The $200 billion blueprint - Wal-Mart financial plans

Discount Store News, Oct, 1999

The once unthinkable prospect of Wal-Mart surpassing sales of $200 billion is at hand. When the current fiscal year ends in January 2000, Wal-Mart's sales will hit $165 billion. By the end of the following year, sales are projected to reach $190 billion. And a few weeks into the first quarter of 2001, sales will surpass $200 billion on a rolling 52 week average.

The company is committed to growth, and its goal is simple. It wants to achieve the 15% annual earnings per share growth that makes it worthy of being considered a global growth company. In order to do that a minimum of $25 billion in additional sales volume is needed every year for the foreseeable future.

Last year Wal-Mart added $20 billion in volume when its sales reached $137 billion. John Menzer, who was cfo at the time and is now president and ceo of International, pointed out to analysts that the sales increases were achieved despite concerns a few years earlier that the company couldn't sustain its pace of growth.

In addition to sales gains, Wal-Mart will have to achieve new efficiencies in its business to remain a low-cost operator. The goal may be simple, but the diversity of strategies and challenges to overcome in achieving it are anything but.

Domestic growth comes mainly in the form of supercenters--a format popular with consumers that no other retailer has embraced as aggressively as Wal-Mart. The opening of 150 units this year should give Wal-Mart a year end tally of 715. There are plans for at least that many openings in the years to come, with 1,350 supercenter expected to be operational by 2003.

Discount stores are today the main profit generator at Wal-Mart, but that will change in the next few years. Supercenters produce average annual sales of $70 million, compared to discount stores which average $33 million. Older and smaller units are being closed when a supercenter opens nearby, while the more recently constructed discount stores are capable of expanding to the supercenter format. New discount stores continue to be opened with the expectation that most of those being built can be eventually converted to supercenters. Conversions have gradually reduced the number of discount stores from a high of 1,995 three years ago to a projected 1,827 by year end. The opening of 40 discount units this year and future openings will partially offset the decline.

The Sam's Club division continues to grow. The opening of roughly 10 new units this year is expected to give the club division a year-end total of 460 units. Sam's isn't Wal-Mart's major growth vehicle, but the club format has plenty of potential as new clubs are built to replace older units and others undergo extensive remodeling to add new departments and services. The merchandise mix has also changed, with some clubs near metro areas offering a greater selection of upscale items.

The Neighborhood Market is still characterized as a test although expectations are high the format will be aggressively expanded. Five of the units are open, with plans for another dozen in 2000. What Wal-Mart will do with the format beyond that remains a mystery, although Wal-Mart has the resources to rapidly expand. Intended to complement rather than compete with supercenters, Wal-Mart has to fine tune the product offering, but could use the 40,000-sq.-ft. store to penetrate metro markets where the lack of real estate precludes the much larger supercenter.

International operations are seen as the growth engine that will drive longer-term sales increases. Wal-Mart is still a relatively young player on the global scene, and a majority of the division's more than 900 stores are located in Mexico and Canada. The acquisition of 230 Asda supermarkets in the United Kingdom doubled the division's sales volume. Construction of new stores is expected in markets such as Brazil, Argentina and China, but more acquisitions are on the way.

A rapidly expanding network of food distribution centers will support Wal-Mart's effort to capture an increasing share of the food market through multiple formats. Ten food DCs are open now, and four more announced locations in Wisconsin, Utah, Alabama and New York scheduled to open in the coming years. Two perishables-only DCs are also planned, although locations haven't been announced.

Wal-Mart Interactive and Sam's Interactive constitute the company's e-commerce initiatives. With the fall 1999 relaunch of its three-year-old web presence, Wal-Mart plans to leverage its brand equity, database of customer information, store traffic and systems expertise to obtain more than its share of an e-commerce market of yet unknown proportions.

Supercenters, discount stores, Sam's Club, Neighborhood Markets, international and e-commerce provide Wal-Mart with a diversity of vehicles to achieve the sales growth it needs to drive the consistent earnings increases that fuel its stock price. Just as Wal-Mart's growth strategy is well defined so is the company's understanding of the pitfalls that could lead to its decline. Maintaining the company's culture and resisting the natural tendency to grow complacent with past success are the top priorities of senior executives. So is its relationship with vendors. Increased collaboration with vendors is essential for Wal-Mart to achieve further efficiency gains in the area of inventory management. Wal-Mart is also counting on vendors to help the company customize the merchandise mix in every store.