A Grand Reopening For Wal Mart

After a rude earnings surprise, the chain has decisively put its house in order

It was a quarter that scared a giant. When Wal-Mart Stores Inc., the world's largest retailer, announced two years ago that earnings for the period ended Jan. 31, 1996, would break a string of 99 quarterly increases, the company predictably fell from grace. Its stock, already sliding for three years, dropped like a rock. And many Wall Street analysts questioned whether the great Wal-Mart growth story was finally sputtering to an end.

Unfortunately for Wal-Mart's rivals, what's known in the Bentonville (Ark.) headquarters as "the wake-up call" prompted the behemoth to shake off its doldrums with a vengeance. Indeed, Wal-Mart is balancing still healthy growth with an emphasis on delivering returns to shareholders through stock buybacks and higher dividends. And it's delving into the back-office details of its business like never before. "That [quarter] probably caused us to redouble our efforts to make sure we got our act together," says Chief Executive David D. Glass.

And the reviews are good. Sales for the fiscal year ended on Jan. 31 should jump 12%, to more than $117 billion--vs. $41.5 billion for Wal-Mart's closest rival, Sears, Roebuck & Co. Earnings are expected to climb 14%, to nearly $3.5 billion, well above 1995's paltry 2.2% growth. Investors are taking note. Wal-Mart's stock, as low as 19 two years ago, is now around 39 and trading at near record levels. Shares gained 73% last year, handily outperforming the 31% jump of the Standard & Poor's 500-stock index. "I think the stock can go to 50 next year," says Scott M. Mullinix, an analyst for American Express Financial Advisors, an institutional holder of Wal-Mart stock.

Wal-Mart's rebound can be attributed in part to benefits it's finally starting to see from a series of investments. The company acquired about 100 Pace warehouse-club stores in 1993 for $830 million and 122 Woolco stores the next year for $352 million. It expanded into Argentina, Brazil, and Mexico, and added to its base of "supercenters"--all time- and cash-consuming efforts. "If we could have timed it, we would have done it differently," says Vice-Chairman Donald G. Soderquist.

GLOBAL REACH. Now, international operations, with $9.5 billion in sales last year, should turn a profit of more than $100 million for '97. And Wal-Mart's supercenter sales jumped 37% last year.

The coming of age of these expansion efforts allows Wal-Mart to make key internal strategic shifts. With growth overseas and more efficient stores at home, Wal-Mart is generating huge free cash flow--an estimated $3 billion in the year ended on Jan. 31. That gives it the war chest to buy back shares and boost its dividend to deliver shareholders a promised 15% total annual return, including 12% to 13% earnings growth.

Although Wal-Mart denies it, some analysts say it has lowered expectations for earnings growth, leading to greater credibility on Wall Street. "Wal-Mart used to be a company that was obsessed with one word: `more.' More inventory, more stores, more sales," says analyst Michael Exstein of Credit Suisse First Boston. "Today, it is really seeking a balance between the old juggernaut of `more' and [shareholder] returns."

Driving Wal-Mart's newfound discipline are some aggressive managers who are rising in the organization. In late '95, a veteran of Wal-Mart's logistics-and-distribution operations, H. Lee Scott Jr., 48, took over all merchandising in the U.S. On Jan. 16, he was promoted to president of the Wal-Mart Stores Div., making him one of several contenders to succeed Glass, 62. For almost two years, the boyish-looking Scott has worked hand in glove with Executive Vice-President for Operations Thomas M. Coughlin, whose career includes stints in the loss-prevention and personnel departments. "Lee and Tom deserve most of the credit for the resurgence of Wal-Mart," says Glass.

Together, Scott and Coughlin have bored in on the basics of the business. Inventories have been cut $2 billion in the past 2 1/2 years, saving $150 million in interest costs. At a recent meeting, one young buyer proudly reported his reduction in protractor stocks. Instead of shipping in packs of 80, the vendor now sends them in packages of 10, saving Wal-Mart the cost of storing more than $100,000 worth of inventory. The goal: cut $500 million more this year, excluding new stores. "It's not complicated," says Scott. "It's a cerebral endeavor, whereas merchandising, for the most part, has been thought of as an art."

KID STUFF. Scott and his lieutenants are also mining Wal-Mart's wealth of data to boost margins and sales per store. An analysis of shopping data showed that buyers of heavily advertised children's videos often pick up more than one kids' video per trip. The lesson: Don't set up a hot kiddie video all by itself on an end-of-aisle display. Make sure the rest of the video collection is nearby.

Wal-Mart may be on a roll, but it's not without challenges. Global expansion remains its riskiest venture. Eileen M. Leary, an analyst for State Street Research & Management, an institutional Wal-Mart shareholder, warns that the retailer could have trouble maintaining double-digit growth as it becomes more dependent on less stable international markets. Still, most of Wall Street is bullish. Analyst Jeffrey M. Feiner of Lehman Brothers Inc. expects the company's revenues to climb 11%, to $131 billion, in the next fiscal year.

Glass has other tricks up his sleeve. Near the desk in his office is an artist's rendering in green and white of a prototype Wal-Mart convenience store. Glass plans to tinker with the idea this year or next. As long as he and his troops keep experimenting and executing, even giant Wal-Mart may have room to grow.

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