Sam?s Comps Slip as Costco Climbs

For the past couple of months, comparable-store sales at Sam’s Club have been about as flat as a warehouse store’s concrete floor.

But the world’s largest retailer isn’t about to abandon its wholesale-club division, said Daniel Barry, an analyst who follows Wal-Mart Stores Inc. for Merrill Lynch Global Securities in New York City.

“No way,” Barry said. “They wouldn’t do that. It’s a very high return on investment, and they’re still showing growth.”

And Wal-Mart is promising better comparable-store sales numbers for September.

Barry was echoing the words of Lee Scott, Wal-Mart’s CEO. At a Sept. 5 conference in New York City sponsored by Goldman Sachs & Co., Scott grumbled a little about the August sales, but then assured investors and analysts that Sam’s Club is here to stay.

Wal-Mart said sales at all of the corporation’s stores open for at least a year were up 3.8 percent in August. That’s slightly below the estimates of 4 to 6 percent analysts had expected.

The Sam’s Club division, however, had a same-store sales increase of only 1.1 percent for the month. It was the lowest since December, when the shock of September 11 terrorism dampened Christmas shopping and same-store sales dropped by 0.3 percent at Sam’s.

Analysts consider same-store sales to be a good barometer of a company’s health because they provide an apples-to-apples comparison. Sam’s Club gross sales for August were $2.38 billion, up 6.8 percent from sales of $2.23 billion in August 2001. But those numbers include sales from new stores that opened within the past year.

Wal-Mart opened 25 Sam’s Clubs in the fiscal year that ended Jan. 31, bringing the total to 500. Since then, another 17 have opened. In addition to the U.S. stores, Wal-Mart has 48 Sam’s Clubs in Mexico, eight in Puerto Rico, eight in Brazil and three in China. The stores outside the United States, however, fall under the purview of Wal-Mart’s International Division, not the Sam’s Club division.

Management Change

On Aug. 23, two weeks before releasing the anemic same-store sales figures, Wal-Mart announced that Tom Grimm, 58, who has headed the Sam’s Club division since 1998, would retire “effective immediately.”

Grimm was replaced by Kevin Turner, 37, who began his career as a Wal-Mart cashier in 1985 in Ada, Okla., and worked his way up to chief information officer (See story below). Turner now oversees the day-to-day operations of the Sam’s Club division.

Turner reports to Tom Coughlin, 53, a Wal-Mart employee since 1978 who has been president and CEO of the Wal-Mart Stores division since 1999. On Aug. 23, Coughlin became president of the Sam’s Club division as well.

According to Wal-Mart’s proxy statement issued in April, Grimm received a total of $2.2 million in compensation for the fiscal year ended Jan. 31, not including unexercised stock options that he could cash in. The amount does include $596,232 as a bonus and $900,000 in stock awards. A spokesperson for Sam’s Club said Wal-Mart won’t reveal Turner’s salary.

Coughlin received $2.9 million in compensation last year, including a bonus of $935,929 and stock awards totaling $875,000.

Before joining Wal-Mart, Grimm was president and CEO of Pace Membership Warehouse in Denver. Wal-Mart purchased the 110-store Pace chain from Kmart Corp. in 1993. Grimm was also the founding principal of Price Savers Wholesale Warehouse in Salt Lake City, where he was president and CEO for eight years.

“Tom Grimm is one of the true pioneers in the wholesale club business and we have great respect for the improvements he has helped bring to the Sam’s Club member,” Scott said in a press release announcing Grimm’s retirement. “The operating standards of our clubs have improved under Tom’s leadership. We also have seen improvements in the quality and selection of Sam’s Club merchandise, as well as improvements in the ancillary services offered to our members in areas such as fuel and pharmacy.”

Turnaround

The wholesale club segment had been in a bog for about a decade before seeing a healthy increase in sales in 1998. That year, Sam’s Club had an average same-store sales increase of 9.3 percent, even better than the company’s Wal-Mart Stores division, which saw comps increase by an average of 8.9 percent. Elsewhere in the sector, Costco was up by 8 percent, Target by 6.1 percent and Kmart by 4.8 percent.

It was Sam’s Club’s best year since its inception in 1983. For 1998, Sam’s had a 11 percent sales increase and a 15 percent increase in net profit.

Sam’s Club said there had been growth in consumer confidence. More than 38 million Americans were card-carrying Sam’s Club members. That’s almost one out of every three U.S. households.

Most of those people had shelled out $35 for an annual membership. Sam’s also offers business memberships for $30 per year and now has an Elite membership for $100.

In 1998, with 253 stores and $22.9 billion in annual sales, Sam’s was the No. 1 wholesaler in the country. Costco Wholesale Corp. was No. 2 with 275 clubs and $18.2 billion in sales.

But things were about to change. Since 1998, Wal-Mart has almost doubled the number of Sam’s Club stores, but revenue has only increased by 42 percent. Costco, on the other hand, has opened 119 stores (an increase of about 43 percent), but has more than doubled its company-wide sales.

Costco Crunch

Sam’s 1.1 percent increase in same-store sales for August looks skinny when compared to a plump 6 percent increase that month for Costco.

For the month of August, Costco’s total sales rose 10 percent from $2.74 billion a year ago to $3.01 billion.

Costco had sales of $38 billion for the fiscal year ended Sept. 1. That’s up 11 percent from $34.1 billion for the previous fiscal year.

Costco operates 394 warehouse stores: 290 in the United States and 104 internationally.

Although Sam’s Club outnumbered Costco by 106 stores, the Wal-Mart division brought in $24.8 billion in sales for the fiscal year that ended Jan. 31.

That averages out to $96.4 million per store for Costco and $49.6 million per store for Sam’s. So the average Costco is bringing in almost twice as much in sales as the average Sam’s Club store.

Wal-Mart was careful to word things just right in its annual report from January: “Based on domestic U.S. net sales, the Sam’s Club segment ranked first among all warehouse clubs.” With that phrase, Wal-Mart was comparing Sam’s Club’s 500 U.S. stores to Costco’s 290 U.S. stores.

Barry said Costco has obviously been growing more rapidly than Sam’s. When stores are less than five years old, they’re going to have better comparable-store sales because shoppers still consider them new, he said. Costco’s products are a also a bit more upscale than Sam’s, Barry said.

In July, the numbers didn’t look much better. Sam’s Club reported a same-store sales increase of 1.9 percent for the month, compared with 5 percent for the company’s Wal-Mart branded stores. (See chart.) Early in the year, Sam’s Club saw healthy comp-store increases of 7 percent in January and 6.9 percent in February.

For the fiscal year’s second quarter, which ended July 31, Sam’s Club reported a 3 percent increase in operating profit to $275 million. The Wal-Mart Stores division saw operating profit jump 17 percent to $3.05 billion. The company’s net income increased 26 percent on a 13 percent revenue gain.

Sam’s Club accounted for 13.5 percent of Wal-Mart’s $218 billion in sales in the fiscal year ended Jan. 31. In addition to the 517 Sam’s Clubs, Wal-Mart has 2,780 Wal-Mart stores in the United States and 1,200 international stores.

Softer Side of Sam’s

Sam’s Clubs range in size from 90,000-190,000 SF, with the average one being 123,558 SF.

Sam’s has bulk displays of name brand hardgood merchandise, some softgoods, institutional size grocery items and selected items under Wal-Mart’s “Member’s Mark” store brand. Most Sam’s Clubs also carry software, electronic goods, jewelry, sporting goods, toys, tires, stationery and books. Most clubs also have fresh food departments, which include bakery, meat and produce. Some Sam’s Clubs offer one-hour photo processing, embroidery departments, pharmaceuticals, optical departments and gas stations.

For the fiscal year that ended Jan. 31, Wal-Mart’s annual report showed a breakdown of Sam’s Club sales by percentage: sundries, 32; food, 30; hardlines, 20; service businesses, 11; and softlines, 7.

Turner Turns to Sam’s Club

Wal-Mart has been a way of life for Kevin Turner.

Turner, 37, began working as a cashier for Wal-Mart in 1985 in his hometown of Ada, Okla. He rose through the ranks there, to customer service manager, housewares department manager and head office cashier, all while working his way through college.

In 1987, Turner earned a bachelor’s degree in business with an emphasis in management from East Central University in Ada.

The next year, he joined Wal-Mart’s internal audit department. Two years later, Turner joined the company’s Information Systems Division, where he worked his way up from business analyst, strategy manager, director and assistant chief information officer for ISD until February 2000.

At that time, Turner became chief information officer overseeing operation of the ISD worldwide. The division has about 2,000 employees in Bentonville. Wal-Mart is famous for its sophisticated data-tracking system, which is part of the ISD.

“The largest asset we have inside Information Systems is not the technology,” Turner told the Business Journal in a July interview. “It’s the people who are able to run and maximize that technology.”

Turner said there’s always room for improvement and “the best ideas come from the people who do the work.”

On Aug. 23, Turner, who is also a member of the executive committee of Wal-Mart Stores Inc., was named to run the day-to-day operations of Sam’s Club.

Turner was unavailable for comment after his promotion.

“He won’t make time for interviews,” said Melissa Berryhill, a Sam’s Club spokeswoman. “He’s got different priorities at this point in time.”