Wal-Mart Stores Inc.’s new U.S. stores chief is shifting away from widening profit margins through inventory reductions to focus on sales growth, according to Cleveland Research Co.
Bill Simon is bringing back promotional displays at the front of stores, returning more items that were removed and dialing back price cuts, Jeff Stinson, an analyst at the Cleveland-based equity researcher, said in a report this week. Simon, Wal-Mart’s former U.S. operations chief, replaced Eduardo Castro-Wright last month.
“We are seeing the ‘old’ Wal-Mart approach surface on merchandising as well as pricing,” Stinson said. “Rebuilding top-line sales looks to be the No. 1 objective.”
Sales at U.S. stores open at least a year have fallen for four consecutive quarters after the removal of grocery products and increases in gasoline prices, putting pressure on Simon to lure back shoppers. Wal-Mart, the world’s largest retailer, faces increasing competition from big-box rivals such as Target Corp. and discounters such as Dollar General Corp.
Wal-Mart spokesman Greg Rossiter declined to make Simon available for an interview or to discuss any changes Simon is making.
Wal-Mart rose 62 cents to $50.97 at 11:35 a.m. in New York Stock Exchange composite trading. Before today, the shares had gained 1.6 percent since June 28, the day before Wal-Mart announced that Simon would take over the U.S. stores.
The comparable sales declines are particularly worrying to some shareholders as the rest of the industry shows improvement, according to David Abella, a portfolio manager at Rochdale Investment Management in New York. His firm manages $2.9 billion including Wal-Mart and Target shares.
“If I go to Wal-Mart, I expect to find almost anything,” Abella said. “Reducing inventory makes things leaner and meaner, but it’s also very frustrating when a big box does not have what you want.”
This year, Wal-Mart returned about 300 items to shelves after initially pulling them, Simon said at a March investor conference, when he was still the operations chief. Leon Nicholas, a director at consulting firm Kantar Retail who’s based in Cambridge, Massachusetts, said Wal-Mart has returned thousands more since then.
“We assume they’ve brought back 3,000,” he said in a telephone interview. Some of the returning products have tags attached on the shelf saying, “Look What’s Back.”
Simon’s strategy is a departure from that of John Fleming, the U.S. merchandising chief who is leaving Aug. 1. Fleming was an architect of Wal-Mart’s so-called Win/Play/Show strategy, where products with the best growth and profit prospects got premium shelf space.
Adding Back Items
In the past two years, Wal-Mart has removed items in slower-growth “show” sectors like tools, and bulked up “win” categories like consumer electronics and pet products, aiming to reduce inventory and expand profit margins. In the year ending Jan. 31, inventory declined by $1.8 billion in the U.S. Company- wide gross margin, the percentage of sales left after the cost of goods sold, widened to 24.8 percent from 24.2 percent.
That strategy appears to be over, according to analysts such as Cleveland Research’s Stinson and David Palmer at UBS Securities LLC. Instead the retailer is renewing its focus at some stores on “Action Alley,” the high-traffic area in front near the checkouts, which had earlier been cleared out to reduce clutter.
“The quickest change we have seen over the last couple weeks is that pallets are returning to Action Alley,” according to the Cleveland report. “Overall inventory is beginning to ramp back up as quickly as possible.”
‘3 in 30’
The report cites an objective to get Wal-Mart’s merchandising strategy back to where it was three years ago in 30 days. The initiative has been dubbed “3 in 30.”
Wal-Mart has not changed the forecast, made in May, that same-store sales for U.S. locations will range from negative 2 percent to positive 1 percent this quarter.
This year, the retailer has lowered prices on ketchup from H.J. Heinz Co. and Procter & Gamble Co.’s Crest toothpaste in so-called rollbacks aimed at driving sales growth. Those cuts went too deep and failed to boost sales enough, and Wal-Mart has since raised prices on some items, Stinson said.