Shrinkage. Supercenter sales. Stocking shelves. Stuff in storage; aka, too much inventory. Those are some of the “Urgent Agenda” item edicts from the corporate offices of Wal-Mart Stores Inc., with the urgency likely being spread through the supplier chain.
Wal-Mart Stores’ cash cow, the supercenter format, and the major overhaul underway is showing modest progress based on the retailer’s 4.8% uptick in second quarter U.S. sales and with same-store comps of 1.5%. It’s a marked improvement over the flat metric reported a year ago, and may also factor in a more confident consumer.
U.S. store revenue totaled $73.959 billion in the quarter ended July 31. This comprised a whopping 62% of the retailers total revenue in the quarter as Sam’s Club sales were flat and international sales dropped 9.6% from the year-ago period.
While the U.S. top line growth was notable, the retailer’s operating income was down 8.2% to $4.819 billion as Wal-Mart spends more to boost wages and training. Not helping were reduced margins from lower than expected pharmacy reimbursements and rising “shrink” (difference between product bought from suppliers and product sold to customers) related to the retailer’s fresh food business and efforts to clean up inventory issues
Wal-Mart Stores CEO Doug McMillon said he is not happy the lack of expense control in the recent quarter.
“For the back half of the year, we will manage these items closely with a continued commitment to efficiency, cutting costs where appropriate, even in a period of investment,” McMillon said in the earnings statement on Tuesday (Aug. 18).
Shrink is one the “Urgent Agenda” items being addressed by Walmart U.S. CEO Greg Foran and his senior execs.
“We are reviewing the end-to-end inventory management process with a special focus on shrinkage and working to close gaps. Investments are being made in training programs for store and asset protection associates as well as investments in staffing in high shrink areas of the store,” Foran explained in the release.
As he has for many months, Foran said this will take time before results are more visible to the bottom line, with the estimated time being 18 months or more.
“These expenses will impact us for the rest of the year,” Foran added.
The re-introduction of greeters at the front of the store is away the retailer is stepping up efforts to monitor theft. Roughly 8,000 department managers are being put back in supercenter stores to better control inventory and help with customer service. A complete retraining and decluttering in the retailer’s back room, particularly the supercenters, is also underway because management says that is where shrink and other inventory issues arise when product is not marked down to sell.
Foran said some of the lost margin was related to the retailer’s pharmacy prescription business. He said reduced reimbursement rates from pharmacy benefit managers is an industry trend that cuts into the retailers margins on prescription sales.
“We are also seeing a lower mix of higher-margin cash transactions, reflecting a marketplace shift in which more customers are now benefiting from greater drug insurance coverage. While we are taking a number of actions to lessen the impact, we expect to have pressure on pharmacy for the rest of the fiscal year,” Foran said in the earnings report.
He said many issues that present profit challenges will linger through the remainder of this year.
“We are certainly disappointed. But we are not standing still. We know we can do better, and we will. For the Walmart U.S. business, doing better means staying focused on improving the customer experience in our stores, and delivering sustainable top and bottom line growth for the long term,” Foran said.
On a positive note, Foran said the retailer’s “Urgent Agenda” efforts to better control inventory are taking root. In the recent quarter, sales growth outpaced inventory increases for the first time in several quarters. The company reported inventories of $45.007 billion as of July 31, down from $45.451 billion during the same period in 2014.
He said credited store traffic increase of 1.3% on customer service improvements like the “Checkout Promise” initiative which ensures that more registers are open during peak shopping periods. He said customers should find stores are cleaner, better maintained and well stocked.
“We’ve added approximately 1,700 items, primarily in grocery, to warehouse stock, driving faster replenishment times to the stores and we are ensuring the product is available for our customers,” he said.
Operationally, Foran said the retailer recently began an overhaul of its inventory management systems, routines and schedules. The “Customer Availability Program,” or CAP, will supplant decade-old processes with modern technology and new routines that keep associates on the sales floor rather than in the stockroom.
Processes for truck deliveries at peak times and for stocking shelves have been simplified, freeing more associates to be on the floor during peak customer traffic, Foran said. He also said Walmart is beginning to provide MC-40 technology to all department managers. This smaller, more intuitive hand-held tool is designed to simplify many tasks now handled by the managers, especially those related to inventory control.
This month, he said store managers are receiving mobile tablets that will help them stay connected to the business, while keeping them on the sales floor to help customers.
E-COMMERCE, SMALLER STORE PERFORMANCE
Apparel, household items, and e-commerce sales showed gains resulting from previous changes and investments, Foran said. He said store traffic was particularly strong on the general merchandise and softlines (apparel and household) side of the supercenters. Foran said seasonal categories also performed well and changes in replenishment strategies ensured product was on the shelves when and where customers needed it.
The rising star of Wal-Mart Stores is the e-commerce business. Foran said e-commerce sales were aout 0.2% to the retailer’s 1.5% overall comp. Part of that was attributed to the “Dare to Compare” day on online rollback pricing against Amazon’s Prime Day event.
Neil Ashe, CEO of Walmart Global e-Commerce, said the event was the largest ever non-holiday pickup at U.S. stores. He said it was also the largest day on record for home delivery. Online orders picked up in store go toward the store sales, while home delivery is reported as e-commerce sales.
While all the formats in Walmart U.S. had positive comp sales growth in the quarter, the Neighborhood Market grocery format had comp sales of 7.3%.
“We remain encouraged by the performance of this format,” Foran said.
While Neighborhood Market stores historically perform well, they do not generate the sales revenue of a supercenter, according to Brian Yarbrough, analyst with Edward D. Jones. He said lifeblood of Walmart’s U.S. sales growth history has been tied to the supercenter. He expects sales and profits to moderate as the retailer shifts its focus to smaller formats. Also, food is the retailer’s big revenue driver and deflationary prices had reduced same store grocery comps by 0.6%.