Wal-Mart at turning point - East Valley Tribune: Business

Wal-Mart at turning point

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Posted: Saturday, February 25, 2006 6:25 am | Updated: 4:15 pm, Fri Oct 7, 2011.

BENTONVILLE, Ark. - After watching its sales momentum surge over the past four decades, Wal-Mart Stores now finds it has to work harder to grow — with 3,900 stores nearly saturating the U.S. market, it’s the company’s sales strategy, not new retail outlets, that will determine Wal-Mart’s future.

Analysts are optimistic the nation’s largest retailer will get the job done — even if the company isn’t so sure itself.

Wal-Mart is offering a broader selection of high-end items and sprucing up its stores to make happier customers, but has set a yearly earnings target below that of people who watch the world’s largest retailer.

In a world where most Americans already live near a Wal-Mart, CEO Lee Scott is betting that trendier merchandise and a more appealing shopping environment will boost sales faster than simply opening new Supercenters can accomplish.

The company is clearly under pressure.

Although this past week Wal-Mart reported fourthquarter earnings were up 13.4 percent, its stock slipped as revenue fell short of Wall Street projections and its profit outlook also disappointed the market.

The stock ended the week at $45.45, near the low end of its 52-week range of $42.33 and $53.49.

Many industry analysts expect Wal-Mart to have a good year as it continues to deploy its new strategy — in spite of higher energy prices that are pinching the spending power of its core lowerincome customers and that have driven up Wal-Mart’s own costs.

‘‘The outlook for them this year is the best it’s been in about the last three years,’’ said Richard Hastings, senior retail analyst at Bernard Sands in New York.

Hastings noted that Wal-Mart since late last year has been stocking its stores with trendier women’s fashions and higher-end home electronics. The company also is renovating 1,800 stores, widening aisles, lowering shelves, sprucing up floors and cleaning up restrooms.

The aim is not so much to get new customers in the stores but to lure millions of consumers who shop for basics like groceries and paper goods to the aisles that offer the more fancier clothes, electronics and home furnishings. The new merchandise ranges from the Metro 7 line of urban-style women’s fashions to fish and shrimp certified to have been raised or caught in ways that do not harm the environment.

Analysts said the company needs these changes to help it reclaim sales lost to smaller, more upscale rival Target Corp.

‘‘They’ve got to create a better shopping experience, better merchandising, and really try to sell more things to those selective shoppers in their stores,’’ said Sandra J. Skrovan, vice president and head of Wal-Mart research at consultant Retail Forward Inc. ‘‘They’re in a transitional period.’’

Scott told analysts in October that 86 percent of Americans shop at Wal-Mart at least once a year, but the higher their income bracket, the less likely they are to leave the grocery or staples departments.

Fourth-quarter results, covering a holiday season when some of the new products were in place, showed Wal-Mart seems to be headed in a good direction.

‘‘While it remains early days, change is in the air and in the results at WMT,’’ Goldman Sachs analyst Adrianne Shapira wrote in a research note. Shapira said Wal-Mart was conservative in setting a target for earnings per share this year of $2.88 to $2.95, below Wall Street expectations, and put her own estimate at $2.94, up 12.6 percent from the past year.

But problems remain, not the least of which is Wal-Mart’s size. The chain has three times as many stores as Target and plans about 1,500 more stores. That makes it harder to keep stores looking fresh, and to ensure that new displays, products and styling are in place throughout the company.

‘‘They’re paying attention to their problems. They are aware that when it comes to store-level execution there are problems and they’re paying attention to it,’’ Hastings said.

Eduardo Castro-Wright, president and chief executive of Wal-Mart USA, told analysts this past week a reorganization of the retailer’s regional structure last year gives more power and responsibility to district and store managers and will ‘‘close the gap that exists between strategy and performance.’’

While Wal-Mart is trying to raise its profile among more affluent shoppers, it’s also trying to improve its image with workers and the public. Unionbacked critics continue to hammer away at Wal-Mart for what they say are substandard wages and health benefits, and organized labor is pushing bills in about 30 states that would force Wal-Mart to spend more on health coverage.

Scott announced this past week that the company will expand lower-cost coverage for employees this year, the second improvement in health benefits in six months. The company said 615,000 of its 1.3 million U.S. workers were on Wal-Mart health plans as of January, versus 568,000 a year earlier.

‘‘More consumers don’t just see Wal-Mart as a business, they see it is a social and political issue. Until Wal-Mart changes substantially, those consumers they are going after, who can make a choice about where they shop, will avoid Wal-Mart,’’ said Chris Kofinis, spokesman for WakeUpWalMart.com, a union-funded campaign group.

The fact that Wal-Mart has to find new ways to grow is an outgrowth of its own success, said Charles Fishman, author of ‘‘The Wal-Mart Effect: How the World’s Most Powerful Company Really Works and How It’s Transforming the American Economy.’’

‘‘Once you have saturated the country and soaked up enormous quantities of market share, it gets hard to grow in this country faster than the economy and general spending grow,’’ said Fishman, a senior editor at Fast Company magazine.

Fishman’s book is rich with statistics illustrating Wal-Mart’s dominance. According to market research he commissioned, 53 percent of Americans live within five miles of a Wal-Mart and 90 percent live within 15 miles.

Wal-Mart accounts for 10 percent of the U.S. retail economy, 15 percent to 16 percent of all groceries sold, 25 percent of health and beauty products and a quarter of all toys, Fishman wrote.

But it is hard for Wal-Mart to grow substantially based on just those kinds of products, Fishman said.

Consumers may have switched to Wal-Mart to buy paper towels or dog food, but they’re not going to buy twice as much dog food just because the price is lower.

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