter is hardly nipping at Wal-Mart's heels, with just under $60 billion in sales and 1,500 stores in 47 states, but most agree the behemoth of Bentonville could take a few pointers from its stylish rival.

No stranger to fitting into tight urban spaces, Target already has stores in the Bronx, Queens and Staten Island and recently cracked the Manhattan market with an agreement to occupy a space in Harlem, with nary a peep from the same forces that have fought tooth-and-nail to keep Wal-Mart out. It's known for its creativity on the inside, as well: Alliances with big-name designers like Isaac Mizrahi, Mossimo and Michael Graves have helped win affluent shoppers.

Hoping to lure shoppers and boost sales, Wal-Mart has launched a massive effort to revamp some 1,800 stores over an 18-month period. The improvements, including wider aisles, simulated wood floors and less-cluttered displays, are meant to showcase another change — a freshened mix of merchandise. Taking a page from Target's book, Wal-Mart is attempting to offer more upscale goods, from organic food and personal electronics to housewares and apparel. Its newest private label offerings include Metro 7, aimed at urban women, the U.K.-designed “George” clothing line and a home decor collection by entertaining celeb Colin Cowie.

Wal-Mart is also embracing the concept of customer “segmentation,” meaning it plans to customize the mix and layout of goods to suit local demographics. The company has identified six distinct groups: Hispanics, African Americans, “empty-nesters/boomers,” affluent, suburban and rural shoppers.

It's a Wal-Mart world

Buoying efforts to retool its business at home is the incredible success of Wal-Mart abroad. The retailer became an international company in 1991 when it opened a Sam's Club in Mexico City. It now operates more than 2,700 stores in 13 countries, and saw its international sales climb 30 percent to $22.7 billion last year.

Its record overseas is not unblemished, however. Wal-Mart took an $863 million charge in 2006 when it sold 85 German stores to Metro AG after almost a decade of trying to succeed in Europe's biggest economy. It also withdrew from South Korea, selling 16 stores to the country's top retailer, Shinsegae Co.

What has helped Wal-Mart in Mexico, where the company is now the largest private employer, is its large scale and consistency of product and price. That has helped it throughout Latin America. And it may have been what hindered it in Germany; it's more difficult to compete in markets that already have established retailers and supply chains.

In China, Wal-Mart is in a race with its largest global competitor, French retailer Carrefour SA, to tap into the nation's booming economy and expanding middle class. An earlier entrant into the Chinese market, Carrefour has some 240 stores in China; Wal-Mart has 73 stores, and recently bought a 35 percent stake in Trust-Mart, a local discount chain that operates more than 100 stores.

It's also dipping a toe in India, where it is working on a partnership agreement with Bharti Enterprises Ltd. to invest up to $2.5 billion over the next eight years. In the United Kingdom, which accounted for 36.8 percent of Wal-Mart's international sales in 2006, its ASDA subsidiary has become Britain's No. 3 supermarket.

Even if Wal-Mart gets its merchandising mix right and finds a way to continue growing domestically without cannibalizing its own profits, it will still have legal problems to contend with. The most notable landmine on Wal-Mart's horizon is the class-action suit filed by Betty Dukes alleging discrimination against 1.5 million current and former female employees. Wal-Mart itself has estimated in court papers that the suit, filed in a California federal court in 2001, could cost the company billions of dollars in damages if it were to lose at trial.

And in the short term, Wal-Mart's less affluent customer base may be disproportionately pressured by tightening in the subprime mortgage market. The retailer known for “rock-bottom prices” has outperformed other merchants during slower economic times, Merrill Lynch analyst Virginia Genereux noted, but this pattern seems to be breaking down over the last 18 months. The danger to the company is difficult to quantify, she said, but subprime lender woes could pressure its comps into the second half of the current year.

But admirers think Wal-Mart still has plenty of cards yet to play.

“I see lots of opportunity for Wal-Mart. I don't think they're anywhere close to saturated,” says Rich Hollander, president of the Buxton Co., a Fort Worth, Texas-based retail research and consulting firm. “They will try lots of things…. When they stop trying new things, when everything they try works, that's when you'd better be a little nervous.”