Wal-Mart tries to stave off sales decline

By BusinessWeek

Wal-Mart Stores (WMT, news, msgs) reported sales of $374.5 billion -- more than a third of a trillion dollars -- for its fiscal year ended Jan. 31. It's a stunning number, but the discount giant could see store-sales growth turn negative this year, for the first time ever.

The fiscal-year numbers reported Feb. 19 by the world's biggest retailer 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 gain in company history. That follows a 1.9% gain in 2006. (For the fiscal fourth quarter, revenue increased 8.4% to $107.4 billion and net income rose 4% to $4.1 billion.)

Burt Flickinger III 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, currently just under 3%; the 1% rate of U.S. population growth; and the increase in square footage, which grew 8.4% last year at Wal-Mart. "It's pathetic," says Flickinger.

A hit on profits

Customers are giving Wal-Mart lower marks these days, as well. A yearly survey of customer satisfaction by the University of Michigan released 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, news, msgs) to discount department store Kohl's (KSS, news, msgs). And Wal-Mart's fourth-quarter same-store sales rose 1.7%, which beat Target (TGT, news, msgs). No wonder investors have bid up Wal-Mart's stock 5% since the beginning of the year.

The thinking on Wall Street is that Wal-Mart will outperform the rest of the industry because its low prices provide relief to Americans pressured from higher credit-card bills, larger mortgage payments and high energy costs.

And Wal-Mart 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 retail consultant Walter Loeb.

The problem is that whatever sales momentum there is comes 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 number of shoppers who will then stock up on higher-margin goods like apparel.

But that's not happening. Even gift cards, 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.

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 a recent analysts' presentation. The retailer currently operates about 7,000 stores worldwide, including 3,000 outside the United States.

The retailer currently operates about 7,000 stores worldwide, including 3,000 outside the United States.

But time and again, Wal-Mart has found that its formula for success -- high volumes of cheap goods -- doesn't work everywhere.

Continued: Apparel has been a sore spot

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