For Exiting Wal-Mart CEO, a Victory Lap

Michael Duke will replace Lee Scott in February after Scott revived the big-box retailer's sales and share price, as well as his reputation

Talk about a holiday surprise. Retail giant Wal-Mart Stores (WMT) announced just a week before Black Friday, the biggest sales day of the year, that it would have a new chief executive officer come February. Lee Scott, the company's CEO for the past nine years, is stepping down. He'll be replaced by Michael Duke, , 58, who currently leads the company's international division.

Retailers traditionally don't make such appointments right in the middle of their biggest selling season. But longtime Wal-Mart watchers see the change as more of a victory lap than a forced departure for the 59-year-old Scott, whose tenure had been marred by disappointing results and controversy until this year. "He's dealt with the public relations, the vicious union attacks, he's gotten morale back up—the best thing to do is leave at a moment of strength," says Howard Davidowitz, a retail consultant with his own firm in New York. "When you talk about management transition, this is as good as it gets."

Strategy Shift Lures Back Customers

Even long-term critics, such as the union-funded Wal-Mart Watch campaign, applauded the news, sort of. "Wal-Mart's announcement must be viewed in the context of the recent election," the group said in a statement. "It represents an opportunity for Wal-Mart to change from the low-wage, low-benefit business model to one that will be more appealing to an Obama Administration."

Wal-Mart's reputation took a beating in recent years as critics complained of its skimpy employee pay and health-care benefits as well as big-box stores that decimated smaller hometown rivals. Moreover, the nation's largest retailer seemed to lose its low-price focus, chasing designer apparel much like rivals Target (TGT) and Kohl's (KSS). Investors were disappointed, too, as the company's costly new store launches cannibalized sales at existing locations and Wal-Mart's once soaring stock price was relegated to the bargain bin.

The sorry streak began to change this year, in part due to the slumping economy luring customers back (BusinessWeek, 10/30/08) for cheap prices. Yet that shift was also aided in part by changes the retailer made in the past two years. Wal-Mart has been opening fewer locations and smaller stores when it does. A store remodeling program introduced skylights, wider aisles, and warmer colors to Wal-Mart's characteristically cold and cluttered layout. The company has also been editing its product assortment, focusing mostly on top sellers sold at rock-bottom prices. This holiday shopping season the chain is heavily promoting brand-name toys at $10 each.

Sales and Stock Up

As a result, Wal-Mart has been posting sales results sharply better than rivals in what is shaping up to be one of the worst sales years on record. Wal-Mart's stock is up this year, a rarity in the current dismal market. "This is Wal-Mart time," Scott told Wall Street analysts Oct. 27 during an annual presentation at company headquarters in Bentonville, Ark. "This is the kind of environment that Sam Walton built this company for." Wal-Mart shares rose slightly, to 51, on the news of Duke's appointment.

Duke joined Wal-Mart 13 years ago after stints at the Federated and May Co. department store chains, and much like Scott, worked his way up in the company's famously efficient logistics department. Since 2005, Duke has headed Wal-Mart's international business, with 3,200 stores and $100 billion in sales. He has faced some thorny decisions, such as exiting poorly performing South Korea and Germany, while bulking up in Latin America. Duke has indicated that he will shift more of Wal-Mart's new-store focus to faster-growing emerging markets. "Wal-Mart has reached the point of diminishing returns in the U.S.," says Donald Delzell, head of the retail consulting firm Future Merchants. "Continued growth is based on international expansion."

Talking Turkey

Duke's appointment is disappointing news for two other executives considered candidates for the top job: Eduardo Castro-Wright, 53, president of the U.S. stores division, and C. Douglas McMillon, 41, who runs the company's Sam's Club warehouse chain. As part of the Duke announcement, Castro-Wright was promoted to vice-chairman, responsible for the company's worldwide procurement. Scott will remain as an advisor to Duke, and give speeches on behalf of the company.

Left unanswered is who will replace Duke. Wal-Mart said it would name Duke's successor by the close of its fiscal year in January 2009. Knowledgeable observers say the leading candidate is McMillon, the Sam's Club chief. "He's really helped drive growth in that business," says Joe Feldman, a managing director at Telsey Advisory Group, a retail consultancy in New York. Sales at Sam's Club were up 6.7% in fiscal 2008, while operating income rose 9.3%. A company lifer, McMillon launched his Wal-Mart career back in high school in Jonesboro, Ark. The one hole in his résumé is a lack of international roles: "My gut feeling is they want to give McMillon broader experience," says Feldman.

Duke also has two well-regarded lieutenants who would figure to be in the running: Craig Herkert and Vicente Trius. Since 2004, Herkert has been president and CEO of the Americas, which includes the retailer's operations in Argentina, Brazil, Canada, Mexico, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Puerto Rico. Trius, meanwhile, joined Wal-Mart in 1996 and currently runs Asian operations, and earned his stripes by growing Wal-Mart's Brazilian business from a 10-store outpost to a thriving unit with more than 300 outlets.

Of course, the internal politics matter little to customers such as Richard and Katherine Jordan, retirees from Arcadia, Calif., who recently were buying 10 turkeys at their local Wal-Mart for a church dinner. "You can't beat their prices," Katherine Jordan said. "At $1.10 a pound, they're cheaper than what the other stores are charging. And these are Butterballs."

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