Walmart’s six priorities for growth

Walmart CFO Charles Holley weighed in on the retailer’s growth priorities earlier this week during a presentation to investors at the Bank of America Merrill Lynch Consumer & Retail Conference.

Holley’s comments echoed many of the points suppliers would have heard the prior week when top executives spoke at an event Walmart refers to as its Year Beginning Meeting. Broadly speaking, Holley outline Walmart’s six priorities for achieving short term and long term success. Foremost among them is the need for the U.S. businesses to continue delivering strong results followed by improved returns internationally. He said the company must continue to be a great steward of its capital, drive great productivity and efficiency, leverage expenses and build world class organizations in the areas of e-commerce and compliance.

"Walmart U.S. is a very large business, but it still has a lot of growth through both (comp store sales) and new stores, both large and small formats, and market share gains," Holley said. "If you just look at foods, consumables and over-the-counter (medicines) we believe we gained about 50 basis points of market share in the U.S."

He also highlighted a familiar point executives tend to make in such presentations that given its size – more than 4,000 stores – the potential for expense leverage is great.

The potential remains great internationally as well, a division where Holley once served as CFO.

"We’re very focused on improving results in our international segment and it remains our growth engine," Holley said.

Walmart expects to add roughly 20 million square feet of new selling space in international markets this year. About 60% of the division’s sales growth is expected to come from the expansion of selling space with same store sales accounting for the remaining 40%.

"We continue to convert markets to (every day low price) and we’re making progress on reducing cost," Holley said. "This will help drive sales, profits and returns. Our priorities continue to be in making improvements, especially return improvements in Brazil and China. I think this is very important to our long term success."

While much of Walmart’s international growth has come through acquisitions, as Holley shifted his discussion to the company’s third priority – responsible use of capital. – he noted that acquisitions are now last on the list.

"We want to use our capital to grow the business, either through building new stores or e-commerce businesses or even be setting up our shared services model to take cost out of our businesses in Latin America," Holley said. "The last thing in investing we would do is look at acquisitions. Acquisitions you can’t plan and we only want to do them if we think there is a very good probability that we can add value to the investment and we’ll add value to our shareholder."

With what’s left over, the company plans to pay dividends, now at a $1.88 a share after a recent increase, and buy back stock, all while retaining a double AA credit rating, according to Holley.

"We've been very consistent with this over the last few years. We are not a company that believes in accumulating a lot of cash. We want to invest in great opportunities and we want to return what's left over to our shareholders," Holley said.

Last year, Walmart generated more than $25 billion in operating cash flow, invested $13 billion in capital projects and acquisitions, paid $5.4 billion in dividends and bought back $7.6 billion in stock.

As Walmart makes those investments, the company continues to look for ways to increase efficiency and leverage expenses. Holley reiterated the company’s commitment made several years ago to reduce expenses by 100 basis points by 2016.

In the area of e-commerce, Walmart’s three priorities consisting of penetrating and expanding in key markets, developing a global technology platform called Pangea and develop a next generation fulfillment network. Walmart has a solid e-commerce foundation in the U.S. and the U.K., and is making strides in markets such as China and Brazil

"Our own (product) offerings continues to grow and we continue to grow the SKUs offered by our e-tailers who participate in our marketplace and this means increasing our ability to offer a very wider product assortment that provides great value and choice for the customer," Holley said. "It will continue to get even better. We are miles ahead where we were just two years ago."

While the company is developing its Pangea global technology platform it is also looking to build a fulfillment network that leverages the company’s unique asset base.

"We are still in pilot phases of our same day delivery for Wal-Mart U.S. but we know we have a very important advantage in our brand and promise along with the 4,000 stores that are within a very short distance of a large part of the population," Holley said.

Although mentioned as one of the company’s six priorities for this year, Holley had relatively little to say regarding the development of a world class compliance organization. He commented on significant progress that has been made without elaborating on specific changes and indicated costs associated with the Foreign Corrupt Practices Act investigation could continue at a quarterly rate of $40 million to $45 million.