No, it is definitely not a failure. It doesn't need a sequel, however. As a fighting game there is not much to add or improve anymore, I think. If Nintendo really wanted to develop Arms into a series or a franchise, then they could just swap the genre. If we know one thing then it's that Nintendo doesn't care about genres at all, so why not.
They could either turn this into a Jump n Run where the characters use their Arms to grab items from the distance or maybe use them for bouncing around and reach higher areas. Something like that. Or they could also turn it into a Beat 'em Up like Streets of Rage, where every stage is based after one character and that character is the stage boss. But a sequel with the same gameplay would be pretty unnecessary. Such a sequel would rather tank in the sales department and that would be a prime lesson in how to waste an opportunity and fuck up a new IP.
Gameplay > Graphics
Substance > Style
Art Direction > Realism