Wal-Mart Relatively Recession-Proof, CEO Says

Since Wal-Mart Stores Inc. accounts for about 8 percent of retail sales in the United States, “things can get a lot worse before they get bad at Wal-Mart,” the company’s CEO, Lee Scott, said Thursday referring to question concerning the possibility of a recession.

Scott told a group of about 200 students at the University of Arkansas that Wal-Mart sells primarily “consumables” — food, soap and toilet paper — that shoppers will buy even during a recession. But the world’s largest retailer has higher price markups on “discretionary items” that sell better when the economy is robust.

“On the things that are discretionary, we’ve seen the customer pull back,” Scott said. “Unfortunately, you make most of your money on discretionary items, not on Tide.”

The comments, made during UA’s 2001 Business Giants Forum, came two days after Wal-Mart released its fourth quarter and year-end financial numbers in what Scott described as a “challenging” economic environment.

Wal-Mart reported a 4.5 percent increase in net income for the quarter ended Jan. 31. The amount was the lowest quarterly income report for the company in the past five years, but it still beat analysts lowered earnings expectations by a penny per share.

Wal-Mart posted $2 billion in net income (45 cents per diluted share), up from $1.92 billion for the comparable quarter of 1999. Net income for the fiscal year that ended Jan. 31 was up 17 percent to $6.3 billion. Sales increased by 10 percent for the quarter to $56.6 billion and 16 percent for the fiscal year to $191.3 billion.

In a press release Tuesday, Scott said his first year as CEO at Wal-Mart had been “more challenging than any of us would have imagined.” He said consumer spending doesn’t seem to be slowing further, and the economy could be fueled this coming spring by lower interest rates, possible tax cuts and falling gas prices.

The three participants — Scott, American Freightways Chairman Sheridan Garrison and E-Z Mart Stores Inc. CEO and President Sonja Yates Hubbard — didn’t make a prepared speech during the one-hour forum but took questions from students. The event was broadcast live to colleges and some high schools across Arkansas.

One reason Wal-Mart isn’t sweating a possible recession is because the company has an efficient logistics network. So when prices of goods go up nationwide because of a hike in gasoline prices, Wal-Mart’s prices go up less than its competitors, Scott said.

“The person who wins in the short term is the person who’s more efficient,” Scott said.

Scott said the highest paid Wal-Mart store owners make about $200,000 per year, but most of them make about half that amount. The reason the pay is so high, he said, is because they’re responsible for profits at their individual stores. The company has set maximum prices on items, so store managers have to sell a certain quantity of items rather than raising the prices to keep profits coming in, he said.

“The whole focus in the company is on driving sales and taking care of the customer and the associates,” Scott said.

But the No. 1 motivator isn’t money, he said, but the company’s profit-sharing plan makes the employees feel that they have an ownership stake in Wal-Mart.

When asked about ethics, Scott said he agreed with his brother, who is a Washington, D.C., lobbyist. Scott said his brother told him that, when paying income taxes, you try to get as close to the line as you can without going over.

“But when it comes to ethics,” Scott said. “If you can see the line, you’re too close. Wal-Mart has never asked me to look at the line. Sam Walton established this business with a sense of integrity and ethics.”

Hubbard said CEOs make mistakes just like everybody else, but they must be able to recognize those mistakes and learn from them.

“If I make a mistake and I don’t do anything about it, my conscience bothers me,” Garrison said. “And the longer I wait to correct it, the worse it gets.”

Scott said he had a lesson in humility when, after starting work at Wal-Mart at the age of 30, nine truck drivers went to Sam Walton and asked them to fire Scott, who was then head of logistics.

“I just didn’t listen [to the truck drivers],” Scott said. “Being able to listen to what they’re saying and adjust to those needs is important.”

Walton didn’t fire Scott, who said he is now good friends with some of the truck drivers who complained about him.