Scaled Expansion Plan Scores Wall Street Win
The financial markets got what they wanted earlier this month when Wal-Mart scaled back its expansion plans and indicated it would redirect a portion of the cash to repurchase its own shares.
Investors, who’ve seen the company’s shares languish for more than six years, showed their enthusiasm for the new strategy by pushing shares of the company to its largest single-day gain in recent memory. The day of the announcement, shares surged $1.87 from the previous day’s close to end at $49.47. The momentum continued the following week as analysts digested the ramifications of how a reduction in expansion would benefit the company’s overall profitability, same-store sales and store operations. By the time the market closed a week later, Wal-Mart shares had gained a full 61 cents to close at $50.08.
The market’s sudden enthusiasm for Wal-Mart can be linked to the fact that the company put some serious teeth into a promise made to investors last year when executives vowed to do a better job of balancing returns with growth. The statement was widely interpreted that Wal-Mart would slow store growth following years of rampant expansion that had led to declining return on investment and depressed same-store sales as new units were opened closer together. Investors were underwhelmed last fall when they got their first taste of what Wal-Mart meant by balance as the company only slightly moderated 2007 store expansion plans from year-earlier levels. The lack of a significant reduction, coupled with weak fourth-quarter sales and an equally disappointing first quarter had raised new questions about the effectiveness of the broad range of operational, merchandising and marketing strategies unfolding under the leadership of Wal-Mart’s U.S. Stores division president Eduardo Castro-Wright.
What only became apparent earlier this month, is that Wal-Mart had spent the past year dissecting its store pipeline to reorder when and where stores should open as part of a new capital efficiency model.
As cfo Tom Schoewe explained to shareholders, “It is a real fancy way of saying we want to make sure the highest return projects find their way to the top and we are doing those first.”
It also means changing the flow of when openings take place to eliminate the burden on the company’s store operations group. For example, historically, Wal-Mart concluded its annual store expansion plans with a flurry of openings a day or two before the Jan. 31 end of its fiscal year. That was the case during the past fiscal year when the company opened an unprecedented 71 stores during January 2006. Plans for the current fiscal year originally called for 80 units, however most of those openings will now slide into early 2008 as Wal-Mart both reduces the number of openings and moves them to earlier in the year.
Supercenter expansion slows, but remains robust| YEAR | ’00 | ’01 | ’02 | ’03 | ’04 | ’05 | ’06 | ’07* | ’08* | ’09* |
| UNITS ADDED | 167 | 178 | 192 | 213 | 242 | 267 | 276 | 195 | 170 | 170 |
| YEAR-END TOTAL | 888 | 1,066 | 1,258 | 1,471 | 1,713 | 1,980 | 2,256 | 2,451 | 2,621 | 2,791 |
“The majority of those stores [originally planned for January 2008] will move into next year, and going forward we hope not to open any stores past the middle of October to relieve pressure on operations, merchandising and marketing,” said chief administrative officer John Menzer, the executive who led the process and previously served as vice chairman responsible for the U.S. division, and president and ceo of Wal-Mart International and cfo before that.
While much attention has been focused on the scaled-back expansion plans and the massive share repurchase program, the other shoe to drop in all of this relates to the company’s ability to execute Castro-Wright’s customer relevancy initiatives. There is a school of thought in the financial community that implementation of Wal-Mart’s merchandising and customer service initiatives were hampered by the company’s breakneck pace of expansion. Wal-Mart has never wanted to acknowledge as much, but the logical conclusion among investors, and now apparently Wal-Mart, is that operators less focused on opening new stores can concentrate more on improved execution at existing units even as Wal-Mart maintains strong growth.
After all, the company hasn’t exactly shut down store construction, with between 190 and 200 supercenters still planned for this year, down from the original target of between 265 and 270 units. In 2008 and beyond, plans call for 170 supercenter openings annually with Wal-Mart poised to open its 3,000th supercenter four years from now in 2011.