Wal-Mart CFO Says Financial Metrics Will Improve In 2014

Wal-Mart Chief Financial Officer Charles Holley said Tuesday (March 11) that the retailer failed in three of its five main operating objectives last year — sales growth, leveraging its expenses and operating income growth. And while he promised the retailer will do more to leverage expenses this year, Holley said the biggest focus from its U.S., Sam’s Club and International segments will be to improve dismal same-store sales.

Holley, speaking at the Bank of America Consumer and Retail Conference in New York, said sales have rebounded strongly in recent weeks now that the snow is melting and the sun is shining.

Wal-Mart has forecast flat comp store sales for the 13-week period ending May 2, after citing sluggish January traffic because of weather-related store closures and SNAP (food stamp payment) reductions, which mean less money to spend for roughly 20% of the retailer’s shopper base.

He said Wal-Mart’s agenda this year is highly focused on accelerating its small format stores and linking them up with expanded digital and mobile capabilities. These two initiatives comprise more than half of the company’s $12.4 billion in capital expenditures for the fiscal year.

He said expanding new brand offerings is also key in driving shopper satisfaction and ultimately traffic and sales. Wal-Mart added several brands last year including active wear clothing from Avia and Russell, and Calphalon and Faberware cookware. Holley said more brands are coming and the retailer will only use private label to fill gaps in value within certain categories.

HEADWINDS, HEALTH CARE
While Holley is optimistic this year will be more profitable than last, he did mention several headwinds the retailer is likely to face, with the primary hits being foreign currency fluctuations and added costs for ongoing compliance issues.

Oddly enough, Holley said Wal-Mart was taken by surprise that more than 100,000 additional employees signed up for health care under the Affordable Care Act. He said that was an unexpected cost increase of $300 million this year.

When analysts asked Holley why Wal-Mart was surprised and didn’t anticipate the expense, he said Wal-Mart is not aware of every employee’s situation and what other insurance they may or may not have outside the plan that Wal-Mart offers.

Wal-Mart has said it financially performs better in times of slight inflation as opposed to deflationary climates. Holley said deflationary pressures could hurt sales revenue in 2014. That will likely remain true in certain competitive categories such as electronics or laundry detergent, but food and fuel inflation is on the rise.

A new report from the Food and Agricultural Organization of the United Nations shows the food price index rose sharply in February driven rising commodity prices across the globe. The index, based on the prices of a basket of internationally-traded food commodities, saw price upticks in all commodity groups, with the exception of meat, which fell marginally. The largest increases since January have been seen in sugar (+6.2%) and oils (+4.9%), followed by cereals (+3.6%) and dairy (+2.9%).

Analysts said the higher commodity costs take about six months to reach the consumer, except for meat and dairy, which is passed to the market within two weeks.

GROWTH OPPORTUNITY
Holley said Wal-Mart is in a strong financial position to invest in future growth which will occur at the “intersection of physical and e-commerce.” He said the small format acceleration married to improving e-commerce and digital services is the winning prescription.

Retail analysts warn that the value shopping channel is already a crowded space, with Amazon and other online retailers taking market share from big box, small box and warehouse clubs.

That said, Holley told the group that there was still room for hundreds, if not thousands, more small format Wal-Mart stores. He added that the small formats offer fuel and pharmacy along with an in-store kiosk that allows shoppers to order any product Wal-Mart offers elsewhere. The tests underway in home delivery, storage lockers and depot pick-up locations are going well, according to Holley.

“You are going to see a lot more of these pick-up stations built here in the U.S.,” Holley said.