Wal-Mart focuses on performance

Discount Store News, March 18, 1996 by Richard Halverson

BENTONVILLE, ARK. -- Debt, disappointment over profits, dividends, delivery, distribution, and, oh yes, delis, fill the menu of Wal-Mart news.

* Debt: Moody's Investors Service cut by one notch the rating on $8.60 billion of Wal-Mart long-term debt, citing the difficulty it will have in maintaining its financial performance and high growth rate.

Its investments in supercenters and international stores have been slower to generate adequate returns. Both require significant investments, cutting into cash flow, the rating service said.

International operations produced a loss of $16 million for the year ended Jan. 31, 1996, only a slight improvement on a $17 million loss the previous year, Wal-Mart reported.

On the positive side, Wal-Mart could improve on cash flow and reduce leverage any time it wants to by slowing expansion, Moody's pointed out. And the rating service

expects Wal-Mart to improve on returns by capitalizing on its traditional strengths in technology, distribution, buying power and store locations.

Moody's cut puts Wal-Mart's rating on a par with that of Standard & Poor's, and Wal-Mart still retains the highest debt rating of any retailer. The reduction had virtually no immediate effect on the interest rate Wal-Mart pays on its long-term debentures, but rates did nudge up by three basis points (100 basis points equals one percentage point).

* Disappointment: Wal-Mart missed its goal of 100 quarterly profit gains in a row in the fourth quarter of '95 when net income dipped to 41 cents per share from 45 cents in the fourth quarter of'94.

President and ceo David Glass conceded disappointment with the fourth quarter profits. But Wal-Mart reacted to the unhappy news "with aggressive cost and merchandising initiatives," Glass said.

In Bentonville, Ark., associates have taped quarters to their name badges, showing their determination to get back on track during this year's first quarter.

In addition, Wal-Mart won't break the $100 billion sales mark until '96. For the year ended Jan. 31, 1996, total corporate sales rose 13% to $93.63 billion from $82.50 billion the previous year.

Comp store sales gained 3.9% companywide. For Wal-Mart stores, comp store sales rose 5.0%, half of the '94 increase of 10.1%. Same store sales turned positive for Sam's Club, a slender gain of 0.9%, but an improvement over the 2.2% decline in '94.

Operating profits, excluding the McLane's food distribution division, rose 7.1% for the year to $5.8 billion from $5.4 billion in '94.

Net income for '95 rose 2% to $2.74 billion, or $1.19 per share, from $2.68 billion and $1.17 per share in '94.

* Dividends: On the payout side, Wal-Mart's board increased its annual dividend by one penny to 21 cents per share, which was equal to a 1/2 cent quarterly increase. According to Wal-Mart, it was the 23rd annual increase in the dividend paid.

To help offset declining gross margins, which fell to 20.3% in '95 from 22.2% in '89, Wal-Mart hopes to sell more high-margin goods such as apparel. But it also may raise prices somewhat to trim the price difference between it and competitors.

In a recent interview with Wall Street analysts, senior vp Jay Fitzsimmons said, "We feel that offering prices 7% to 8% below our competitors' [prices] might be lower than we have to be. Maybe we only need to be 5% to 6% lower."

Any price increases will be unnoticeable to customers, he added. "We will always have the lowest prices."

* Delivery: In a further test of home delivery, Wal-Mart is offering the service, for a price, to supercenter shoppers in three Arkansas towns: Bentonville, Fayettville and Springdale. Customers may place orders by phone, fax or personal computer.

Last year, Wal-Mart launched its first home delivery test in Fort Worth, Texas, and Springfield, Mo.

Customers can order from a special catalog any of 5,000 to 6,000 general merchandise and supercenter grocery items for delivery to home or office during scheduled delivery times. Prices are the same as those that the supercenters charge in person, but customers pay a delivery charge of $7.95 for phone orders and $6.95 for fax or PC orders.

Shopping Alternatives, Bethesda, Md., operates the home delivery service for Wal-Mart.

"This is a new approach to meeting our customer's expectations for convenient service," said Nick White, executive vp for Wal-Mart's supercenters. "With the time constraints faced by dual-income families and the rise in the elderly population in the area, shopping from home is an emerging trend."

* Distribution: Wal-Mart will build a sixth food distribution center in Bedford, Pa., which will serve East Coast supercenters as far south as Culpepper, Va. A food wholesaler now supplies them from Portland, Maine. The opening is expected for October '97.

And in Pauls Valley, Okla., Wal-Mart plans to open a general merchandise DC in the fall of 1998 to supply stores in northern Texas, Arkansas, Louisiana and Oklahoma. The 1 million-sq.-ft. Pauls Valley DC will cost $30 million. Wal-Mart now operates 33 distribution centers, including five food DCs.