Wal-Mart Lets Up on the Gas

The retailer scales back its U.S. expansion plans as its struggles to get profitable growth back on track

In an admission that its growth formula has fizzled, Wal-Mart announced on June 1 that it is sharply dialing back expansion plans in the U.S. The world's largest retailer plans to open as many as 190 supercenters this year, a 30% drop from its previously announced plans of opening up to 270.

The company said that approximately 80 of the supercenters originally scheduled to open in January, 2008, will open in early fiscal 2009 instead. The announcement comes just after Wal-Mart reported a 3.5% drop in April sales at stores open a year or more, its largest decline since 1979 (see BusinessWeek, 4/30/07, "Wal-Mart's Midlife Crisis").

With growth harder to come by, the company is using another tried-and-true method to bolster its stock. Wal-Mart also announced on June 1 that its directors approved a new share repurchase program that increases its buyback authorization to $15 billion. Investors liked the sound of that, and bid up the shares by nearly 4% on June 1 to $49.36 in afternoon NYSE trading. Nonetheless, the shares have languished in the upper $40s-low $50s since hitting a peak of $61.21 in early 2004.

Less capital spending will free up cash -- $1.5 billion – this year, and the company plans to boost its dividend by 31% this fiscal year, or by $3.6 billion. Standard & Poor's analyst Joseph Asaeda boosted his target price on Wal-Mart shares from $53 to $56. (S&P, like BusinessWeek, is owned by The McGraw-Hill Cos. [MHP]).

"We view these steps as positive, believing that reallocation of assets from maturing U.S. business will lead to improved shareholder value. We expect reduced capital spending and higher free cash flow to fund an increasing dividend and an active share repurchase program," Asaeda wrote in a client note.

Credit Suisse (CS) analyst Michael Exstein says the company's "significant change in capital allocation strategy" should help management better focus on fixing sales at its existing store base. Exstein has a $59 target price for Wal-Mart shares.

But while buybacks can placate antsy shareholders in the short term, the company still needs to regain the momentum that vaulted it to the top of the retail heap. Now Wal-Mart says that it's planning to focus on its customers' needs and improve its merchandise and its operations. "We are pursuing high return opportunities by focusing on markets where our customer segmentation approach offers the best opportunity to create a more competitive position for Wal-Mart and drive higher comparable store sales," says Eduardo Castro-Wright, CEO of Wal-Mart's U.S. division. Wright says that the company is in the midst of a three-year plan to drive returns and this is the second year of the three-year plan.

Castro-Wright has his work cut out for him. Clearly, his three-year plan has gotten off to a rough start. After realizing that affluent shoppers were shopping at Wal-Mart, the company in the last two years aggressively moved towards offering trendy fashions under a new label called Metro 7, doubled the organic food in its aisles and started offering 400-thread count bedsheets. Wal-Mart even bought ads in Vogue magazine and sponsored an open-air fashion show in Times Square.

The entire effort backfired badly. Metro 7 fashions didn't really attract upscale shoppers, who continued to visit Wal-Mart only for their staples like detergent and milk and spurned Wal-Mart's organic offerings. Chief Executive Lee Scott conceded in an April meeting with BusinessWeek that the company has struggled to persuade customers that Wal-Mart can mean high-quality, rather than simply low price. "I think we went too far too fast," he said (see BusinessWeek, 4/12/07, "Organics: A Poor Harvest for Wal-Mart").

In recent months, Wal-Mart has returned to basics and seemed to abandon its pursuit of upscale customers. But low prices alone won't cut it, and the retailer continues to struggle to increase sales. Now Castro-Wright is signaling that he will take another swipe at luring upscale customers to cross the aisle from shopping for basics to buying higher-margin items.

With this strategy, Wal-Mart will have to abandon what it knows best, which is selling commodity items at the lowest price. "It's like deconstructing the brand as it exists today and migrating to a different scale," says Robert Passikoff, founder and president of Brand Keys, a New York brand consulting firm. "Changing that image will take at least a decade and Wal-Mart wants do to it on a dime."

But Wal-Mart has identified that it will give the effort three years, with one disappointing year already under its belt. In this strategy the company will segment its customers and target its merchandise and marketing accordingly. Now, Wal-Mart will have to learn the fine art of selling to customers who are used to a little more wooing than just the mantra of low prices. With a CEO who doesn't believe in marketing, as Scott admitted to BusinessWeek (see BusinessWeek.com, 3/30/07, "Wal-Mart: 'On the Side of the Angels'"), that will be a difficult trick.

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