Wal-Mart announced plans Monday to adjust its growth model, scoring a hit with Wall Street.
The world's largest retailer will slow the pace of U.S. expansion and spending next year as it seeks to improve returns and jump-start its stock price.
In another key shift, the company intends to halt a market saturation strategy in which giant supercenters — stores of at least 100,000 square feet or more — were built a mile apart, which cannibalized existing store sales and was unpopular with some investors.
Wal-Mart, which has been lagging in apparel, will also remove the trendy Metro 7 line from some stores.
"For the past several years, our company goal was 8 percent annual square footage growth," said Wal-Mart vice chairman John Menzer, speaking Monday during the company's annual two-day presentation to Wall Street analysts in Teaneck, N.J. "We believe now because of the company's size…this level would be difficult to achieve in future years."
Wal-Mart, which has more than 6,500 stores in 15 countries and reported sales of $312 billion last year, said it would grow square footage by 7 percent in the U.S. and 10 percent abroad in the next year. It plans to build 305 to 330 stores in the U.S. Of those, 265 to 270 will be supercenters.
Capital expenditures for building and remodeling stores will only grow 2 to 4 percent next year, compared with about $18 billion in 2006, which was a 15 to 20 percent rise over the previous year, chief financial officer Tom Schoewe told analysts.
"We can still grow very rapidly, but what you're going to sense is a lot more concern about capital efficiency," he said.
Wal-Mart shares, which have mostly been stuck at less than $50 for years, jumped $1.91, or 3.87 percent, to close at $51.28 in New York Stock Exchange trading, the highest level in about 20 months.
Propelled by optimism about earnings reports, cheaper gas and Wal-Mart, the Dow Jones Industrial Average jumped 115 points, or 0.95 percent, to close at a record 12,116.91, breaching the 12,100 mark for the first time after crossing 12,000 just last week. Several retail stocks traded heavily, with teen specialty retailer Abercrombie & Fitch up $3.97, or 5.29 percent, to close at $78.99. Shares of Pacific Sunwear jumped 95 cents, or 5.85 percent, to $17.18, after Bank of America upgraded the company's stock on the anticipation of a turnaround under new leadership. Shares of Gap Inc. also rose by 76 cents, or 3.94 percent, to close at $20.06.The Standard & Poor's 500 index increased 8.42, or 0.62 percent, to 1,377.02, and the Nasdaq composite index was up 13.26, or 0.57 percent, to 2,355.56.
Wal-Mart's projected "lower square footage growth should benefit comps over time,'' Lazard Capital analyst Todd Slater said in a research note, as he raised the stock's target price to $59 from $54. "The decrease in U.S. square footage growth not only serves to enhance ROIC [return on invested capital], but should also decrease cannibalization and benefit future productivity."
Wal-Mart said it will be selective about building new stores and place more emphasis on getting better performance from existing units. Comparable-store sales have been sluggish — in the low-single digits and lagging rival Target Stores — in recent quarters. In September, Wal-Mart reported a 1.3 percent sales increase in stores open at least a year — at the low end of its projection.
The U.S. business is tracking 1 percent up this month, said Eduardo Castro-Wright, president and chief executive officer of Wal-Mart U.S. "Certainly we're not pleased with that, but we believe we have a lot of progress in place and we feel very good about our prospects for holiday," he said.
Women's apparel, in particular, has been underperforming. Skinny jeans and the Metro 7 line, which the retailer has ambitiously expanded after initial success, did not connect with many customers.
"We expanded it too far," said Claire Watts, executive vice president in charge of product development, apparel and home, referring to Metro 7. "There are still 800 to 900 stores where it worked and is still working."
Wal-Mart is clearing out skinny jeans from some stores, along with Metro 7, but the fashion miscues will continue to affect softline sales into the fourth quarter, Castro-Wright said.
"With our lead times, it's hard to get the volume in basics to make up for" fashion misses, he added.
Wal-Mart has been tinkering with its apparel business as it tries to convince more affluent and style-conscious women to purchase its apparel. The retailer has run ads in Vogue, staged Manhattan runway shows and opened a New York trend office. This fall, Wal-Mart teams seem to have gotten ahead of customers' acceptance of trends. Despite mistakes, the company does not appear to be backing off apparel.Slides shown during the presentation to analysts listed apparel as one of five "power categories" for the Bentonville, Ark.-based retailer, along with electronics, home décor, fresh food and health-wellness.
The company is testing a new supercenter layout that shifts the location of women's apparel. In older stores, the merchandise runs along the front of the store, parallel to the cash register. The new scheme would create an "H", with men's and women's wear as the two sides, running in narrow bands from front to back. Jewelry, accessories and intimates fill in the space between men's and women's wear.
Apparel isn't the only thing shifting. A committee of top company officers, including Wal-Mart president and ceo H. Lee Scott, vetted each of 1,300 U.S. new store projects and approved only those that would produce the highest returns.
New units that would draw 50 percent or more of their sales from existing stores were placed at the bottom of the list, said Schoewe, who has until recently defended a saturation strategy that clusters new doors around stores with more than $100 million in annual sales. Wal-Mart executives have argued in favor of market saturation, saying that it allowed the company to take market share from competitors and to alleviate crowding at high-volume supercenters.
Now Wal-Mart is investigating ways those stores can better handle customer load, particularly at checkout. Executives have also swapped out plans for 195,000-square-foot stores for a 176,000-square-foot model "where we believe we can get similar volumes in a smaller box, therefore higher ROI [return on investment]" Schoewe said.
In 2007, the company will build 50 stores in disadvantaged zones, defined as sites that are environmentally contaminated, vacant or in areas where there is high unemployment.
Wal-Mart has been struggling with reputation challenges and community resistance to its expansion. At the analyst meeting, Wake-Up Wal-Mart, an opposition group funded by the Union of Food and Commercial Workers, handed out letters to analysts alleging the company's public image was hurting its performance.
Wal-Mart staged its own media event, unveiling a eco-friendly retail exhibit in partnership with MTV at the MTV TRL store in Times Square.
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