There are a couple of events that you may have missed. The sledge hammer is in the warehouse, so it sounds like you're not able to get in there yet. If Arlene is standing outside the warehouse door, then just talk to her and she'll give you the red key. Once you go in the warehouse, go down a screen and there is a tunnel to go through. On the other side is the sledge hammer.
If Arlene isn't standing outside the warehouse, then probably you've not talked to her yet and gotten the purple key. If she won't give you the purple key, it's because you didn't talk to Willis. But because you've done 4/6 levels I suspect you've already done both those things. Anyway, Willis is across the bridge to the west of the warehouse. Arlene is in the house in the bottom left of the screen called "Stantonsburg East." If she is not there, then she already gave you the purple key.
She'll just be gone for a while until you use the purple key to do the level in the upper left of the town. Once you do that, then she'll turn up just to the left of the warehouse and you can get on in.
Once you have the sledge, you can go up north and find the water balloons, and from there you can get to the rest of the levels.
Hope that helps!