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Looks Matter: Wal-Mart Hopes Facelift Boosts Profits

Heavy customer use has taken a toll on the four-year-old Wal-Mart in Crenshaw, Calif., a suburb in Los Angeles' San Fernando Valley.

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Heavy customer use has taken a toll on the four-year-old Wal-Mart in Crenshaw, Calif., a suburb in Los Angeles’ San Fernando Valley.

Graffiti is etched on a bathroom mirror, there are stains on rugs and dingy aisles remain crammed with merchandise.

About 20 miles north, a Wal-Mart in Panorama City, Calif., was remodeled in 2006. A fake wood laminate floor was put down in apparel, with a spacious grid of fixtures that hold coordinated outfits. Lower shelving enables customers to see across the store. New auto-flush toilets were installed.

Shopper Lupe Marrufo, who used to avoid the Panorama City store, said, “This is the first time I’ve gone into this one and thought, ‘This is OK. Now everything looks pretty good.'”

In Gadsden, Ala., about 60 miles north of Birmingham, the remodeled electronics department lured customer Rachel Odom to splurge. “I didn’t even come here to shop for a TV,” she said. “But when they set the nice ones out on display, everything looked so much sharper…and I had to have it.”

Wal-Mart, which built its reputation with low prices and never placed a premium on appearances, now believes clean, contemporary stores are required to woo middle-class shoppers and reinvigorate its lagging U.S. division.

The world’s largest retailer generated $352 billion in revenue last year, and plans to slow the pace of expansion in the U.S., focusing instead on making existing stores more profitable. To achieve that goal, Wal-Mart needs better venues to display the apparel and home decor that it has been working to upgrade. During the past 10 months, the Bentonville, Ark.-based retailer has taken jackhammers and paint rollers to 1,300 stores across the U.S. as part of its biggest remodeling effort in corporate history.

What may be good for the long haul, however, has been painful in the short term.

Work resumed in January after an almost two-month hiatus for holiday selling. The retailer aims to complete partial or full remodels of 500 more stores, for a total of 1,800, by yearend. Disruptions from the projects hurt same-store sales in the third quarter and, by extension, the stock price. Wal-Mart posted its first comps decline in a decade, down 0.1 percent, in November.

The results were better during the fourth quarter, when construction was suspended. U.S. same-store sales rose 1.6 percent, topping analyst expectations, and revenues rose 11 percent to $99.08 billion. But weakness in key categories of home and apparel returned in February when Wal-Mart U.S. sales rose 0.9 percent, below analysts’ expectations of 1 to 2 percent growth.

“We’re expecting a bumpy ride in the first half as these special projects start up again,” said Christine Augustine, a retail analyst with Bear Stearns. “We are expecting disruptions through midyear, but we are ‘outperform’ rated on the stock because I feel there is some light at the end of the tunnel.”

Mark Miller, a retail analyst at William Blair, reiterated his “outperform” rating, noting in a Feb. 21 research report that “comp sales appear poised to strengthen as we move through 2007, given easier comparisons, uplift from 2006 remodels (and less disruption from 2007 remodels), and stronger real-wage growth.”

Wal-Mart would not comment on the remodeling.

Some retail and financial experts believe Wal-Mart has not received enough credit with customers and Wall Street for merchandise improvements because the fashion has been lost in cluttered, drab stores.

For much of the last three years, sales in stores open at least a year have lagged rival Target Stores Inc. as Target excelled at reaching middle- and upper-middle-class shoppers.

More troubling, Wal-Mart’s stock price has been flat for about seven years and pressure is mounting on chief executive officer H. Lee Scott and Eduardo Castro-Wright, president of the U.S. division. The elevation of chief marketing officer John Fleming to chief merchant in January also signals Wal-Mart is serious about all facets of style.

Fleming is said to be charged with aligning marketing and merchandising to give Wal-Mart a more contemporary aesthetic.

Remodeling so many stores simultaneously has been both costly and, at times, chaotic. During construction, same-store sales at stores being remodeled dropped by 300 basis points, according to data Wal-Mart released to financial analysts in October. Once the work was completed, sales increased by 100 basis points in apparel and 300 basis points in electronics.

Kaye Young, senior vice president of Columbus, Ohio-based retail consultancy Retail Forward, visited about 30 U.S. Wal-Mart stores in October and November. She encountered jackhammering, associates shouting over the din, apparel racks pushed into a central, unreachable clump, blocked aisles and cold winds whipping in from doors propped opened.

“You could see people were clearly frustrated,” Young said. “Whole sections of things would disappear and not reappear.”

At the company’s October meeting with analysts, Scott conceded he was “surprised the disruption that occurred during the remodels was as extensive as it had been.”

Whatever the cost in temporary chaos, many financial analysts and retail experts believe store overhauls are a must.

“When you look at the freshness of Target and some of the other off-mall stores, you realize what a big problem Wal-Mart has in aesthetics,” said Howard Davidson, chairman of retail consultancy and investment firm Davidson & Assoc. The arrangement of Wal-Mart’s older stores is particularly ill-considered. “No woman gets in the mood to buy fashion when there are huge stacks of cookies in the aisles,” he said.

Bear Stearns’ Augustine said it’s not just remodels creating turbulence. New regionally based operations teams, shifts in labor scheduling and a new method of shipping goods to stores based on how fast they are sold (known as “remix”) has transformed many of Wal-Mart’s operating practices.

“They are pretty much executing change across the entire organization,” Augustine said. “If this were a case study, you’d say, ‘Whoa, recipe for disaster.'”

Amid concern on Wall Street, Castro-Wright has defended his decision to move quickly.

“We could have waited 24 months to have everything in place and then start implementing, but we decided…if we get 80 percent right, it’s enough,” he told analysts in September. “We embarked on a very aggressive process to remodel stores based on the information available to us at the time as it relates to segment. Will all of it be absolutely correct? Certainly not. But we believe that it will be correct enough and will help us drive comp growth.”

In the past, Wal-Mart would just as often relocate a store to a bigger space as invest in a major remodel. Executives were fond of saying that a pretty store didn’t necessarily sell more merchandise. That attitude is changing. Wal-Mart will spend 10 to 13 weeks per project to completely remodel 325 stores this year.

Those are in addition to the “special project” remodels, essentially fixes of “image” areas like apparel and bathrooms, where the retailer’s research suggests customers are most likely to form a positive or negative impression. Work lasts about a month per project.

In apparel, Wal-Mart brought in three-quarter-length mirrors, benches for waiting customers outside fitting rooms, corner “X” fixtures with lifestyle images that delineate a brand shop-in-shop and standardized, four-way fixtures that allow pants to hang with a coordinating jacket and tops. Some apparel departments will have a dedicated cash register.

The retailer pruned apparel stockkeeping units by 20 percent, according to a research note from Citigroup analyst Deborah Weinswig. Wal-Mart is following a broader retail trend that favors a narrower focus on the best-selling styles in any given category.

In addition to the standard upgrades, including laminate wood floors in apparel, projects are increasingly tailored to fit one of five store profiles: suburban, urban, Hispanic, Baby Boomer and rural. The rural group of about 2,000 stores is by far Wal-Mart’s biggest category, representing the traditional small-town base where Wal-Mart remains virtually the only game in town. The other segments represent relatively newer opportunities. For instance, Wal-Mart has identified 300 urban stores where more than 40 percent of the customer base is Hispanic or African-American.

“Those stores sell more apparel than our national average, they sell more housewares, they sell more health and beauty aids,” Wal-Mart vice chairman John Menzer told analysts in June. Apparel departments may be larger in those stores.

Wal-Mart has also identified more than 200 stores where 40 percent of the customer base is 55 or older; these units have larger pharmacies with lowered counters and smaller children’s departments. There are at least 300 stores serving customers with an average annual household income of $75,000 or more.

The retailer has designated certain stores as laboratories. The ballyhooed Plano, Tex., unit, for example, is the testing ground for understanding the affluent, suburban customer. Based on experiences in Plano, Wal-Mart will eliminate the loudspeaker in new and remodeled “affluent” stores. Those units are likely to get amenities such as granite countertops in the bathrooms. In some highly competitive Texas markets, there are larger dressing rooms and stone inlay at entryways.

Bruce Dybald, president of retail design firm Design Forum, which has worked with Kohl’s and Ann Taylor, said Wal-Mart must be relentless in eliminating weaker performing sku’s.

“When you clear away the clutter, you get much more credit for what you actually have,” he said. “Wal-Mart has not shown the customer a good story about improved product.”

— With contributions from Emili Vesilind, Los Angeles; Rusty Williamson, Dallas, and Elizabeth Thurman, Birmingham, Ala.

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