Wal-Mart Stores Inc Chief Executive Officer H. Lee Scott last year missed the world's largest retailer's goal of boosting profit as fast as sales as he opened over 200 stores and slashed prices to stay ahead of rivals.
Scott fell short again last month, when Wal-Mart's same-store sales failed to meet analysts' forecasts for the first time in more than a year. Wal-Mart's shares fell 2.5 percent on the news Thursday. They have declined 15 percent since Scott took over in January 2000, more than the 7.2 percent drop in the Standard & Poor's Retail Stores Composite Index.
Some investors say they want Scott to show he can keep increasing earnings by as much as 15 percent a year, as Wal-Mart did in the economic boom of the 1990s. While sales may climb that much as Scott opens hundreds of stores, investors say he's fighting narrowing profit margins in Wal-Mart's expanding food business and, possibly, a drop in consumer spending.
"I want to see earnings more in gear with sales," said James Luke, who manages BB&T Asset Management's US$200 million Large Company Growth Fund, which includes 87,550 Wal-Mart shares.
Later today, analysts expect Wal-Mart to report US$0.36 a share in profit for the first quarter ended April 30, according to Thomson First Call. The Bentonville, Arkansas-based company earned US$0.31 a year earlier.
Scott helped shield Wal-Mart from the US recession last year by expanding the food business that predecessors David Glass and Sam Walton started almost two decades ago, investors said. Wal-Mart added food to its selection of clothing and household goods to attract customers to stores more often, analysts said.
In October, Scott said he planned to open as many as 325 stores and move or enlarge 115 this year in Wal-Mart's biggest-ever expansion. The stores included supercenters -- warehouse-size discount stores with a supermarket -- and smaller grocers dubbed Neighborhood Markets.
While adding groceries increases revenue, food sales generate less profit per dollar than other household goods. As of the end of last year, gross margins at Wal-Mart's main division had narrowed for five straight quarters.
"Wal-Mart doesn't want to destroy the everyday low price it enjoys with the consumer [but] somehow you have to have some higher-margin products," said Argus Research analyst Marie Driscoll, who rates the shares "buy" and doesn't own any.
Wal-Mart ended last year with more than US$2 billion in cash and equivalents -- almost the same amount discount chain Target Corp and supermarket operator Kroger Co earned combined -- even after investing more than US$7 billion in its business. Wal-Mart has said it plans to spend about US$10 billion this year on its expansion.
Investors say they are looking to Scott to find new ways to reach consumers, who may cut back in coming months after spending through the recession. Concerns about spending increased when Wal-Mart reported a 3.3 percent increase in last month's same-store sales, less than analysts' estimates for a 4.5 percent gain.
Wal-Mart's willingness to experiment with new store designs, technology and products is what helped it win customers from rival Kmart Corp, investors said. Kmart sought bankruptcy protection in January after sales slumped and some suppliers stopped deliveries.
Scott declined to be interviewed for this story, spokesman Tom Williams said.
One experiment that's paying off is the four-year-old Neighborhood Market chain, investors said.
The stores, designed for shoppers who want to make a quick stop, each are generating about twice the US$7 million to US$10 million in annual sales they had been forecast to make, said Burt Flickinger, managing partner with Reach Marketing consulting firm.
Wal-Mart plans to add 15 to 20 Neighborhood Markets to its 31 this year, Williams said.
Not all of Scott's efforts have led to immediate success.
Store remodelings and price cuts on thousands of products haven't yet led to a profit at Wal-Mart's German division since the retailer bought the Wertkauf chain five years ago and 74 Spar Handels stores in 1998.
Scott also is seeking ways to add financial services beyond the banks that lease space in more than 900 stores. Changes in US banking laws ended Wal-Mart's plans to buy Federal BankCentre in 1999. Wal-Mart is in talks with Toronto-Dominion Bank, Canada's second-largest bank, about opening branches in its US stores, Williams said.
Scott this month started to test whether consumers will buy used cars alongside clothing and household goods. He agreed to lease space near five Houston stores to Asbury Automotive Group Inc, tapping a US$400 billion market.
The business extends Scott's reach in the automobile market, for which Wal-Mart already offers gas stations and Tire & Lube services at some stores, and roadside assistance service memberships.
If Scott took over the business, which some investors expect, that could drive up costs.
"I'm not convinced that this is going to be a successful format" for Wal-Mart, said analyst David Campbell of Davenport & Co. "They've got enough on their plate."
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