WAL-MART CEO SCOTT, ON THE HOT SEAT, NAVIGATES NEW COURSE

Katherine Bowers

ROGERS, Ark. -- On a brisk spring morning, much of northwest Arkansas' power elite, in suits and cowboy boots, waited in a field about five miles from Wal-Mart Stores' headquarters for the groundbreaking of a lifestyle center mall.

Lt. Gov. Win Rockefeller exited from a helicopter, but the crowd hardly noticed. Instead, many gawked in the opposite direction, where Lee Scott had arrived with his wife, Linda, in a silver Honda Odyssey SUV. It was a rare local public appearance for Wal-Mart's president and chief executive officer, whose plastic Wal-Mart badge saying "Lee" dangled from his lapel.

More than five years into his tenure, Harold Lee Scott Jr., 56, is trying to sell the public on a kinder, gentler Wal-Mart and persuade increasingly skeptical Wall Street analysts that the world's largest retailer, based in Bentonville, Ark., is still a growth juggernaut. That pressure intensified last month when Wal-Mart reported first-quarter earnings that missed expectations and rival Target posted better-than-expected profit.

Scott, a private person in corporate America's most public job, is an executive at a career crossroads. He has broken with 45 years of corporate protocol by spending the last year in a blitz of speeches, town hall meetings and television appearances. Scott believes it is imperative for Wal-Mart to answer detractors by telling its story. Just a few weeks ago, he told a business forum in Chicago: "We democratize merchandise" for consumers.

The past two years have been a perfect storm for Wal-Mart. Criticism over employee wages and benefits, development fights, lawsuits and scandal coincided with declining same-store sales and downgrades from analysts. Wal-Mart stock has been trading near its 52-week low of $46.20, a blow for a company that posts its share price everywhere from the headquarters lobby to outside employee rest rooms. Competitors -- such as Target, perceived as more hip; Costco, better at cultivating affluent shoppers; and Walgreens, which offers a more convenient shopping format -- are pushing ahead with new stores, benefiting from supply-chain technologies Scott and Wal-Mart pioneered.

Scott, who declined interview requests, presides over an international corporation that accounts for about 2% of the U.S. gross domestic product and employs 1.6 million. On his watch as CEO, revenues have swelled to $285 billion from $165 billion. In the last fiscal year, he took home almost $12 million in salary, bonus and stock awards, with an option to buy 339,001 shares.

Scott refused to pose for Fortune magazine's 2003 Most Admired Company cover because he didn't want to be seen as taking individual credit for team success. Colleagues describe him as unsentimental, dryly funny and consistent. He prefers to read (Jimmy Buffett's biography, recently) rather than talk on long flights, is impatient with inaccuracy and spends a day each week in stores. He drives a Volkswagen Beetle.

Organizational philosophy texts such as "The Geography of Thought: How Asians and Westerners Think Differently and Why" are required reading for Scott's top lieutenants. Another requirement: being quick on the uptake when Scott asks for help on The New York Times crossword puzzle, which he does while traveling.

HUMBLE BEGINNINGS

Like company founder Sam Walton, Scott comes from humble beginnings. He was raised in Baxter Springs, Kan., a town of about 4,600 most notable for a robbery by Jesse James. He has some of Walton's famed common touch, chatting with Wal-Mart associates via an internal Web site dubbed "Lee's Garage," in honor of his father Harold's Route 66 gas station.

Scott occupies Walton's corner office, with its laminate-wood paneling and views of traffic lights on Walton Boulevard. Some analysts question whether Scott has turned Wal-Mart into a distribution engine with a retail veneer. Others wonder if an executive who has spent 26 years around the battleship gray corridors of the home office can separate legitimate criticisms from the clamor that surrounds the company.

Scott arrived at Wal-Mart in 1979 when it was a regional player with $1.2 billion in sales and about 200 stores. He set about tightening operations with a suffer-no-fools attitude and a series of abrasive memos.

"When I was 30, I thought I knew everything," he recalled in a 2003 interview with trade journal Supply Chain Management Review. He also remembered a Wal-Mart executive warning: "If I was trying to make enemies, I was headed in the right direction."

In transportation and logistics, where he worked from 1979 until 1995, he squeezed time and money to make operations more efficient. He automated routing and implemented backhauling -- scheduling trucks to pick up loads on their way back to a distribution center so they never travel empty. That business generates almost $1 billion in revenue, said Rollin Ford, Wal-Mart executive vice president of logistics.

As he matured, Scott's forte was seeing how logistics could benefit the entire organization. He replaced Walton's distribution system with a hub-and-spoke model and initiated cross-docking. He also oversaw construction of grocery distribution centers and the first import warehouse, both integral to rolling out Supercenters, the company's most profitable format.

COMPETITIVE FERVOR

Raising prices -- even by a penny -- to pay for additional wages or benefits for store associates could give competitors an edge. And the competition is always on Scott's mind.

In Wal-Mart headquarters, which has the lightless feel of a Las Vegas casino, competitive juices run rampant. The focus is to outmaneuver, outwork and outsell the other guy 365 days a year.

As Scott's star rose, the focus was on beating rivals, particularly Kmart. The company churned out anti-Kmart lapel pins depicting a red K with a devil's face being choked or knocked out by the Wal-Mart "smiley."

"There was always an emphasis on aggressively going after the business," said Les Dietzman, a former Wal-Mart vice president who now heads a chain of Christian merchandise stores. "The emphasis was: 'How can I sell more?' as opposed to 'How can I control or manage better?"'

That has come to haunt Wal-Mart in the form of managers reducing store operating costs by forcing associates to work off the clock. The retailer faces about 40 "off-the-clock" lawsuits, according to its 2005 annual report. In response, Scott implemented forms of corporate baby-sitting -- from hiring compliance officers to investing in software that locks cashiers out of their registers when they are legally mandated to take a break.

He seems to regard these endeavors as irritants and distractions.

Speaking at a 2004 Prudential analysts' conference, Scott began with a financial recap: "People read so much about Wal-Mart that all of a sudden they get to believing that the focus of the company is on headlines or issues external to retailing." Management "cannot allow these extraneous issues to somehow brood over and stop what it is that we are so capable of doing."

The attitude angers those who say setting employment standards is part of Wal-Mart's social responsibility.

"They've gotten so caught up in their own culture, they've lost sight of the implication of how they treat people," said George Whalin, president of Retail Management Consultants in San Marcos, Calif.

Scott is often asked what he wants his legacy to be.

"He's always answered the same way," said Jay Allen, senior vice president, corporate affairs, "that when he walks out the door, he wants to know if Sam Walton were standing there that he'd say, 'You did a good job."'

Analysts agree that one of Scott's achievements has been grooming the next generation. Within his direct reports, Scott has a mixture of homegrown talent such as Kevin Turner, CEO of Sam's Club, and external hires such as Chief Financial Officer Thomas Schoewe, recruited from Black & Decker. He also mentors about 40 junior executives with his Key Leaders program.

Among his biggest challenges is communicating Wal-Mart's mission "in a global kind of way," RBH'S Hastings said. "GE is not a perfect company, but it's a mature company, and it does a good job of explaining and exploring its relationship with the changing societies of the world."

Scott may be on his way there, with more visibility and perhaps a slightly broader view, but it is not likely he'll ever seek, or receive, the recognition of iconic business figures.

"I think everyone needs to understand this is not about Lee Scott," he said during a 2003 interview on his college radio station. "It is the fact that Lee Scott is at Wal-Mart that has provided the great emphasis on this career. And as long as you keep that in perspective, you can handle this thing."