Retail experts note opportunities, threats for new Wal-Mart CEO

Analysts and retail experts anticipate strong, charismatic leadership from Doug McMillon when he takes the reins from Wal-Mart Stores Inc. CEO Mike Duke on Saturday (Feb. 1).

Not to take anything away from the success of Duke’s tenure, but McMillon is faced with the task of moving the retail juggernaut through what some believe is one of the most transformational periods in retail history.

Just 47-years old, McMillon is among the 71% of incoming CEOs to be promoted from within, according to a study by Booz & Company. The study also found that one in four CEOs promoted since 2012 worked exclusively for that company.

Michael Exstein, and analyst with Credit Suisse, gave McMillon a favorable nod on Wednesday (Jan. 29) when he upgraded Wal-Mart shares to “outperform” from a “neutral” position. (Credit Suisse conducts investment banking business with Wal-Mart and is compensated accordingly.) He said over the past several years, Wal-Mart has responded to its changed place in the competitive environment, rather than its historic place of setting the retail agenda for much of the industry to follow. 

Exstein and other retail experts outlined key areas where they think McMillon might focus his energy to produce the greatest results for shareholders, public perception and the retailer’s 2.2 million employees.

“The ‘fill-in’ trip, exposure to gasoline, and one-on-one customer marketing are among the recent issues that Wal-Mart has lacked a head start in,” Exstein said. “We expect McMillon to delineate plans for a small store format and the acceleration of its roll out,  to rationalize the international operations and to recommit to general merchandise, where business is increasingly up for grabs as some big box retailers continue to close stores.”

Analysts see McMillon as a “cool character” and one who pays attention to details.

“I do not think Doug see’s himself as a caretaker,” said Faye Landes, retail analyst with Cowen & Co.

She said companies chose CEOs “on their ability to move the needle forward and effectively handle anything that might come out of the blue. Doug is a very appealing leader.” (Landes in an independent analyst, with no holdings or compensation received from Wal-Mart Stores.)

MOVING THE NEEDLE
“While comparable store sales have been challenged, there are a lot of close-in opportunities that can move the needle,” said Jason Long, CEO of Shift Marketing Group.

He said as Wal-Mart finally seems to be making a serious commitment to their small store format, he wonders if Walmart stores may be as common as Starbucks in the not too distant future. Long said as other big-box retailers are shuttering stores, there is an opportunity for Wal-Mart to benefit.

Carol Spieckerman, CEO of New Market Builders, agreed. She said Target, once viewed as a major competitor to Wal-Mart, is faltering and this could be the time for Wal-Mart to reach out to Target customers.

“There is a short window of opportunity for Wal-Mart here, but they would have to move quickly,” Spieckerman said.

Exstein said Wal-Mart has been distracted by the immediate need to address several company-specific issues related to the merchandising, technological, and operational aspects of its business. As Mike Duke successfully tackled these issues during his tenure, McMillon is now in a position to make more strategic changes.

JUGGLING PERFECTION
The retail CEO of the future is one that must be able multitask like no other, according to Spieckerman. She said as the digital, mobile, physical and social aspects of retail collide, an effective leader for a company as complex as Wal-Mart will expend a lot energy “keeping the pins the air.”

To Wal-Mart’s credit, she said, they have been agile, testing multiple initiatives at once and then rolling them out with little fear of failure – especially after they made the investments in @WalmartLabs.

At the same time, Wal-Mart is often singled out for low wages, something Spieckerman said is somewhat unfair as hourly retail worker jobs industrywide have lagged other sectors. 

“Wal-Mart is very good at redefining the argument, and I expect this will continue,” she added.

Cameron Smith, CEO of Cameron Smith & Associates, said it’s not that employee sentiment is at a concerning low, but it could be better.

“That being said, this is Doug’s forte,” Smith added.

Another area in which McMillon is deemed proficient is having the knack of empowering the leaders beneath him. Spieckerman said this will be a huge advantage if McMillon can mobilize effective leadership below on many different simultaneous tasks and have them report up to him.

“The company has become quite diverse in recent years, a radical change from the traditional buyers and merchants, adding software developers, marketers, IT engineers and content creators. Getting this diverse group on the same page will be a big job,” she  said.

E-COMMERCE GAINS
The experts in this report agree that Wal-Mart’s commitment to e-commerce has the most potential to grow company sales long term. Exstein said McMillon is poised to benefit by the commitments to information technology and e-commerce under Duke’s tenure.

Smith said with the ease of price shopping today, Wal-Mart’s Everyday Low Price strategy can’t compete alone in the growing omichannel world. He said the headline could read, “Doug’s biggest challenge will be to bring Wal-Mart into a leadership role on omnichannel" as they are estimated by some to be two years behind Amazon.

“Wal-Mart has earned the right to be compared against Amazon, and there is huge opportunity here if Wal-Mart continues to leverage its physical scale,” Spieckerman said.

In the November 2013 call with investors, Wal-Mart said investments in e-commerce would impact earnings about 10 cents a share. As Wal-Mart has 3.24 billion shares outstanding, that figure suggests Wal-Mart’s global investment in e-commerce this year is in the range of $324 million.

The retail giant expects to grow e-commerce sales to $10 billion through end of fiscal 2014, which is Jan. 31. Online sales were $7.7 billion during fiscal 2013.

INTERNATIONAL EFFICIENCIES
McMillon, in his international boss role, has focused during the past five years on improving efficiencies within the diverse international operations.

Conversion to Everyday Low Price strategies in Brazil and China has not been without its challenges. Factor in regulation changes in India and the dissolution of its partnership with Bharti and expansion in Canada, and there is no rest for the weary.

Exstein said Wal-Mart has yet to rationalize its lower-return international division, but the opportunity is likely approaching as the Foreign Corrupt Practices Act (FCPA) investigation nears conclusion.

“McMillon is uniquely qualified to initiate this rationalization having previously overseen the international division, and he appears realistic in holding this segment to higher levels of performance standards. Rightsizing the segment would enable Wal-Mart to reallocate incremental capital toward higher-return initiatives domestically, including refocusing on general merchandise and coming up with an integrated gasoline strategy,” Exstein said.

DATA SHARING
In this time of massive data gathering, Spieckerman said Wal-Mart faces key decisions about how they share this new Big Data with suppliers going forward. She said McMillon helped to pioneer vendor-managed systems at Wal-Mart years ahead of other retailers. The Retail Link system gives suppliers up-to-date transparency access which can be used to better manage shipments and sales data.

But the data now collected on shopper preferences, brand awareness and price sensitivity goes several layers deeper.

“How much of the data will Wal-Mart hand over to suppliers? Will they charge for it or will they expect suppliers to share all the data they are collecting as well?,” Spieckerman asked. “Many of the larger consumer packaged goods suppliers are already involved in direct-to-consumer operations, further blurring the lines between supplier and retailer.”

RISKS TO SUCCESS
Exstein listed several risks that pose a threat to his firm’s upgrade of Wal-Mart shares. He said failing to act decisively when addressing issues such as the Foreign Corrupt Practices Act, efficient small store expansion and shoring up productivity in the international arena could keep Wal-Mart from re-establishing its industry leadership.

Exstein said other retailer FCPA issues have typically settled within two years, which is where Wal-Mart finds itself.

Lack of food inflation also threatens Wal-Mart’s net margins, which is why the retailer is prepared to focus on general merchandise. 

Lastly, negative headlines regarding general business practices, labor issues and healthcare costs could create some headwind for Wal-Mart shares. That said Exstein does not think media headwinds – bad publicity – will ultimately inhibit Wal-Mart’s forward progress.

Shares of Wal-Mart Stores (NYSE: WMT) closed Wednesday (Jan. 29) at $74.10, down 57 cents in heavy volume. During the past 52 weeks the share price has ranged from a $81.37 high to a $68.13 low.

Wall Street’s one year target price of Wal-Mart shares is $83.77. Exstein is more optimistic and has raised his Wal-Mart target price from $80 to $87.