Investor community presses Wal-Mart execs for specifics on operating strategy, comp sales
Wal-Mart investors are again backing off the retail giant after the retailer’s top executives tempered earning projections for next year at somewhere between $4.29 and $4.49 per share, flat against the adjusted earnings per share predicted for this year.
Hosting analysts Thursday (Oct. 6) at the home office in Bentonville, Wal-Mart executives were short on details around specifics into the metamorphosis it plans to make in the short term. Wal-Mart Stores CEO Doug McMillon said internally the company will in the near future look more like a Silicon Valley tech company than a traditional retailer. He said key differences will be in how capital is deployed, faster decision making, and using technology to increase efficiencies and enhance customer experiences. He said the changes have to happen if the company is going to survive another 50 years.
Wal-Mart declined to give specifics of its ongoing price investment numbered into the billions, except to say it will be “controlled and thoughtful.” Wal-Mart said it would not break out its level of investment, nor disclose the markets or categories where it’s being deployed.
Analysts who watch the retailer on behalf of banks, investment firms and other financial sector companies say “controlled and thoughtful” would be hard to model.
Avoiding margin pressure and leveraging costs will be “no slam dunk” next year, said Chief Financial Officer Brett Biggs. He said Wal-Mart gave a flat guidance in part because they want to remain fluid enough to ratchet up investment if they need to do so.
The retailer said nothing about upcoming holiday sales projections but focused more on updating analysts on the three year plan it laid out a year ago. One year into the plan Wal-Mart has already lowered the expectations with respect to next year’s earnings and gave very little clarity for next two year period.
Wall Street has largely been supportive of the investments Wal-Mart is making in its people, including $2.7 billion over two years, e-commerce investments now at more than $5 billion, the $3.3 billion Jet.com deal, and increased stake in JD.com. When asked if this hefty investment level at e-commerce will be a recurring element or an outlier, McMillon said it’s an outlier.
Wall Street is mixed on the retailer’s two-year sacrifice of profits. Mark Martiak, strategist with Premier First Allied Securities, said Wal-Mart has to invest and the ramp up made in e-commerce is the right step if they are going to gain market share against Amazon. He said Wal-Mart may have to look more closely at real estate holdings and closing underperforming stores because it’s important for the company to keep the focus on e-commerce and developing segments like pickup that drive people to the stores.
Walmart U.S. CEO Greg Foran spoke to analysts about the focus on store performance. He said at anytime he can see the “Fast, Clean, Friendly” scores of the store fleet on a phone app. He said he can check on other store metrics as well. He and Walmart International CEO David Cheesewright said they evaluate the low store performers routinely. Cheesewright said they try and rehabilitate the low performers but if there are better places to spend money they do not hesitate to close underperforming operations.
More cautious analysts say Wal-Mart investors now selling their shares are likely not happy about having to do so, and are getting out because of flat earnings and a lack of detail as to how the company will grow revenue when it reduces the number of new stores and faces growing online competition.
Wal-Mart executives squelched the recent rumors and headlines about widely reported play for Indian-e-tailer Flipkart. Cheesewright said the Indian market is very complex and different from anywhere else in the world.
“We are in a stage of learning about that market. We talk to lots of people there trying to learn and do better. For now we like the cash and carry business. India is not a focus for us right now,” Cheesewright told analysts on Thursday.
Analysts asked Wal-Mart execs if the grocery pickup play is offensive or defensive. McMillon quickly said Wal-Mart was playing more offense with its new strategies. There’s no silver bullet approach, however, McMillon said, adding that “running great stores is important,” but no more so than offering shoppers a convenient online option.
McMillon said Wal-Mart will continue to look for ways to reduce costs because that’s the foundation for its Everyday Low Prices. When asked about margin erosion he said margins across the globe have been driven lower because of internet transparency of price. He said Walmart is and has to remain prepared for lower margins in the future across the world of retail.
Part of the reasoning behind the retailer’s planned transformation to a tech-like company is that more nimble and leaner operations provide for faster cycles and are cheaper than the traditional, more isolated models that dominated retail for decades.
Analysts also pressed Wal-Mart on getting higher store comps given the U.S. store fleet is running more efficiently with eight quarters of positive comps and seven quarters of positive traffic. Also, e-commerce is beginning to gain positive traction. Wall Street believes 2% comps should be reasonable expectations in the future.
The retailer did not provide any indication comps will soon rise to 2% or higher. McMillon did say that Jet.com and that business is growing for certain. He said Walmart.com will benefit as Lore finds synergies in the two businesses.
The ongoing Federal Corruption Practices Act probe into Wal-Mart’s international businesses in at least five markets still looms over the retail giant. Some experts say the case could reach a settlement within the next few months. A settlement could cost the retailer anywhere from $600 million to more than a $1 billion according to some estimates. That cost would be in addition to the $858 million Wal-Mart has already spent on legal and internal compliance actions taken during the investigation.
Cheesewright did tell analysts that compliance safeguards the retailer has put in place over the past two years are without equal in the industry and will be difficult for others to quickly replicate. He said this could be an advantage for the retailer once the matter is settled.