Wal-Mart Focuses On Improving Assets, Products
Last updated Tuesday, October 28, 2008 7:10 PM CDT in Business
By Kimberly Morrison
THE MORNING NEWS
Wal-Mart Stores Inc. executives on Tuesday were confident -- and at times, unusually candid -- with analysts about everything from their international growth strategy to a failed attempt to offer mortgages through a now defunct bank.
Chief Executive Officer Lee Scott was briefly even empathetic to the crowd of about 200 Wall Street elite gathered at the John Q. Hammons Center in Rogers during his final remarks in the company's two-day investor meeting.
"I would like for you to know that we as a group, as a team, understand and have empathy for what you all are going through right now. Having been through several years of being under fire ourselves, it is not without experience that we say that," Scott said. "These are certainly challenging times and we as a management team would like to do our best to be part of the solution, not only what is happening in the United States, but around the world."
Mike Duke, vice chairman of the world's largest retailer, said the company leaders in its international markets like Japan, Brazil and India are "laser-focused" on price and driving returns on investment.
Domestically, Wal-Mart is focused on store renovations to drive capital efficiency and forecast comparable store sales, a key metric of sales from stores open at least one year, would be in the low single-digit growth.
Growth Projections
Wal-Mart's capital expenditures through next year will remain about the same as a year ago, but will be allocated more heavily to remodels as part of the retailer's capital efficiency model.
Capital spending through this year is projected to be approximately $13 billion, down from about $14.9 billion last year. Worldwide capital spending is projected to be $13 to $14.5 billion through next year and will add up to 20 million square feet next year, up from the 18 million square feet added last year.
Almost Mortgages
Wal-Mart has repeatedly said it no longer plans to seek an Industrial Loan Charter to enter branch banking services, but Scott said the retailer was recently on the verge of offering mortgages.
"We were getting ready to do mortgages like a week before one of them went away, and that was going to be our partner," Scott said in responding to a question from an analyst about opportunities in the financial sector. "So I'm glad we're not doing them, but I just don't know that the political climate has changed. I don't know about our appetite to own a bank and some of the things have changed in the background that eliminate some of the savings we would have had, so you have to be careful."
Seiyu Execution
Wal-Mart executives were happy to report a successful turnaround in Japanese subsidiary Seiyu Ltd. The announcement at last year's investor meeting that the company planned to fully acquire the retailer that had failed to turn a dime under Wal-Mart's direction did not sit well with analysts.
But the move allowed Wal-Mart to fully implement its plan, and executives said it was the right move with little disagreement from the crowd.
"I'm happy to tell you the turnaround is going quite well," said Ed Kolodzieski, Chief Executive of Seiyu.
The 12-month turnaround for Japanese subsidiary Seiyu included streamlining operations, which included closing two distribution centers, consolidating some other operations and completing 50 remodels. The company recently discontinued mail-order operations and announced a voluntary early retirement plan for some Seiyu employees.
Duke, responding to a question from Goldman Sachs analyst Adrianne Shapira, said the Japan operations have generated an operating profit, but declined to offer more specific figures.
Union Legislation
Wal-Mart found itself against steep criticism in August for requiring its employees to attend informational meetings about a bill that would make it easier for employees to form unions. Some employees said the company was telling them how to vote; Wal-Mart said it was attempting to educate their work force.
One analyst asked Scott about how the company's performance might be affected if the hypothetical passage of the Employee Free Choice Act.
"I thought it was titled the 'forced choice act,'" Scott joked. "We like driving the car and we aren't going to give the steering wheel to anybody but us."
Balance Sheet
Tom Schoewe, chief financial officer, said the focus on free cash flow has made Wal-Mart a stronger and more viable company, especially compared to its peers. The company has generated $11 billion in free cash flow over the past 12 months, which beat the top five performers in Standard & Poor's Retail Index.
Wal-Mart's operating income growth in the past 12 months is up $1.9 billion while the S&P is down $4.6 billion.
"How many companies could stand before you today and say the balance sheet is stronger today than it was a year ago?" Schoewe said.
Opportunities
An analyst asked Scott where that new capital might be best allocated, and if it might consider pumping some into the market or looking at buying floundering companies not in retail.
"I think what we've proven over the years is we're a pretty good retailer, but we have to remember that's what we are," Scott said. "There are going to be things we would never have been able to do in the past that make sense for the customer and this company, and give you returns, that maybe we would look at."
Analyst Takeaway
Joe Chumbler and Scott Alaniz, analysts with local firm Boston Mountain Money Management, said in a note to investors that Wal-Mart will hit a bulls-eye by targeting mom this holiday season and the company's price leadership should lead to stronger sales than competitors. They were also positive on store remodels, which they said are a low-risk investment and provide excellent returns.
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