Hometown values & a global reach at 35; Wal-Mart enters mid-life without a crisis

Discount Store News, March 3, 1997 by Mike Troy

Wal-Mart enters middle age this year with the observance of its 35th birthday, and the lingering question for its shareholders, employees and customers is how robustly the retailer will carry on in the next stage of its life.

To cynics, the company's worldwide expansion, sputtering Sam's Club division and stagnant stock price appear to be the retailing equivalents of such familiar mid-life icons as the sports car, aching joints and a receding hair line. Whether this holds true will become more apparent in the current year--a year that will be pivotal for many aspects of Wal-Mart's expanding retail empire.

Whether Wal-Mart is able to prove wrong those who would like to see the world's largest, and by many measures most successful. retailer stumble. will depend on the following factors:

* The profitability of supercenters. Wal-Mart continues to plow capital into the opening of new supercenters and the conversion of existing discount stores into supercenters.

There were 105 supercenters opened during the past year, bringing the total number to 340. It was the first year in which the number of supercenter openings exceeded the number of discount store openings. Supercenter openings through decade's end will range between 100 and 150 units annually.

While the strategy is part of Wal-Mart's larger initiative to become the biggest food retailer in the United States, the plan does have a hitch: It takes longer for a supercenter to become profitable than a discount store.

On the up side, those units opened during the earlier part of the decade are expected to start making more of a contribution to profits soon.

* The conversion of existing discount stores to supercenters. Wal-Mart continues to open traditional discount stores, but the pace has slowed dramatically and expectations are that most of the newly opened stores will eventually be converted to supercenters. Wal-Mart opened 70 discount stores last year, compared to the 176 discount stores it opened in 1991 alone.

Going forward, Wal-Mart expects to open 50 to 60 discount stores annually. Particularly important to watch will be the Northeast and the West, both areas where Wal-Mart still has a fair amount of room to grow.

* The profitability of international expansion. Wal-Mart's goal is to have international stores turn a profit after three years of operation, an uncertain prospect given the significant operational challenges of overseas retailing.

Nevertheless, Wal-Mart is proceeding as quickly as prudence and international red tape will allow.

Last year, stores were opened in China and Indonesia, and the year before that stores were opened in Argentina and Brazil.

In North America, Wal-Mart has a major presence in Canada and Mexico. There are a total of approximately 243 international stores.

* The continuing rebound of the Sam's Club division. Eight new clubs were opened last year and six to eight new units will be added annually in the years ahead.

Although the division doesn't offer the growth of supercenters, sales have begun growing after a sluggish two years, and the slowdown in expansion has lessened what was once a drain on profits. There are approximately 436 Sam's Clubs in The United States.

* The ability to remain a low-cost operator and EDLP retailer. Wal-Mart established the retail industry's benchmark for excellence in distribution and logistics, but the company's lead has narrowed as other retailers have invested in technology to improve their efficiencies and lower prices.

Meanwhile, there are those in the financial community who believe Wal-Mart could goose its earnings with margin-expanding price increases that would go virtually unnoticed by consumers.

* Reduced inventory levels. Inventory was cited recently by executive vice president of merchandising Lee Scott as an area of ongoing focus. "Even with all the new stores we added last year, we took almost $1.4 billion from inventory and we'll take another $1 billion this year," Scott said. "And we haven't even had to work hard at it yet."

* Earnings growth. Inventory reductions and profit contributions from the investments in supercenters and international expansion that took place during the early '90s are expected to boost Wal-Mart's earnings into the mid-teens.

All told, the sluggish earnings growth and current challenges Wal-Mart faces are of its own making. Within the span of a few years, the company moved into Canada with the acquisition of 122 Woolco stores, expanded the presence of Sam's with a difficult to digest Pace warehouse club acquisition and invested heavily in its future with international expansion that hit a snag in Mexico when the peso was devalued.

Those events produced a drain on earnings from which Wal-Mart now appears to be emerging.

Nevertheless, the retailer continues to be a victim of its past successes. During Wal-Mart's first 20 years as a public company, it understated its expectations and then consistently outperformed. The reverse has been true for the past five ears: the company elevated expectations and then often came up short.