What a difference 15 months makes.
That is how long Doug McMillon has been president and chief executive officer of Wal-Mart Stores Inc., and in that time the world’s largest retailer has made some of the boldest moves in its history, from investing heavily in new technologies to joining the campaign to boost minimum pay.
McMillon, 48, represents a major generational shift at Wal-Mart, as it continues to seek new ways to reach its goal of half a trillion dollars in sales and step up its game in e-commerce, where it lags far behind its major online rival, Amazon. They also indicate a much more open, responsive Wal-Mart compared to the resistant, much-targeted behemoth of years past.
The generational shift continued Friday at the retailer’s annual general meeting in Fayetteville, Ark., as Robson Walton, the 70-year-old chairman of the board of directors, passed the baton to his son-in-law Greg Penner, 47.
From all accounts, Walton has been a very active chairman – and a link to Wal-Mart’s past, introducing members of the Walton family at every shareholders event, including 90-year-old Aunt Alice. Walton will continue to serve as a director.
While Penner represents a new generation, there are limits to how far the Waltons will go to allow changes at the company. Wal-Mart rejected pressure from institutional shareholders who’ve been calling for the company to elect an independent chairman. A shareholder proposal to that effect was voted down Friday.
“The chairmanship is still very much ‘all in the family,'” said Carol Spieckerman, president of Newmarketbuilders. “Clearly, Penner has been groomed for the role, so it isn’t surprising. In passing the baton, Rob Walton touted Penner’s technology, finance and international background, three pillars that succinctly sum up Wal-Mart’s future. The technology and finance connection is particularly compelling at a time when many other retailers are talking about having to make trade-offs in order to fund technology upgrades and digital strategies.”
Despite the shake-up in the chairman’s suite, Wal-Mart came into the annual meeting on a confident note after posting improved financial results in the first quarter, including U.S. comps of 1.1 percent, the second consecutive quarter of positive comps in a row.
Yet McMillon’s focus on building technology platforms, testing and rolling out smaller store formats and new delivery options, and launching e-commerce overseas, has yielded mixed results – indicating he still has a lot of work to do.
Wal-Mart’s gross margin as a percentage of sales dipped from a high of 25.26 in the first quarter of 2011 to 24.82 and 24.83 in the first quarters of 2014 and 2015, respectively, while year-over-year revenue as a percentage of sales fell from a high of 9.61 in 2006 to an average of 1.74 since McMillon took over. Operating margin slipped from 5.9 percent in 2006’s first quarter to 5.6 percent in 2015 period. But McMillon grew 2015 revenue to $487.6 billion and operating income to $27.1 billion, from $315.6 billion and $18.5 billion, respectively, a decade ago.
Wal-Mart in the fourth quarter ended Jan. 30, posted a same-store sales increase of 1.5 percent, compared with a 0.4 percent decline in the previous year’s quarter, while same-store traffic logged its first positive comp since the third quarter of fiscal 2013, a 1.4 percent gain. Profits in 2015 will advance only 1 percent, impacted by health-care headwinds and currency fluctuations, chief financial officer Charles Holley said at the annual meeting.
“Not many companies could have weathered these major headwinds,” Holley said. “Wal-Mart’s worldwide sales grew by $9 billion in 2015. Wal-Mart International contributed $136 billion in sales last year and increased profits at a faster rate than sales or 3.6 percent. We spent $14 billion on growth last year. We need to change the way we use our cash, which is why we’re focused on small store formats and our e-commerce business.” The retailer in 2015 paid $6.2 billion in dividends to shareholders and repurchased $1 billion in shares.
McMillon, who has close ties to the Walton family, was 47 when he became Wal-Mart’s ceo. Prior to taking the job, he was president and ceo of Wal-Mart International. He took the company’s reins at a time when Wal-Mart’s image was that of a “good old boys network.” Under previous ceo Mike Duke, Wal-Mart admitted to possible violations of the Foreign Corrupt Practices Act and the retailer is still being investigated by the Justice Department. It’s spent hundreds of millions of dollars on legal fees to date.
McMillon at the annual meeting said Wal-Mart is investing significant resources on improved compliance training. The sponsor of a shareholder measure to institute a claw-back policy for executive compensation said, “It’s a matter of concern given the number of international investigations going on. Legal fees have grown to $700 million now. That’s a lot of money going to lawyers.” The proposal didn’t pass.
With 2.2 million associates and 11,453 stores and clubs around the world, Wal-Mart’s payroll is enormous. For years, the retailer has been accused of underpaying its U.S. associates. After protests around the country organized by labor unions, McMillon revealed in February that Wal-Mart would increase the opening minimum wage for 500,000 associates to $9 an hour. Last week, Wal-Mart said it will also give raises to 100,000 department managers starting in August.
Wal-Mart U.S. ceo Greg Foran said higher wages are just the start in terms of employee benefits. “You’ll have more control over your schedules and we’re enhancing our sick leave policy,” he said at the annual meeting. “By 2020, Wal-Mart will have hired over 250,000 veterans. Our goal is to make sure every associate is better off. You’ll be equipped to better serve our customers. We want to have a fantastic fresh-food experience and operate better stores.”
Wal-Mart is investing $1 billion in wages and training in 2015, but critics said it’s not enough. One shareholder proposal demanded $15 an hour for associates, but it failed to win enough votes to be ratified.
Nonetheless, McMillon has been projecting the image of a kinder, gentler image of Wal-Mart. “Associates need to have good jobs and build careers,” he said at the shareholder event. “I’m proud of the work we’ve done this year to demonstrate how we feel about you.”
One thing that McMillon and Penner share is an enthusiasm for technology. Penner, who received an MBA from Stanford, started in 2005 at Madrone Capital Partners, a venture capital firm with a focus on alternative energy and China. The company, which was backed with funds from the Walton family, ultimately went bankrupt. Since 2011, Penner has served as chairman of the Wal-Mart board’s technology and e-commerce committee.
McMillon has made technology a signature of his tenure. As ceo of the international division, he negotiated the acquisition of a majority stake in China e-commerce site Yihoadian. Spieckerman said McMillon’s been a driving force in Wal-Mart’s leadership as a global multichannel retail. However, the specter of Amazon was palpable at the annual meeting. Wal-Mart revealed that this summer it would test Shipping Pass, which guarantees shipping in three days or less for an annual fee of $50, and is the retailer’s answer to Amazon Prime. The company is also testing delivery of online purchases to office parking lots. In the U.K., consumers can order online from ASDA and drive up to a futuristic pod and pick up their items.
“We’ll continue to make significant investments in two areas that will drive our future: our people and technology,” McMillon said. “Everywhere we operate, we’re seeing people wanting convenience, especially Millennials – eight out of 10 of them are using their phones to shop. We need to talk about digital and physical not as if they’re two different things.”
Nomura analyst Robert Drbul said, “The company needs to invent and be inventive as it relates to what customers want. It remains clear that grocery delivery and pickup is the next frontier in integrating physical and digital commerce.”
Drbul said headwinds to the company this year will include the negative impact of foreign currency exchange on sales to the tune of $14 billion, or 13 cents a share. Meanwhile, the investments in labor and training will have a negative impact of 20 cents a share, he said.
“Our real villains are inside our business,” McMillon said, “bureaucracy, complacency, lack of speed and lack of passion. We’ve got to make this business simpler and faster. No one has the incredible network of stores we have around the world. Now think of our supply chain and logistics team. And let me be clear, there is no business result worth your integrity or our company’s. We would rather have a bad financial result than take a shortcut. We need to dial up our expectations, of each other and ourselves. We can be like those scrappy insurgents in ‘Star Wars.'”
And with that, the shareholders’ meeting cued the movie’s theme music and a video of special effects.