WAL-MART PACES GROWTH OF NEIGHBORHOOD MARKET STORES 2004-10-18 (2)

ELLIOT ZWIEBACH

BENTONVILLE, Ark. -- Wal-Mart Stores here said it still sees "thousands of opportunities" to open new supercenters by building them closer together than it historically has. However, any large-scale rollout of its smaller Neighborhood Market concept remains on the back burner.

At its 11th annual analysts' meeting this month, the company said it plans to open 240 to 250 new supercenters in the fiscal year beginning Feb. 1, 2005. With 1,650 supercenters open to-date and more expected to open before the end of the fiscal year, next year's expansion will put the company on course to exceed 2,000 supercenter locations in 2006.

"But there are still thousands of opportunities -- incredible opportunities -- for us to add supercenters over and above those we've already approved because of the knowledge we've gained about how close together we can put them," Tom Schoewe, executive vice president and chief financial officer, said at the meeting.

Wal-Mart said it expects to open 25 to 30 new Neighborhood Markets next year to add to the 72 locations of the traditional food-and-drug combo outlets it currently operates.

"Do we have less interest in Neighborhood Markets?" Schoewe asked rhetorically. "Not at all. In the last couple of years, we've learned that Neighborhood Markets are really a good tool to have in our arsenal, and we're getting a good return on them. But we've learned we can put supercenters closer to each other, and the financial returns are much greater with supercenters than with Neighborhood Markets.

"Supercenters produce our highest returns, and they usually exceed our projections. So they will continue to be our primary growth vehicle in the U.S. That's the best thing we can do for shareholders."

Mike Duke, president and chief executive officer, Wal-Mart Stores division, addressed concerns expressed by some analysts that Wal-Mart is hurting its supercenter sales by building new units within a few miles of existing locations -- an impact he said Wal-Mart prefers to call "market development" rather than "cannibalization."

To illustrate the positive aspects of opening multiple stores in a given area, Duke discussed the example of a supercenter in an unnamed market that was generating sales of $131.4 million per year and growing in a growth market.

"When we put in a second store four miles away, we saw comps at the first store decline 13% in the first year," he said. "But that was just temporary. From the second year onward, both stores continued to grow, with combined sales of $239.6 million. Comps grew at both stores, market share improved, customer service improved, and profits in the market rose 48%.

"Therefore, building supercenters closer together -- three to five miles apart -- is a key strategy going forward," Duke said.

Speaking at the same event, Jim Haworth, executive vice president of store operations at the Wal-Mart Stores division, discussed ways Wal-Mart is seeking to become more flexible in the way it manages its supercenter operations. For example, he said Wal-Mart is testing a new management approach at 19 supercenters to improve store coverage by stressing team concepts rather than individual department oversight, and trying to determine how to do a better job serving the needs of customers and associates.

In addition, Haworth said the company believes it can benefit from best practices in other countries, including learning from Asda, its U.K.-based retail chain, how to do a better job training employees, reducing turnover, and incorporating more flexibility in the use of part-time vs. full-time workers.

Duke said Wal-Mart expects comparable-store sales to continue to grow as the company makes improvements in the way it operates.

"Our goal is to become a better Wal-Mart," he explained, "and that will require innovation, complexity and thinking upstream. The success of our business in the U.S. will be built on doing a better job of blocking and tackling at store level." Duke said the efforts to improve Wal-Mart will concentrate on three areas:

Doing a better job buying, shipping and stocking merchandise, "including re-engineering the inside of the store so that we're always in stock with the right product the right store 24 hours a day, seven days a week."

Maintaining an aggressive everyday-low-pricing program "by continuing to track our price spread against our major competition on a weekly basis so we can guarantee we'll be the value leader for customers. Our goal is to enhance our spread and our value to customers with more intelligent pricing that also provides greater returns to shareholders."

Maintaining everyday-low-cost leadership, which, according to Haworth, will include productivity improvements, the new approach to supercenter management being tested at 19 stores, and a willingness to utilize best practices from stores overseas in terms of staffing and other in-store practices.

Schoewe said Wal-Mart is continuing to look for overseas acquisitions "that represent good opportunities. We continue to be disciplined in our approach to acquisitions and to make sure anything we do is in the best interests of shareholders."

The company has not made any large international acquisitions in the last five years, Schoewe said, noting the most recent acquisitions have been a 35% minority interest in Seiyu in Japan in 2002 (with the right to purchase majority control); Amigo in Puerto Rico in early 2003; and Bompreso in Brazil earlier this year.

Schoewe said the company is maintaining its earnings guidance of 52 cents to 54 cents for the third quarter ending Oct. 31, noting earnings will probably come in at the lower end of the guidance.

However, Schoewe said earnings for the fiscal year ending Jan. 31, 2005, will be in the range of $2.36 to $2.40 per share -- higher than the guidance the company gave at the beginning of the year "because we exceeded expectations in the first and second quarters."