By  on October 25, 2007

Predicting that Wal-Mart Stores Inc.'s U.S. division has turned a corner, president and chief executive officer H. Lee Scott said Wednesday the giant retailer is "properly positioned'' for holiday selling and to cope with a slowing economy.

Scott defended the decision to focus resources on international growth during a presentation to financial analysts in Rogers, Ark., arguing that it was in the best long-term interest of shareholders.

He forecast "continual improvement month-to-month over the next three to five years" in the U.S., adding that he is more confident about the company's management team and prospects than at last year's analyst meeting.

He conceded that slowing sales and profit growth in the U.S. division, Wal-Mart's largest with $226 billion in revenue, made him "very concerned about the second quarter — the merchandise and the quantities we had. I believe that [second quarter] was the low point.''

Wal-Mart made plan during the second quarter, but Scott said at the time he was disappointed in the U.S. division's results and cut the retailer's full-year earnings per share projections to $3.05 to $3.13, from $3.15 to $3.23. The move sent the stock down five percent.

"Of all the things I've worried about in my seven years in this job, the first half of this year was the most significant concern I've had,'' he said. "We lived through that, we managed through that — [chief merchant] John Fleming...and other people you don't know."

Amid the U.S. housing slump and a credit crunch, Scott declared that "our low-cost, value model should give us the advantage we have historically had" when consumer spending tightens.

Analysts applauded after Scott concluded a 30-minute question-and-answer session.

The $345 billion retailer has struggled with a stagnant stock price, decreasing returns on the U.S. business and operational missteps, as well as a core customer under increasing financial pressure.

Scott said the strategy for apparel — volume basics priced at $10 and less with limited fashion exposure — is "stronger than it was 12 months ago when neither you nor we could figure out what the direction was."Wal-Mart at one point had an elaborate psychographic scheme that described customers as "Gracie" or "Gwen" depending on willingness to adopt new trends, household income, age and other factors.

Unlike electronics and other departments, which have reported soaring same-store sales after remodels, the renovated apparel departments have not generated improved performances, Scott said, speculating that shoppers found the merchandise, rather than the layout, unappealing.

"We need to continue to invest to make that layout pay," he said.

Scott responded to criticism from some analysts on Tuesday of the decision to pay $875 million to acquire the rest of Seiyu, the Japanese subsidiary that has not turned a profit since Wal-Mart acquired a stake in 2000.

"International was a little more controversial yesterday than I might have expected," he said. "But the investments we have made historically are turning into value for our shareholders....We have always run this company for the long term and we will continue to do so."

In a long-view assessment of the global economy, Scott said: "We're in period of difficult economic times in United States...and we tend to forget what's going on in the rest of the world. But when it comes to consumers worldwide, the population of people living in households with an annual income of $5,000 or more a year is going to grow by 10 percent a year through 2015. So there are more consumers with more disposable income coming into market between now and 2015 than ever before. And the markets in which that's going to occur are many of the markets we are already in operation: China, India and markets where we hope to be sometime in the future — Russia."

Scott emphasized that sustainability initiatives have paid dividends for Wal-Mart in terms of operational efficiency and in reputational benefits. Although the company has come under fire for its employee wages and health benefits, among other issues, Scott said the improved reputation has allowed him to do fewer speaking engagements and manage the business more actively. Some financial analysts questioned whether Scott's role in putting out public relations fires in the last several years had hurt operations.

"Eduardo's [Castro-Wright, ceo of Wal-Mart U.S.] office is 30 feet away from mine and I don't want to be a hindrance," he said. "But I love knowing how many copies of Transformers we sold and asking why our market share was only 48 percent. I just love that stuff."As Wal-Mart slows its store openings in the U.S., the company is looking toward new businesses and toward squeezing waste out of its mammoth operations. The company recycles six million pounds of plastic trash per year, receiving credits back for the effort.

Even without a bank permit, Scott cited financial services as an area where Wal-Mart is particularly well-suited.

"We've faced long odds getting into financial services, but we think its an area that fits our [business] model perfectly," he said. "We can go in and lower costs dramatically and build scale."

Wal-Mart now processes two to three million financial transactions, such as money orders, each week.

Earlier, Michael Duke, vice chairman and Wal-Mart International ceo, told analysts that the $77 billion division, which generated about 22 percent of company revenue in 2006, will be treated as a major growth engine and receive corresponding financial investments in the next several years.

In comparison with the U.S. strategy, which has focused on Supercenters and a unified brand approach, the international division focuses on small stores and local brands, many of which were acquired in the last decade.

Wal-Mart operates more than 30 different store formats worldwide.

"We are obsessed with the local customer," Duke said. "The strength of Wal-Mart is we can be viewed as a local — and in many cases small, local — company, but [revenue] adds up globally."

Capital expenditures for Wal-Mart International will rise to as much as $5.8 billion in 2009 from $3.5 billion last year. During the same period, capital expenditures in the U.S. will stay flat, at about $15 billion.

"Wal-Mart International is in a period of unlocking shareholder value after our initial investments," Duke said, citing Wal-Mart Brazil and Wal-Mart China as two countries beginning to produce financially material returns. The countries generating the best returns — Canada and Mexico — plus China account for 80 percent of the planned square footage growth next year.

Wal-Mart de Mexico will open its first bank, Banco Wal-Mart, in November, which the retailer sees as a major opportunity. Wal-Mart has made several unsuccessful attempts to get a permit to open a U.S. bank to process financial transactions.The company is expanding its ASDA Living format in the U.K., a 30,000-square-foot store with home decor, apparel and other soft goods. It is rolling out more Supercenters in Canada and will launch George Home in the market next year.

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