I just don't see where they can take ARMS from what it is now, and propel it forward in a meaningful way that deserves a sequel.  To me, it's a one off idea that worked relatively well and people got some enjoyment out of it.  Ultimately, though, what can they do better with a sequel VS just bringing out some additional content from time to time to keep the existing game from going totally stagnant.  I suppose they could wait a couple more years and do a remake for the next gen system.

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.