Wal-Mart: Fashioning a New Growth Track

Sales at the big-box retailer outpace the industry, but Wal-Mart is struggling to stave off a decline in growth. Can high-margin apparel sales do the trick?

On Feb. 19, the world's largest retailer, Wal-Mart Stores (WMT), reported sales of $374.5 billion—more than a third of a trillion dollars—for its fiscal year ending Jan. 31, 2008. It's a stunning number. But a closer look at Wal-Mart's prospects shows the larger question for the discount giant is whether it can avoid having store-sales growth turn negative in the coming year, for the first time ever.

The numbers the behemoth has reported for its latest fiscal year already reveal evidence of a slowdown. Its Wal-Mart stores division eked out a sales increase of 1% in stores open at least one year, the smallest sales gain in company history. That follows a 1.9% gain in 2006. (Total revenue increased 8.4% for the latest quarter, to $107.4 billion; net income rose 4%, to $4.1 billion, or $1.02 a share.) At this pace, it's obvious Wal-Mart will have to fight flat or negative same-store sales growth in the coming year.
Outperforming Retail Chains

Burt Flickinger III, managing director of New York retail consultant Strategic Resource Group, has been a Wal-Mart shareholder for three decades. He says the company's sales growth rates aren't keeping up with the three indicators every retailer should beat: the inflation rate, which is currently just under 3%; the 1% rate of population growth in the country, and the increase in square footage, which grew 8.4% last year at Wal-Mart. "It's pathetic," says Flickinger.

Customers are giving Wal-Mart lower marks these days, as well. A yearly survey of customer satisfaction by the University of Michigan, released on Feb. 19, shows the retailer scored the lowest among 10 large discount and department-store chains. Wal-Mart's satisfaction rating this year was 68 on a scale of zero-to-100, down 5.6% from a year ago.

Granted, the company's sales increases of 0.5% in January and 2.4% in December, however small, looked good compared with the bloodbath in the retail sector as a whole. Store chains are being hammered across the board with declining sales, from the upscale Nordstrom (JWN) to discount department store Kohl's (KSS). And Wal-Mart's fourth-quarter same-store sales rose 1.7%, which beat Target. No wonder investors have bid up Wal-Mart's stock 6% since the beginning of the year, to more than 50.

The thinking on Wall Street is that Wal-Mart will outperform the rest of the industry because its low prices provide relief to Americans who are being pressured from higher credit-card bills, larger mortgage payments, and high energy costs at home and at the pump. And the big retailer is going all out to woo shoppers with low food prices, cheap drugs, and affordable electronics and staples. "Wal-Mart has continued its strategy of acquiring more margin dollars by selling more and higher-priced items like high-definition TVs," says Walter Loeb, president of Loeb Associates, a retail consultant in New York.

The problem is that whatever sales momentum there is at Wal-Mart is coming from the lowest-margin items at its stores—staples like food and $4 drugs. Indeed, company executives have said in the past they would rather take a hit on profits from these items to attract a large amount of shoppers into its stores who will then stock up on higher-margin goods like apparel. But that's not happening. Even gift cards, which are usually viewed as something people would use for goods to treat themselves, were being redeemed in January for basics like food. "Wal-Mart is the biggest food retailer, and people have to eat, which makes food noncyclical, so it tends to smooth their results," says Stephen Hoch, professor of marketing at the Wharton School of the University of Pennsylvania.
Uncertain Growth Strategy

Harried consumers shopping Wal-Mart's food aisles will help the company buy some time during this slowdown. But as the dust settles in the economy, will Wal-Mart be prepared to find new avenues for growth?

Figuring out a growth strategy has been a challenge. Almost all avenues, whether international or domestic, have run into roadblocks. Wal-Mart knows it has reached a saturation point in the U.S. market and that its fortunes lie abroad. The retailer plans to invest as much as $3.6 billion to open new stores overseas in the next two years, while at the same time paring its investment in building new U.S. stores to $5 billion from $7 billion.

The company plans to open 80% of its new international stores in Canada, Mexico, and China. "What's new for us is that either we will win in every market or exit the market," said Mike Duke, chief executive officer of Wal-Mart International at an analysts' presentation a few months ago. The retailer currently operates about 7,000 stores worldwide, including 3,000 in 13 countries