Wal-Mart talks to the analysts; expansion abroad, one-stop shopping get attention - Wal-Mart Stores Inc

Discount Store News, Nov 6, 1995

BENTONVILLE, ARK. -- For the second consecutive year, Wal-Mart hosted a meeting of top investment analysts at the company's headquarters. About 150 leading analysts attended the three-day event.

According to Morgan Keegan analyst Paul Berg, this year's event had less meat than last year's, when Wal-Mart concentrated on news that its Sam's Club and Canadian discount stores were projected to turn around in 1995. Those two presentations addressed major concerns on the part of the investment community, many of whom later raised their ratings of Wal-Mart's stock.

The major news this year came from ceo David Glass' address, in which he expressed admiration for convenient one-stop shopping concepts like Dollar General, Family Dollar and Fred's. Glass called them "powerful retail concepts" that have the potential to grow significantly in coming years. While Wal-Mart stopped short of expressing interest in its own version of the concept, or purchase of an existing player, the company has been known, in the past, to tip off its thinking in just such asides.

As Wal-Mart has moved to larger and larger supercenters (at least two of the 21 that opened Oct. 25 were well over 200,000 sq. ft.), it faces a danger of alienating many of its core customers particularly elderly, low-income rural shoppers who are intimidated and physically challenged by the sheer size of the stores. And locations that are often far off the beaten track also may scare off older shoppers. At the Moore, Okla., supercenter, Wal-Mart has installed benches in various departments and beefed up its supply of electric wheelchair/ shopping carts to appeal to those shoppers.

It would seem that a smaller, more convenient version of a supercenter might be a growth vehicle for Wal-Mart, which is within 500 units of total penetration of the U.S. retail market. After that, the chain will be facing diminishing returns on its investment. In that context, a convenience strategy makes a lot of sense.

Another analyst, who asked not to be identified, noted that Wal-Mart is planning another round of price cuts, probably timed to go into effect during the Christmas rush. He noted that Wal-Mart expects to absorb a short-term hit on its profitability, but plans to make it back in the long run.

At the Moore store, there were significant price reductions in the toys department, with hand-printed signs pointing to the value prices. In some aisles, there were as many as 12 of these signs, almost all spotlighting popular name brand toys.

Morgan Keegan's Berg noted that other major pieces of news at the analysts meeting included the announcement by Glass that the company expects to see earnings growth of only about 16% a year over the next five years, against 20% and more over the past decade. "Still, they've set a number for us to track," Berg said. "Before, we really didn't have a target." Berg added that if Wal-Mart can maintain 6% same store sales growth, his earnings target of between 13% and 15% will be easily attainable; however, if same store growth declines to the 4% level or so earnings growth will plummet to the 10% range. Historically, Wal-Mart has never had same store growth as low as 4%.

Long term, the most significant topic was probably Wal-Mart's discussion of its international growth strategies. To date, these have played a very small role in Wal-Mart's overall performance, but like the growing supercenter segment, Wal-Mart is relying on these operations, in Canada, Mexico, South America and Asia, to play a major role in its ongoing operations.

While noting that operating in countries with very different cultures and political situations can be problematic, Wal-Mart executives said that the opportunities far outweigh the risks. The company has struggled somewhat in Mexico since the devaluation of the peso, and in Canada, where the Woolco stores it purchased were in much poorer condition than first thought. It has also had problems in Brazil, where several major suppliers refused to sell goods to its first unit, reportedly due to pressure from more-established competitors like Carrefour.