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Castro-Wright Sees Wal-Mart Growth Potential in U.S.

Despite plans to scale back new stores, Wal-Mart's president and ceo Eduardo Castro-Wright plans to tap into 15 "opportunity markets" in the U .S.

Eduardo Castro-Wright wants it known that Wal-Mart Stores Inc. has not exhausted opportunities in the U.S.

This story first appeared in the November 19, 2008 issue of WWD.  Subscribe Today.

Castro-Wright, president and chief executive officer of Wal-Mart Stores U.S., delivered that message Tuesday during Morgan Stanley’s Retail and Consumer Conference in Manhattan.

That’s not exactly what he conveyed at Wal-Mart’s analyst meeting in October, when Castro-Wright said the world’s largest retailer would reduce the number of new stores projected for fiscal 2009 and fiscal 2010. Wal-Mart, which opened 218 new units last year, will launch 191 in the current fiscal year and 142 to 157 next year. Capital expenditures will fall from $9.1 billion last year to between $5.8 billion and $6.4 billion this year and potentially rise to $6.3 billion to $6.8 billion in the next fiscal year.

But scaling back new stores and reducing capital expenditures doesn’t mean Wal-Mart is retreating from the U.S. market. “It’s not accurate to say we have stopped growing in the U.S.,” Castro-Wright said.

The retailer has identified 15 “opportunity markets” where Wal-Mart has low penetration. “They’re not the most urban or largest markets,” he said. “They’re places where we have a 3.9 percent share as opposed to our average 8.9 percent share. They represent 32 percent of total retail sales. The [combined 15] markets are the size of the retail market in China, and larger than Russia and India combined.

“The growth potential for the U.S. business is there, it’s real and it’s waiting to happen,” Castro-Wright said. “We are not favoring the growth of international over the U.S. If you add the capital expenditure of Wal-Mart U.S. and Sam’s Club, it’s more than we are investing internationally.”

Castro-Wright acknowledged that “the U.S. business has suffered for many years with declining return on investment. That trend has been reversed, and starting this year we’re seeing our return on invested capital come back.”

During a period in which many retailers are being battered by falling sales and profits because of the troubled global economy, Castro-Wright highlighted the retail giant’s third-quarter performance, which included an earnings gain of 7.5 percent. Sales at Wal-Mart U.S. grew 6.1 percent, while same-stores sales advanced 2.7 percent. Castro-Wright noted that the gap between Wal-Mart and the rest of the retail industry is widening substantially. Wal-Mart’s share of U.S. growth in October was 51.7 percent, which means that more than 50 cents of each dollar of growth in the U.S. was captured by Wal-Mart.

Asked “Will there be a Christmas?” Castro-Wright said, “We believe Christmas will come. Clearly, the consumer does not have the ability to spend as much as the beginning of the year. Disposable incomes are dropping. Most of the retail industry is struggling.”

Wal-Mart is building smaller but more productive stores. “Space optimization will drive sales in the future,” Castro-Wright said. “We’ve changed the way we present merchandise. Some things in apparel and home were disadvantaged because customers had to walk quite a bit into a pad. Our new design has a central alley, and it’s having customers consider us in areas where they did not consider us before.”

In the last three weeks, gas prices have declined. Castro-Wright said the impact on consumer behavior “was almost immediate. Traffic to rural stores increased in October. Traffic increased in urban stores. Customers are now shopping more frequently, but we have not seen a significant change in ticket price.”

The retailer, which has been criticized for paying associates low wages, has created the My Share incentive plan. Associates share in a store’s results if it’s above plan for sales growth and profits and achieves certain goals related to customer experience and inventory management.