Action Alleys In, Rollbacks Out at Wal-Mart Stores

ELLIOT ZWIEBACH

BENTONVILLE, Ark. — Wal-Mart Stores here last week said grocery traffic increased and grocery sales generated slightly positive comparable results for the second quarter, but its price rollbacks have not driven the desired sales lift.

The price rollbacks improved the stores' price perception in May and June, “but they did not generate the level of top-line sales we'd hoped for,” said William S. Simon, president and chief executive officer of Walmart U.S. “So in July we put the emphasis back on our core EDLP model.”

Wal-Mart did not restore its price-impact Action Alley pallet displays to stores until six weeks ago, he said.

With the return of Action Alleys, “store managers have more autonomy to make decisions on what's right for their customers,” Simon said, adding that he believes “it will take some time to see significant changes in comps, but we are beginning to see more encouraging traffic trends.”

He also said Wal-Mart has met with suppliers to review its assortments “to make sure we have the breadth of inventory customers have come to expect” after trimming slow-moving SKUs through its Project Impact initiative in the last year. In the process, the company is restoring “thousands of products” and adding new items “and letting customers decide through their purchase decisions what to include in our assortment.”

Neil Currie, an analyst with UBS Securities, New York, said the extreme price rollbacks at Wal-Mart succeeded in increasing unit sales during the quarter “but did not grow total sales enough and put pressure on gross margins, which declined slightly.”

As Wal-Mart returned to its EDLP strategy and added inventory back to the stores, he said, “[it] saw improving traffic trends towards the end of the quarter, but [the average sales] ticket remains under pressure due to economic stress and pricing pressure.”

Currie said it's not clear whether more pallets in Action Alley and the accompanying assortment changes will be enough to improve Wal-Mart's value perception among consumers.

For the second quarter, which ended on July 30, net income rose 3.6% to $3.6 billion and sales increased 2.8% to $103 billion, while overall comps, excluding fuel, fell 1.4% (including a drop in comps of 1.8% at Walmart U.S. and an increase of 1% at Sam's Club).

For the half, net income was up 6.6% to $6.9 billion, and sales climbed 4.4% to $202.1 billion, while comps, excluding fuel, fell 1.2% (including a drop of 1.6% at Walmart U.S. and an increase of 0.8% at Sam's).

Mike Duke, president and chief executive officer, said the second quarter was challenging. “The top priority for the business remains improving top-line sales and customer traffic. I'm fully aligned with the focus on assortment and pricing and with strengthening our supplier relationships, and I'm also impressed with the urgency and speed Bill [Simon's] team is demonstrating in executing changes in strategy that are making sense for our customers and shareholders.

“They are moving rapidly to build in the initiatives that worked and adjusting those that have not worked.”

Wal-Mart boosted its full-year earnings guidance to a range of $3.95 to $4.05 per share from the previous range of $3.90 to $4 “due to the strength of our underlying operating performance, despite the challenges facing Walmart U.S. in the short term, and the current economy,” Tom Schoewe, executive vice president and chief financial officer, said.

According to Simon, fresh categories at Walmart U.S. continued to drive growth, with events like the Summer Fruit Fair helping to drive double-digit comp growth in many produce items, including strawberries, while dairy and meat experienced modest inflation that was offset by deflation in other areas.

Simon said Wal-Mart gained “significant share” in soft drinks and snacks during and after the rollbacks, while health and wellness comps were slightly negative due to higher generic utilization and a shift to 90-day prescriptions — though wellness categories continued to show positive results, he pointed out.

Simon said Wal-Mart is looking forward to opening its first three stores in Chicago, “and with the news of Chicago, we've been contacted by officials in some of the largest U.S. urban markets who want to discuss opportunities with us, which bodes well for our continued growth in the U.S.”

Simon also said Wal-Mart is using fuel cell technology to power two stores, with plans for as many as 10 by year's end.