WAL-MART ATTEMPTING DELICATE BALANCING ACT ON THE BOTTOM LINE
Byline: Valarie Seckler / With contributions from Jennifer Brady
NEW YORK — Wal-Mart is aiming to be a nimble giant.
It’s developing a smaller format to enter new markets, accelerating its supercenter expansion and targeting foreign markets to keep its profits growing at a double-digit clip. On Tuesday, the 2,740-unit discounter reported its fourth-quarter profit climbed 16 percent on a 12 percent sales gain. Earnings came to $1.09 billion, or 48 cents a share, topping Wall Street estimates of 47 cents. In the prior-year period, the discounter netted $942 million, or 41 cents.
However, with the stock price languishing — until Tuesday — and with its discount stores at a mature level, new growth venues must be established.
In an interview with WWD, a spokesman for the Bentonville, Ark.-based chain, outlined where new opportunities lie. Among them:
Making the Wal-Mart Supercenter its top growth format, with 100 slated to bow in the U.S. this year, while 50 traditional discount stores are to be launched. Seventy traditional units will be converted into supercenters.
Adding traditional discount stores to increase its presence in metropolitan areas such as Los Angeles, where it now has 25 locations. Atlanta, Dallas, Houston, Kansas City and Phoenix are slated for more growth.
Entering more middle markets with a “small,” 57,000-square-foot discount store format. By comparison, the typical Wal-Mart store averages 110,000 square feet.
Mining markets underserved by mass merchants in Oregon, Washington and California as well as New England.
Scouting for acquisitions.
Last year, Wal-Mart opened 57 discount stores, closed two and relocated or expanded 14 additional sites.
It also opened 105 supercenters, including 92 that replaced traditional discount stores. “They’ve realized there’s a limit to how many Wal-Mart discount stores they can open in the U.S., so the focus of their expansion is on the supercenters,” said Walter Loeb, president of Loeb Associates.
NatWest Securities analyst Robert Buchanan pointed out that 94 percent of the company’s new square footage is going to Wal-Mart’s supercenters.”By the end of this year, supercenters will account for about 24 percent of Wal-Mart’s sales and profits,” he said. “That continues to be the bet, and I think it will be a successful bet.” Wal-Mart is expected to end the year with 444 supercenters.
Analysts said the supercenters produce about three-times the sales of the discount stores. They average 187,000 square feet, house a supermarket, and offer services such as banks, quick-processing photo labs and fast food restaurants.
“To maintain their profit growth, they’d have to open about 160 discount stores a year and they’re running out of sites,” said Joseph Ronning, analyst at Brown Bros. Harriman. “Instead, they identified efficient distribution as one of their strongest suits, and combined that with their knowledge of food merchandising from Sam’s.”
Wal-Mart’s supercenters have gross margins that are 200 to 300 basis points lower than the discount stores, Loeb estimated, but they can produce healthy returns as long as inventory turns quickly.
Another 38 stores bowed off shore: three in Argentina, five in Canada, two each in China and Indonesia, and 26 in Mexico.
“They’re continuing to look in South America, and I believe they’re focusing on Asia more than Europe,” Loeb added. “These are areas where they believe the acceptance of Sam’s Clubs will be greater, markets that are more value-driven than fashion-driven.”
Nine Sam’s Club’s were opened, six were closed and two others were relocated. Also, one regional warehouse and two food distribution centers bowed.
The store growth and additional distribution centers helped Wal-Mart notch double-digit earnings increases for the quarter and year ended Jan. 31.
In addition, sales in the fourth quarter jumped 12 percent to $30.9 billion from $27.6 billion.
Wall Street like the report, as Wal-Mart stock added 1 7/8, or 7.6 percent, to end at 26 1/2 on the New York Stock Exchange Tuesday.
Despite the overall strength of Wal-Mart’s fourth=quarter performance, apparel continues to be sluggish, according to analysts. They noted the category — especially women’s — has been trailing the chain’s average sales growth.
“They are not making a big, unified statement in apparel,” said NatWest analyst Buchanan. In most of the discount stores, “There is a little bit of this and a little bit of that,” he added. “Their apparel assortment could probably take a page from Target’s book.”
The Wal-Mart division, comprising discount stores and supercenters, logged an operating profit of $1.89 billion, up 14.5 percent from a year earlier. Sales were up 12 percent to $22 billion, as comparable-store sales climbed 5.4 percent.
The challenge for Wal-Mart, analysts said Tuesday, is to maintain profit growth of 13 to 15 percent annually as it runs out of locations for its traditional discount stores. “It was a good fourth quarter, but we have to remember the prior-year comparison was depressed,” Ronning said. “It was the period that broke Wal-Mart’s string of 99 straight quarterly profit increases.”
As a result, the chain is emphasizing its newer supercenter format that triples the productivity of its traditional discount stores, and smaller concepts to operate profitably in small markets.
“We’re locating a lot of our new, traditional discount stores in New England and California,” the Wal-Mart spokesman said. In New England, he said, “we’re taking over some sites and building others.” He added, “We’re eyeing a few Rich’s discount stores and other locations.” Rich’s Department Stores, based in Salem, Mass., is liquidating.
New England offers many middle markets for Wal-Mart stores ranging from 57,000 to 76,000 square feet, he continued, while California contains urban markets not fully exploited.
A 76,000-square-foot Wal-Mart recently opened in a former Kmart site in Rutland, Vt., and is performing “very well,” the spokesman noted.
“We’re returning to smaller markets. Another is Poulson, Mont., where shoppers don’t have a lot of options. They have to drive over an hour through the mountains to shop at a national discounter.” A 57,000-square-foot Wal-Mart is slated to open in Poulson next year and a distribution center in Raymond, N.H., opened last year to support the growth.
Much of Wal-Mart’s expansion in the Eighties and Nineties has been focused in the central U.S., leaving room for growth on the coasts.
As of Jan. 29, Wal-Mart operated 95 discount stores in California, and 72 units in New England: 25 in Massachusetts; 19 in Maine; 16 in New Hampshire; nine in Connecticut, and three in Vermont.
Wal-Mart got high marks from Ronning for paring inventory levels by $100 million last year to $15.9 billion. “They did it despite a 12 percent sales increase,” he added. “Wal-Mart’s single biggest fixed asset is inventory, so it’s costing them a lot less.”
The savings contributed to a cash flow that increased to more than $300 billion in 1996 from just $83 million a year earlier.
Operating profit at Sam’s Club in the fourth quarter leaped 18.6 percent to $274 million. Sales moved ahead 7 percent to $5.5 billion. Comps ran up 7 percent.
Wal-Mart’s international business showed an operating profit of $65 million, rebounding from a loss of $13 million. Sales abroad climbed 23 percent to $1.65 billion.
Wal-Mart has done well in Canada, where it estimates it has captured 45 percent of the market, surpassing Zeller’s as the country’s leading discounter. And Wal-Mart believes it is the largest retailer in Mexico, said Ronning, who reported the chain is profitable there.
In the full year, Wal-Mart’s profits grew 12 percent to $3.06 billion, or $1.33, from $942 million, or 41 cents. Sales advanced 12 percent to $104.9 billion.
At the Wal-Mart division. operating profits rose 11 percent to $5.55 billion. Sales advanced 13 percent to $74.8 billion. Sam’s Club operating profits edged up 8 percent to $864 million. Sales rose 4 percent to $19.79 billion.
The international division had operating profit of $24 million against a loss of $16 million.
“All operating divisions reported an increase in the comparable-store sales growth and improved profits over the prior year,” David Glass, president and chief executive officer, said in a statement.
Mass Monitor: Wal-Mart
’96 Sales: $104.9 billion
’96 Profit: $3.056 billion
Wal-Mart discount stores: 1,959
Wal-Mart supercenters: 341
Sam’s Clubs: 436
Wal-Mart’s Hypermart USA: 4
Markets: U.S., Puerto Rico, Canada, Mexico, Brazil, Argentina, China and Indonesia
Sales associates: 675,000
Distribution centers: 35
Source: Wal-Mart Stores Inc.