Wal-Mart: To Grow or Not to Grow?


Twice in the past year,Wal-Mart Storeshas given its stock a shot in the arm by announcing plans to rein in expansion in the United States.

Investors are now watching to see if there will be a repeat performance at the retailer's annual analyst meeting on Tuesday and Wednesday. Wal-Mart, whose shares have done very little this year, typically outlines its capital spending and store expansion plans there.



Next week's analyst meeting could prove a positive near-term catalyst if management further reduces square footage growth or capex," Goldman Sachs analyst Adrianne Shapira wrote in an research note.

But since Wal-Mart has cut its growth plans twice in the past year -- once at its last analyst meeting and again at its shareholders meeting in June -- it raises the question of how much more room there is for the world's largest retailer to pull back.

"I would be surprised if between June and now that they made a huge material change to what they told us, but they might," said MFC Global Investment Management analyst Sarah Henry.

Pushing for a Slow-Down

Analysts have pushed Wal-Mart to pull back on U.S. expansion so it can concentrate on improving sales at its more than 3,400 namesake discount stores and supercenters, which combine grocery stores with the discount store format.

Its shares rose nearly 4 percent last October when it said it would delay opening new stores that are close enough to existing locations to draw away customers, and planned to build smaller ones where possible to reduce costs.

The Bentonville, Arkansas-based company also said it expected retail space to grow by 7.5 percent in the fiscal year that started Feb. 1 -- a modest slowdown from the 8 percent increases in recent years.

The shares jumped 4 percent again on June 1, when Wal-Mart said it would cut the number of supercenters it plans to open by as much as 30 percent this year. It also lowered its fiscal 2008 capital spending to $15.5 billion from $17 billion.

Chief Administrative Officer John Menzer said last month that the retailer's goal was to beat that $15.5 billion capital spending figure.

Plan for Sales Improvement

But the planned slowdown has yet to help U.S. sales.

Sales at U.S. stores open at least a year, or comparable-store sales, rose 2.1 percent last fiscal year -- the smallest gain since Wal-Mart began posting such figures in 1980.

For the first eight months of this fiscal year, U.S. comparable-store sales were up 1.5 percent, compared with a year-earlier gain of 2.6 percent.

To try to improve sales, Wal-Mart is emphasizing its low prices and revamping its merchandise, especially clothing. But this effort comes as its core lower-income shoppers are being squeezed by high food and fuel prices, and a slumping housing market.

The company's stock has failed to make gains. Shares of Wal-Mart are down more than 11 percent since the company announced the slower growth plans at its last analyst meeting on Oct. 23, 2006. They trade at 13.5 times next year's earnings.

By contrast, rival Target trades at 15.6 times next year's earnings, and its shares have gained nearly 4 percent.

Analysts said they wanted to hear what strategies Wal-Mart will pursue to ensure U.S. sales get back on track.

"I'd rather them come out and be honest and say 'We think it's going to take a couple of years to fix it' instead of a couple of months because, in reality, that's what it's going to take," said JP Morgan analyst Charles Grom.

He said the stock would probably trade in a low- to mid-$40s range until there is a marked improvement in comparable-store sales.

Analysts also said they would like an update on the international business, where Wal-Mart has faced struggles ranging from Japan, where its Seiyu Ltd unit is headed for its sixth straight annual loss, to India, where it faces protests over its wholesale venture with Bharti Enterprises.

Analysts also want an update on how Wal-Mart may fare during the holidays after it vowed to aggressively cut prices to win sales. On Thursday, Wal-Mart cut prices on 15,000 more items.

"I think that strategy can be effective if you can get the customers to shop the rest of the store" and buy higher-margin items, Henry said.

But she added: "It's tough to drive comps if you're continually taking down the price on everything."