WAL-MART’S BATTLE WITH BIGNESS
Byline: Mark Tosh
NEW YORK — Wal-Mart Stores used to make it look easy, but growth for the world’s biggest retailer is becoming a lot more challenging to manage.
The fundamentals are still there — great merchandise allocation and planning systems, strong earnings and retailing’s lowest cost structure and prices. But in the last year the discounter has missed some sales and profit goals, fumbled the repositioning of its Sam’s Clubs and is facing some concerns about quality control in apparel.
“I’m hanging in there,” said NatWest Securities analyst Robert Buchanan, who continues to recommend purchase of Wal-Mart stock despite the difficulties. “But I feel like I’m on the ropes a little bit and my confidence has been rocked.”
While the exclusive Kathie Lee collection is seen posting $300 million in sales last year, Bob Adler, president of Halmode Apparel, the manufacturer that holds the master license, acknowledged that among the complimentary letters there’s an “occasional complaint” about garments shrinking or failing to hold up after laundering. That’s been a problem at times at other celebrity lines, such as Kmart’s Jacyln Smith collection.
“We find [Wal-Mart] to be very fair and very good partners,” Adler added. “They have been brutally demanding on quality, and they have every right to be so.”
Wal-Mart is also struggling to maintain its historic 15 to 20 percent annual growth rate in a stagnant retail environment. Last Wednesday, after the company said earnings would decline by about 10 percent in the fourth quarter for the first time since 1970, doubts on Wall Street about the chain’s future growth pushed its shares to a five-year low, to 19 1/4 on the New York Stock Exchange. The stock recovered this week, closing at 20 3/8, down 1/8, on Tuesday.
“Wal-Mart’s growth is slowing down, but there are some industry issues and some internal Wal-Mart issues that will resolve themselves,” said William Whyte, analyst at Stephens Inc., Little Rock, Ark.
Wal-Mart executives in Bentonville, Ark., have set in motion several strategies to regain momentum and restore full confidence on Wall Street.
Among the strategies:
* Restart the expansion in Mexico this year, with 10 to 12 openings on top of the 97 units already operating; open its first four units in China and manage its first store in Jakarta, Indonesia, which will be owned by its Lippo Group partner.
* Broaden the Kathie Lee line to include intimate apparel, sleepwear, watches and hair care products — including dryers and curlers — and launch McKids children’s sportswear.
* Attempt to dominate the grocery industry by the year 2000, with 110 to 125 supercenters combining food and general merchandise slated for the next two years.
* Use a new bonus plan tying executive payouts to profit performance rather than stock price, which has been phased in during the last couple of years.
* Remerchandise Sam’s to recapture more consumer sales after focusing heavily on sales to businesses.
At Sam’s, Robert Voss was brought back as senior vice president of merchandising last August to revitalize a tepid merchandise assortment. He worked at Wal-Mart from 1975 until 1990 and was part of the team that launched Sam’s in 1981. Most recently, Voss was executive vice president of merchandising at Nashville, Tenn.-based Dollar General Corp.
In an interview last week, Voss said the key for Sam’s is to insure that there are enough great savings on products to draw customers, instead of mediocre savings across the board. In apparel, the key is to reduce stockkeeping units and focus more on “fashion and basics.”
“We can sell men’s and ladies’ casual apparel real well,” he added. “We don’t need trendy sportswear.”
The 430-unit Sam’s membership warehouse division reported same-store sales declines in the final three months of 1995 and is expected to show a decline again in January, though Sam’s reported operating profits of $197 million in the third quarter, a 14 percent increase.
“Sam’s is just killing them right now,” said Buchanan of Natwest. He said because of concerns that Sam’s units cannibalized sales at adjacent Wal-Mart discount stores, beginning in late 1993 Sam’s was remerchandised for small business customers rather than retail shoppers, but the strategy backfired.
“I think we got a little off focus,” Voss said. “Our mission is to provide extremely good values for both wholesale and [individual] members.”
Wall Street also thought Wal-Mart was on a mission to break $100 billion in sales last year, but the chain will fall short. Wall Street expects Wal-Mart to hit about $94 billion when its fiscal year ends on Jan. 31, up from $82.5 billion in 1994.
Sales performance wasn’t helped by the chain’s weak Christmas, when the discount stores posted only a 2.7 percent same-store gain in December compared with a 9.7 percent gain in 1994.
However, Buchanan of NatWest said he believes Wal-Mart continues to take market share in apparel, which he attributes to the discounter’s margin structure and low prices.
“I think they’re doing a better job in apparel, but I don’t think it’s ever going to be a home run for them,” he added. “They’re doing a lot better than they were, in part by executing better and presenting better.”
Buchanan said Wal-Mart’s updated assortment of Kathie Lee basics also helps sell “what’s beneath it in terms of quality, fashion content and price.”
Where Wal-Mart could really score is in international expansion. The discounter reportedly has invested more than $1 billion in international development over the last few years and operates more than 250 stores outside the U.S.
The international division trimmed its losses in the third quarter from $15 million a year ago to $10 million in the recent period. The 130 Canadian stores are showing better gains, with same-store sales up more than 10 percent in December, according to some estimates. In addition, the first supercenter in Argentina opened in Buenes Aires in November. It topped $5 million in sales in each of its first two weeks, according to analysts.
“No one recognizes the potential of this international investment,” said Dan O’Connor, president of Management Ventures, a consulting firm. “I do not believe by any stretch of the imagination that Wal-Mart’s growth is over.”
Whyte, of Stephens, agreed that Wal-Mart is eyeing some “huge opportunities” but cited the supermarket sector. “Nobody dominates the grocery store business the way Wal-Mart dominates the discount store business,” he said. “So they see some huge opportunities, especially in the small towns” where big grocery chains are not well entrenched. Wal-Mart will capitalize by converting discount stores to supercenters, including 95 this year. Whyte estimated that supercenters, which combine discount stores with supermarkets, sell 25 percent more general merchandise than discount stores due to cross-over shopping.
Whyte said Wal-Mart also expects to have positive cash flow by the end of next year, which would allow the company to begin reducing debt.
Rich Church, an analyst at Smith Barney, said that what Wal-Mart needs to get its earnings growth back on track is a better economy.
Still, Church rates Wal-Mart stock “outperform,” based on the current weak price. In the short term, he said the “stock is dead money,” but longer term, Wal-Mart has an attractive position in the market compared to other retailers.
“At the end of the day, I think it’s going to be Wal-Mart and Target,” Church said. “There’s an upper end of the discount sector and a lower end, and Wal-Mart and Target fill those segments very nicely.”