Nov. 21 (Bloomberg) -- Wal-Mart Stores Inc., the world’s largest retailer, unexpectedly announced the retirement of Chief Executive Officer H. Lee Scott after almost nine years at the helm, replacing him with overseas chief Mike Duke.

Scott, 59, is preparing his departure as Wal-Mart is poised to become this year’s top performer among the 30 stocks in the Dow Jones Industrial Average. An industrial engineer by education, Duke, 58, will be the retailer’s most internationally experienced CEO, signaling he’ll emphasize boosting returns globally by improving buying, distribution and merchandising.

“Mike Duke, like Mr. Sam Walton, the founder, has a great operational background in the stores,” Burt Flickinger, managing director of consultant Strategic Resource Group in New York, said in a Bloomberg Television interview today. “Duke had done a good job turning around international.”

Wal-Mart gained $2.26, or 4.5 percent, to $52.92 at 4 p.m. in New York Stock Exchange composite trading.

The shares dropped to as low as $41.44 in October 2000, nine months after he took over, and have fallen in five of nine years under his watch. Through yesterday, the shares were 6.6 percent higher this year, on course for their biggest gain since 2001 as improvements in U.S. stores and price cuts attracted customers from Target Corp. and Macy’s Inc.

Duke’s Challenge

Scott will continue as chairman of the board’s executive committee. Duke is responsible for Wal-Mart’s international operations, which accounted for a quarter of revenue last year, after running the retailer’s logistics unit and U.S. operations. The changes are effective Feb. 1, the Bentonville, Arkansas- based company said today in a statement.

“When the U.S. economy improves, Wal-Mart’s biggest challenge will be to retain these new customers and show that it’s more than a cyclical story benefiting from a bad economy,” said John McMillin, an analyst at Lord, Abbett & Co., which owned 15.2 million Wal-Mart shares through September.

Duke speaks with the twang of his native Georgia and says he likes talking to customers when he visits stores. He told analysts last month that on a recent trip to Japan he quizzed a mother on store brands sold by Seiyu, a Wal-Mart chain.

He will be the fourth CEO of Wal-Mart, founded in 1962 when Sam Walton opened a discount store in Rogers, Arkansas. David Glass became CEO in 1998, four years before Walton died at the age of 74. Scott succeeded Glass in 2000.

The timing of the retirement caught Charles Grom, an analyst at JPMorgan Chase & Co., by surprise because of Scott’s age and because the holiday shopping season kicks off the day after Thanksgiving next week. At Wal-Mart’s annual analyst meeting last month, Scott didn’t signal he may step down after joining Wal-Mart 29 years ago as an assistant logistics director.

Early Criticism

Scott’s first years as CEO saw criticism from analysts, lawmakers and unions as the retailer built in more and more communities. Political leaders said Wal-Mart was stingy with its benefits to employees, while investors sold the company’s shares as growth slowed.

Scott once attempted to push Wal-Mart into trendier clothes, including its Wal-Mart’s George line of cashmere sweaters and blazers. The effort failed to boost revenue even as the U.S. economy grew earlier in the decade.

The executive said after Wal-Mart’s annual shareholder meeting in June that he “felt like I should lose” the board’s support had he failed to revive the company. “I wasn’t worried that I would,” he said.

Lord Abbett’s McMillin said Scott probably decided to retire without pressure from directors.

‘Job Security’

“It would be like firing Charlie Manuel after the Phillies won the World Series,” said Jersey City, New Jersey-based McMillin, referring to the manager of the Philadelphia Phillies, a Major League Baseball team. “Lee’s job security might rival Charlie Manuel’s. Everybody is happy that someone as qualified as Duke is there to replace Lee.”

Duke was Scott’s likely successor after Wal-Mart Vice Chairman John Menzer, a rival for the CEO’s job, retired in March, Grom wrote today in a note to clients. He rates Wal-Mart as “overweight.”

“After talking with management, we think Mr. Lee Scott is simply looking to retire and sees today as an opportune time given the company’s current stability,” Grom said.

Neither Scott nor Duke was available for an interview today, David Tovar, a Wal-Mart spokesman, said.

‘Right Time’

“Some of you might be wondering why we are making the change at this time,” Rob Walton, Wal-Mart’s chairman and son of the founder, said in a memo to employees today. “I think Lee said it best when he told me, ‘This is a great job, but you can’t do it forever and at that point you have an obligation to find the right time for a transition.’” The memo was provided by Tovar.

In analyst meetings this year, Scott credited his executives for the retailer’s turnaround. The introduction of $4 prescriptions, discounts on groceries and flat-panel televisions and improvements in merchandising under Eduardo Castro-Wright, U.S. stores chief, spurred the recovery, he said.

Castro-Wright was promoted today to vice chairman with additional responsibilities for global procurement.

“There’s relief in the belief that Scott is confident he’s leaving the company in a strong competitive position,” said Joseph Feldman, a Telsey Advisory Group analyst in New York.

Had Scott stayed several more years, it would have lessened the likelihood that Duke, a year younger, would have succeeded him, Feldman said.

‘Orderly Transition’

“It’s a nice orderly transition,” said Maggie Gilliam, a retail consultant at Gilliam & Co. in New York.

Castro-Wright, 53, is now being groomed as Duke’s possible successor, Feldman said. Among candidates for Duke’s overseas job, he said, are Craig Herkert, Americas CEO, Vicente Trius, in charge of Asia, and Doug McMillon, who runs the Sam’s Club warehouse chain.

Duke told analysts last month he’s focused on improving returns overseas to enable stores to lower prices, especially as global economies sink into recession.

International sales may advance 9.3 percent in the year starting in February, outpacing a companywide increase of 5.5 percent, Gregory Melich, a Morgan Stanley analyst in New York, wrote in an Oct. 30 note to clients.

Duke, an industrial engineering graduate of the Georgia Institute of Technology in Atlanta, helped Wal-Mart curb distribution and logistical costs as an executive in those units. He took charge of the overseas division in 2005, 10 years after joining Wal-Mart and after working for Federated Department Stores and May Department Stores.

“Duke seems to be the right pick,” said Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport, Beach, California. Internal promotions make sense, “especially those from the transport and logistics side of the business, the center of the company’s extraordinary power and competitive advantage.”

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina at cburritt@bloomberg.net.

Last Updated: November 21, 2008 18:34 EST