By  on October 24, 2007

Wal-Mart Stores Inc. said sales growth would slow during the next several years as it reduces U.S. expansion to make long-term investments abroad.

To improve returns, Wal-Mart will build fewer new stores in the U.S., reduce corporate expenses and overhaul merchandising, human resources and financial software systems.

"We have an opportunity to grow profitably and reverse that trend of declining ROI [return on investment]," chief financial officer Tom Schoewe told financial analysts Tuesday at the company's annual investor presentation in a convention center near Wal-Mart's Bentonville, Ark., headquarters.

In merchandising — an area where the retailer has been inconsistent the last several years — Wal-Mart is focused on low prices and major brands across the store.

Apparel remains a problem. In the last three months, apparel comps have been down 7.4 percent compared with Kohl's, which is up 1.3 percent, and J.C. Penney, up 1.9 percent.

"Today everyone is suffering in the apparel business, not just us," said Eduardo Castro-Wright, chief executive officer of Wal-Mart U.S., citing warm weather and cuts in discretionary spending related to tightening of consumer credit.

As a result, Wal-Mart is getting even more conservative in its approach, barely mentioning fashion in its presentation Tuesday. Instead, the apparel team is embracing a mission to be the market's dominant source of low-cost apparel staples.

"We are focusing on our basics and essentials," Castro-Wright said.

Basics priced $10 and under make up more than half of Wal-Mart's apparel sales and will continue their prominence in coming seasons, said Dottie Mattison, senior vice president and general merchandise manager of women's apparel. "Wal-Mart is about price leadership. Helping our customer take care of the family, exerting our scale...to deliver key items for the family, at $10 and less."

After Schoewe delivered the strategic overview, financial analysts pressed him during a question-and-answer session to justify the decision to rein in spending on the U.S., the world's largest consumer market, in order to invest in countries such as Japan, where Wal-Mart has been challenged in efforts to make a profit.

The $345 billion retailer has struggled with a stagnant stock price and decreasing returns on its U.S. business, where stores have been coping with operational gaffes and a core customer under pressure from gas prices and lack of wage growth.Domestic square footage growth, about 9 percent in 2006, will drop to about 6 percent this year. Spending on new Supercenters and clubs will drop from about $8 billion in 2006 to $4.5 to $5 billion in 2009. The company plans to build or relocate about 170 Supercenters next year and about 140 the year after, compared with recent years when 200 to 300 such projects was the norm.

In contrast, Wal-Mart will increase square footage outside the U.S. from 17 million in the 2007 fiscal year to 28 to 30 million square feet by the 2010 fiscal year.

Several analysts appeared to be skeptical that the focus on global growth would translate to a more robust stock price.

Christine Augustine, analyst from Bear Stearns, questioned Wal-Mart's decision to flatten capital spending in the U.S. and increase expenditures for Seiyu, the Japanese subsidiary that has failed to turn a profit since Wal-Mart acquired a stake in 2000. The company announced on Monday it would offer another $875 million to purchase the remaining 49 percent of Seiyu.

"How many years do you think it's going to take before you actually see a return there [in Japan] and why have you made this additional investment? How can you justify that?" Augustine asked.

"Japan would represent the second-largest market in the world, a wonderful opportunity, different than any other market in which we participate," Schoewe said. "In the case of Japan, it's a long-term strategy because it's a great long-term opportunity."

An analyst who didn't identify himself commented: "If you look at history, the stock price will benefit most from improving comps in the U.S. and it just feels like the board continues to do things that aren't necessarily generating shareholder value."

In his response, Schoewe cited Mexico and Canada as foreign expansions that dented returns initially but now produce among the highest pre-tax returns in Wal-Mart's portfolio."Our board has an obligation to think not just about next quarter's results, but five or 10 or 15 years from now," he said. "And that's why you'll see us entering countries like India."

Another analyst pointed out that the company's reasons for staying in Germany, from which Wal-Mart withdrew in 2006 after failing to make a profit, were similar to ones being offered now for continued investments in Japan.Schoewe described the German experience as "expensive tuition" on what not to do when expanding internationally. In contrast, he said Wal-Mart's entry into Japan was carefully studied by a group of executives before any acquisition.

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