Analysts quiz Wal-Mart officers on market, legal issues

Wal-Mart’s top management team sat down with analysts following Friday’s (June 7) shareholder meeting to discuss operating challenges and growth potential for the retail giant this coming year.

Chief Financial Officer Charles Holley said the company would not provide new earnings guidance for its second quarter of fiscal 2014, which ends July 31.

Last month during Wal-Mart’s first quarter earnings call the company gave a second quarter guidance between $1.22 and $1.27 per share. This compared to $1.18 earned in the prior year period.

Walmart U.S. and Sam's Club, excluding fuel, expect same-store sales for the 13-week second quarter period to between flat and 2% and 1%-3 %, respectively.

Holley said the company would remain focused on its three-prong strategy of growth, leverage, and return.

FAMILY FOCUSED
Leon Nicholas, senior analyst with Kantar Retail, said every presentation Wal-Mart executives make revolves around this triple-focus strategy of growing sales while also leveraging all assets in order to drive better shareholder returns.

“When you look at who Wal-Mart’s biggest shareholders are – the Walton family – it’s pretty safe to assume this strategy is going to stick for quite sometime,” Nicholas said during a recent Kantar conference in Rogers.

On Friday, analysts asked management if they had to make a choice between the three goals, which could be sacrificed. The short answer given by the executive team was none.

Doug McMillon, CEO of Walmart International, did discuss how the diverse global business unit has thought through its investment strategy for future growth. He said Canada has some of the highest store returns in the world.

Last year Wal-Mart spent $750 million in Canada with 73 new projects adding 4.6 million square feet of retail space. At the time the retailer said it held the No. 2 spot in a highly competitive Canadian market. McMillon said evaluating growth opportunity for near maximum return on the capital invested is how the retailer approaches future capital expenditures.

He reiterated that the decision to scale back expansions in China and Brazil were necessary to ensure better returns on capital investments.

“In China … we were too accommodating in store layout, as you know some of the supercenters were in malls and we really needed them on one floor with customer parking. When we gave on too many of our principles we found our performance was not as strong,” McMillon said.

In Brazil, he said they had the wrong format with Maxxi Atacado because it failed to meet expectations. Maxxi is a cash and carry operation that sells goods from a wholesale warehouse similar to Sam’s Club or Costco. The average store size is 65,000 square feet.

He said the two markets held the global division returns back a bit, but at the same time the company made price investments in the mature Japanese market in hopes of improving growth there.

“We took a shorter margin in Japan and worked at raising customer loyalties there. We didn’t raise margins in other markets because of that. Each one of these markets has to grow share over time and deliver return over time. If we make too many trade-off decisions we could harm our investment in a market,” McMillon said.

CEO Mike Duke reminded analysts that Wal-Mart has provided a high level of consistency over time because it is a portfolio of businesses. The retailer operates in mature and developing countries located in varying geographies which are managed for the long-term. But Duke said the portfolio also allows the company to provide annual consistency for its shareholders.

U.S. COMPETITION
With fierce competition for consumer dollars Wal-Mart executives were asked how they plan to produce a positive and sustained customer traffic trend in the U.S. business.

Bill Simon, CEO of Walmart U.S., said until the last quarter the company had produced six quarters of positive comp traffic. And he considered the most recent quarter a bit of an anomaly. Same store sales fell 1.4% for the quarter ended April 27.

In their May 16 earnings report, Wal-Mart execs said softer consumer sales hindered by higher taxes and larger winter heating bills this winter resulted in earnings that missed analysts’ expectations. However, the company pocketed $3.78 billion in its fiscal first quarter ending April 27, and operating income in the Walmart U.S. division was up 5.9%.

Simon said the productivity loop is the answer as the company continues to offer low prices on fresh food and other consumables which are traffic drivers to the store. Once in the store, Simon said they will continue to coax shoppers across the aisle into general merchandise.

“We continue to work on this, and don’t expect another quarter like the first quarter,” he said.

Analysts asked management to explain any external factors that are hindering gains in marketshare or improving overall comp traffic and sales. Simon said there are changes in the retail landscape as the number of stores are growing faster than the rate of shopping trips per consumer.

“It’s challenging but I think you will see the strong get stronger and weak get weaker. I put us in the strong category,” Simon said.

CONSUMABLE-CENTRIC, MARKETSHARE
As other retailers have expanded heavily into consumables and grocery, analysts wanted to know if Wal-Mart management might consider focusing less on consumables and differentiating more into other product categories. They cited the fact that Costco has used that strategy and had not suffered lower traffic or sales comps.

Simon responded, “Please don’t misinterpret our focus on consumables, as a lack of focus on everything else, because the velocity of a pillow is once a year or two where bananas and milk are a weekly or twice-weekly purchase.”

The consumables drive the “velocity” (numbers) for store traffic, he added.

Analysts asked Simon how he can grow marketshare when so many retailers are doing the same thing, focusing on fresh food and consumables.

“You have to do it better, the supply chain has to get it there faster and efficiently so you can offer the low price,” Simon explained.

He said the company is leveraging all of its assets, including recent investments in the e-Commerce division to ensure they win on low price and gain customers through the omni channel options – aka, various ways to shop with Wal-Mart – and more delivery choices.

Holley said the company will continue to invest in its e-Commerce business which will offset about nine cents per share in earnings this year, and two cents in the current quarter.

On the international stage, McMillon said, the company is taking marketshare, even though it did not produce first quarter results as strong as he had hoped. McMillon doesn’t expect a robust back half of this year economically, but his team is focused on growing marketshare in the short-term in each of the countries and banners in which it conducts business.

GLOBAL COMPLIANCE
Analysts asked for an update on the company’s expenditures toward the ongoing independent investigations into alleged violations of the Foreign Corrupt Trade Practices  Act (FCPA). The allegations involve potential criminal activities in Brazil, China, India and Mexico.

Wal-Mart spent roughly $73 million on FCPA matters in the recent quarter and $157 million in fiscal 2013, according to the company’s annual report with Securities and Exchange Commission.

Jeff Gearheart, the executive officer overseeing global compliance for Wal-Mart Stores Inc., told the analysts Friday that roughly 41% of that total was spent on the company’s internal compliance activities and majority on the investigations which are underway in the four countries.

“Those investigations will go on as long as necessary and go where the facts lead us. The people up here (Wal-Mart’s executive team) don’t really have any control over that. … It is independent,” Gearheart said.

He also said the retailer is using a “meaningful number of outside experts” related to FCPA. To date, he said 300 legal and accounting professionals have logged more than 100,000 hours toward FCPA issues.

Gearheart said the company expects the costs will remain elevated through the year as it continues to ramp up its own compliance infrastructure. Wal-Mart has added several global compliance officers in each of its international markets. The retailer has invested in systems that will unify the company’s processes relating to permits and other phases of store operations throughout the world.

McMillion said the company has broadened its own compliance efforts to also include issues like food safety and fire prevention. In total, he said there are 14 different dimensions Wal-Mart is targeting in its own compliance activities.

When asked about the expected duration of the ongoing FCPA investigation, Gearheart said, “It’s hard to know … we have no control over that. We will fully cooperate with the government and it will take as long as it will take.”