Wal-Mart execs say company doing well, but ‘tectonic changes in retail’ require more work

Thousands of Wal-Mart employees, shareholders, curious capitalists, shiny celebrities, and a few constant critics gathered Friday morning in Fayetteville, Arkansas, for the now popular and predictable annual meeting. It contains, arguably, an element of televangelism, with the call to Christ replaced by the celebration of commerce.

With country music star and The Voice judge Blake Shelton serving as host, several Wal-Mart executives and employees made the case that the world’s largest retailer is on the right track as they work to grow a business that now boasts 260 million customers a week at stores in 28 countries.

To be sure, it’s been a good year financially for Wal-Mart Stores, even with much of the retail sector reporting declines in store traffic and revenue. The first quarter earnings report was better than equity analysts expected, even with net income down by 1.3% to $3.039 billion. The $1 net income per share beat the consensus estimate of 96 cents per share.

Revenue was slightly less than analysts expected as Wal-Mart reported top line sales of $117.5 billion compared to the consensus of $117.7 billion. That said, revenue grew 1.4% from the $115.904 billion in the year-ago quarter. Some deflationary pricing and foreign currency exchange rates drove down revenue by roughly $1.3 billion in the quarter.

There were more things going right for Wal-Mart in the quarter with comparable store sales growth of 1.4% in U.S. stores and a 1.5% jump in same-store traffic. This marks the 10th consecutive quarter of positive comp traffic for the retail giant. On a two-year stacked basis, comp traffic is up 3%. Comp sales have been up for the past 11 quarters behind improved U.S. store results.

Barron’s contributor Vito Racanelli puts Wal-Mart on a short list of those surviving against the onslaught of Amazon. Gordon Haskett Research Advisors recently initiated coverage of Wal-Mart one week ahead of earnings. The analyst rated the stock a “buy” with an aggressive one-year target price of $90.

“We’ve long been critical on Wal-Mart after years of under-investing and a lack of focus on its U.S. segment. However, this is not your father’s Wal-Mart anymore,” noted Chuck Grom, senior analyst with Gordon Haskett.

He said on the back end of $6 billion of investments to improve e-commerce capabilities and shopping convenience to more customers, Wal-Mart looks primed to regain its productivity loop momentum with traffic already bouncing back. Grom said it’s easier to keep positive momentum than to get it.

“Equally important, Wal-Mart is not backing down against Amazon,” Grom said. “Instead, it’s building a digital ecosystem that should have tangible benefits across the enterprise. We think the stock is a prime candidate to be re-rated higher given both of the aforementioned factors.”

‘TECTONIC CHANGES’
Wal-Mart Board Chairman Greg Penner told the audience of more than 14,000 that the momentum is something on which the company should build.

“At Wal-Mart, we have a lot to celebrate right now,” Penner said, but stressed “that doesn’t mean we can get comfortable” because there are “tectonic changes in retail.”

After a video showing Wal-Mart co-founder Sam Walton encouraging the company to look for and promote “mavericks” who challenge the system, Penner said the company must continue to seek those eager to push for new ideas and innovations. He said managing mavericks and constantly seeking change is a “harder and more strenuous” path, but it will “lead to the future of retail.”

What has also been difficult is the approximately $2.7 billion spent in the past few years by the company to hire more people, boost pay and support more training. Much of the money has been spent on e-commerce investments as Wal-Mart struggles to compete with online retail giant Amazon.

Wal-Mart has partially invested in boosting its retail category expertise with acquisitions of online specialty retailers like Jet.com, Moosejaw, ShoeBuy and ModCLoth. Men’s clothier Bonobos is rumored to be the next deal and could cost Wal-Mart at least $300 million. The specialty online retailer sells items that range in price between $100 and $1,000, significantly higher than apparel sold in Walmart U.S. stores.

But to continue to support the investments, Chief Financial Officer Brett Biggs said the company must also focus on cutting expenses. Expenses as a percentage of sales have grown in the past few years, he said. He said a 1% overall expense reduction could add $1 billion to company’s bottom line.

‘A NEW WALMART’
Using the parts of a song as his theme, Wal-Mart Stores President and CEO Doug McMillon said the company must continue to focus on delivering results, creating “shared value,” better serving customers, and taking care of employees.

“Together we’re building a new Wal-Mart,” McMillon said. “We’re going to make shopping with us faster, easier and more enjoyable. We’ll do more than just save customers money and you, our associates, will make the difference. Looking ahead, we will compete with technology, but win with people. We will be people-led and tech-empowered.”

Changes touted by McMillon included:
• Free two-day shipping on more than 2 million online items;
• Discounts for customers picking up online orders in stores; and
• Grocery pickup in many global markets and delivery from stores in some markets.

McMillon said the company will continue to experiment and invent. Some of the experiments according to Wal-Mart, include “digital endless-aisle shopping in stores, automated pickup towers in stores for online orders, pickup stations in store parking lots, and robotics and image analytics to scan aisles for item availability and shelf presentation.”

“We have started to invent the future of shopping again. We’re making every day easier for busy families and we’re using new ways of working to do it,” he said.

WAL-MART CRITICS
It wasn’t all sunshine and rainbows at the meeting. Organization United for Respect (OUR) Walmart, a union-funded group, challenged Wal-Mart on its claims of better pay, environmental stewardship and employee benefits.

“Through OUR Walmart, associates are directly challenging the corporation to live up to their PR on ‘investing in associates,’ becoming ‘environmentally sustainable’ and being ‘truthful and transparent,’”Andrea Dehlendorf, co-director of OUR, noted in a statement. “Living up to these promises are easily within reach for the nation’s largest corporate employer and the billionaire Walton heirs who control half of the company, but require deep change.”

Following were the shareholder proposals presented by OUR Walmart.

Janie Grice, a Walmart U.S. employee from Marion, S.C., asked shareholders to support a resolution calling on the company to report on how people of color are concentrated in less stable, lower-paying part time positions, and if race is a factor in hiring and promotion decisions.

Carolyn Davis, a member of OUR Walmart, spoke in support of a shareholder resolution requesting that at least one Wal-Mart Board member nominee have environmental expertise.

“Walmart made big promises to become one of the most environmentally sustainable retailers, but Walmart’s greenhouse gas emissions – that directly cause climate change – are not decreasing, they are increasing. That’s got to change,” Davis said in her statement.

OUR Walmart also called for paid leave and sick time policies for hourly employees that mirror those for executives.

“Women who work at Walmart are challenging the company to create policies that ensure the hundreds of thousands of parents working at Walmart can be there for their families, provide for their needs, and get a foothold toward economic stability,” OUR Walmart noted in a statement.

Entertainers at the event were The Band Perry, Ne-Yo, Rachel Platten, Mary J. Blige and Gwen Stefani.

Talk Business & Politics Senior Analyst Kim Souza contributed to this report.