BENTONVILLE, Ark. -- The spread of Wal-Mart stores has only just begun, the company said here last week.
"Wal-Mart's global market share in the 78-plus countries in the formal economy is just 3%," Lee Scott, chairman and chief executive officer, pointed out, "so we don't see any short-term or mid-term limits on our growth or on our ability to take care of customers, and we continue to see opportunities to add to our top line."
Scott spoke at Wal-Mart's 10th annual analysts' meeting here.
Wal-Mart said it plans to open 220 to 230 supercenters next year, including 140 relocations or expansions of discount stores, for a total approaching 1,700 by the end of 2004; 50 to 55 discount stores; 35 to 40 Sam's Clubs, including its first entry in Canada with four Sam's set for the Toronto area; 25 to 30 Neighborhood Markets; and 130 to 140 international stores. For the year ending Jan. 31, Wal-Mart expects to open 213 supercenters, 55 discount stores, 34 Sam's Clubs, 16 Neighborhood Markets and approximately 125 stores overseas.
"Our intent is to continue to add 8% square footage growth each year and increase comp sales growth and add to our top line," Scott said, "and we don't see any change in accomplishing those numbers going forward.
"We're adding stores and distribution centers and spending capital on systems, so we're investing back in the business at an extraordinary rate to make sure Wal-Mart will be a growth company for a long time, and we're making sure there's nothing that prohibits us from doing that."
Scott said Wal-Mart sees more opportunities for domestic growth than it previously anticipated. "We've found we can increase the number of supercenters by putting them closer together than we ever dreamed of," Scott said. "Rather than operate a lot of supercenters doing $120 million or $130 million or $140 million a year, we'd rather put another store nearby and operate two stores doing $80 million or $90 million each" to relieve some of the customer congestion.
That kind of higher density is possible all over the country, Scott said, even close to its home base here in northwest Arkansas, where Wal-Mart is adding two new supercenters -- one north of here about 12 miles, just over the Missouri border, that will compete with a 185,000-square-foot supercenter here and one about 12 miles south in Rogers, Ark., that will compete with an existing 200,000-square-foot supercenter in west Rogers and a Neighborhood Market. "Even in this area we found we can have greater density of supercenters than we had ever imagined," Scott said.
That's part of the reason Wal-Mart is opening more supercenters than Neighborhood Markets, he explained. "Supercenters have a higher return than Neighborhood Markets, and while we're satisfied with the returns on Neighborhood Markets, which are meeting our thresholds and run rates, we'd rather spend our money and efforts on supercenters," he said.
In a subsequent presentation, Mike Duke, executive vice president, operations, for Wal-Mart Stores, said the company is still learning how far apart it can space supercenters. "We use point-of-sale data from existing stores to see where customers live, and as we plan new stores, we project the impact on existing stores based on that data. We have some supercenters today that are as close as three or four miles apart, and we know the impact on comparable sales at some locations has been about 100 basis points." In his presentation, Scott touched on several other issues facing Wal-Mart, including:
* Infrastructure. More concentrated integration of its infrastructure "to leverage back against the entire business base, which is something we didn't do for years. We find disadvantages of size come without any work at all, but the advantages of size require a great deal of coordination and work," Scott said.
* Sam's Clubs. "You get a feeling in business before you see results, and we have a good feeling about the direction Sam's is going. Month by month, we're seeing increasing comparable sales as we differentiate our assortment and focus on business customers. We're doing that without flash and without couponing or other things that artificially inflate sales, but simply by getting more conservative and running the business the way clubs should be run."
* Health care. "Wal-Mart doesn't have a program to discourage people from taking health care coverage. We offer plans with deductibles of $330 or $1,000 and let the associates make the choice depending on their needs. We believe the programs we provide should be catastrophic programs, with no lifetime limits, but we don't pay for everything. For example, we've elected not to pay for birth control or elective gastric surgery. "And we manage our hospital networks and doctors aggressively and carefully, and in doing so, we're able to provide affordable programs whose costs are closely monitored. We could provide the same coverage as competitors for substantially higher costs, and we'd probably get criticized less if we spent more per associate. But we don't think it's in our best interests or the best interests of U.S. industry to be rewarded for being inefficient. We pay two-thirds of our associates' costs, and if we didn't manage it the way we do, our two-thirds and their one-third would cost more."
* Management behavior. "We recognize that, in today's environment, what one person does is sometimes held up as typical of what everyone in a company does rather than being the exception. We realize we have faults and people who make mistakes that hurt all of us. But instead of being defensive, we try to step up and teach our people the costs of those exceptions. If a district manager doesn't handle racial issues properly or a store manager doesn't handle sexual harassment issues properly, then they can't hold those positions. So we believe that raising the level of intensity [about those issues] is very important."
* The outlook for this year's holiday selling season. Scott said he anticipates "a modest improvement" over last year. "I have no sense of an impending boom or that things will be dramatically better or significantly worse. Everyone I talk to expects a modest continuing improvement.
"The biggest sticking point in the economy is the price of fuel. With the number of Americans who live from paycheck to paycheck, high fuel prices are the most regressive tax we have. That's $10 a week more for gas that a consumer can't spend at McDonald's or the movies or Wal-Mart. So the normalization of fuel pricing we're seeing is most encouraging, particularly to us, because with comps improving despite high fuel prices, we see an upside if fuel prices moderate."
Commenting on Wal-Mart's financial performance, Tom Schoewe, chief financial officer, said the company was slightly disappointed with its sales increase of 10.5% in the first half "because we're used to more than that." But it was encouraged that the 14.7% increase in net income "was faster than the rate of sales growth," which he said he attributed to global procurement and the company's ability to manage its mix better.
He also reaffirmed the company's earnings guidance of 45 to 47 cents per share for the third quarter.
Schoewe said capital spending next year will exceed $12 billion, covering 410 to 440 new stores, "which was the company's total size in 1985," he pointed out. Tom Coughlin, vice chairman and CEO of Wal-Mart Stores in the U.S., discussed the restructuring Wal-Mart undertook earlier this year, "when we decided to bring different operating units together under one leadership."
Although discount stores, supercenters and Neighborhood Markets had marked differences from Sam's Clubs in terms of pricing, assortments and operating philosophies, "they had similarities in their supplier base, logistics, information systems and technology," Coughlin said, "which allowed us to utilize synergies that hadn't been utilized before. Combining all that purchasing power also allowed us to lower costs."
Wal-Mart aligned its operating units with the support areas last April, "and that allowed us to do things that had met with resistance in the past, and we've made significant progress in several areas since then," including educating buyers and store personnel about our dot-com programs and shifting its logistics to accommodate the stores' needs better.
In his presentation, Duke said dollar sales at supercenters exceeded sales at discount stores for the first time last year, "and next year, for the first time, we will have more supercenters than discount stores" -- approximately 1,700, he noted, compared with about 1,400 discount stores.
He said 2004 will be "a milestone year" for Wal-Mart because of its move into California. He also said the company will open more discount stores next year "because of opportunities in urban markets, plus redevelopment opportunities," and the company will continue to pursue a fill-in strategy between supercenters with its Neighborhood Markets.
Kevin Turner, president and CEO of Sam's Clubs, said the company's decision to operate those stores primarily for small-business customers is paying off.
Some items and categories meet the needs of everyone who enters a club store, including office supplies, janitorial products and paper, he said.
Wal-Mart is also building Sam's Clubs adjacent to Wal-Mart Supercenters at some locations, he said. "The assortment [at the two formats] looks less alike than it once did, so we're more competitive running both operations side-by-side," Turner noted.
