MoneyTuesday, October 23, 2007 10:49 PM CDT

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Wal-mart to re-assess planning, budget due to poor economy

By Marcus Kabel
Associated Press

The world’s largest retailer is going on a diet.

Beset by shrinking sales growth, Wal-Mart Stores Inc. said Tuesday that it plans to build fewer, and smaller, stores as it cuts costs to help shore up profits.

For the second time this year, Wal-Mart is trimming plans for capital expenditures to about $15 billion from a June forecast of $15.5 billion in the face of continued decline in sales growth, Chief Financial Officer Tom Schoewe told investors and analysts at a conference. The original projection was $17 billion.

Such efforts come as Wal-Mart’s customers are confronted with mounting financial worries that include not only higher food and gas prices but in recent months a widening credit crunch, which has hurt their ability to spend.

“No doubt that our work has been made more difficult by the current economic environment,’’ said Eduardo Castro-Wright, head of Wal-Mart’s U.S. stores. He noted that Wal-Mart should be able to win by offering compelling merchandise and pursuing hot merchandising categories.

The average size of new Supercenters will fall from nearly 195,000 square feet this year to around 180,000 in the next two years, operations executive Bill Simon added.

Wal-Mart’s share price took a hit from the slowdown in growth plans. But some analysts welcomed the move to focus on keeping more of the cash Wal-Mart generates rather than spending furiously on new stores.

Increased free cash flow, or the money left over after a company pays its expenses including capital expenditures, could make Wal-Mart shares more attractive by funding higher dividends, new technologies or acquisitions, analysts said.

“Strong free cash flow is the key to corporate flexibility and potential growth. The highest quality companies, in my opinion, are able to self-finance their future growth from their free cash flow,’’ said Patricia Edwards, managing director and retail analyst at Wentworth, Hauser and Violich in Seattle, which manages about $12 billion in assets and holds about 35,700 Wal-Mart shares.

Wal-Mart said sales will continue to slow after years of strong double-digit growth.

The retailer is struggling on several fronts. Its apparel and home decor businesses are still trying to find the right mix of merchandise. It’s also finding fewer places to build new stores and it faces tougher competition from other retailers.

Schoewe said sales growth will fall to 9 percent this fiscal year from nearly 12 percent the year before and then be between 5 and 8 percent the next two years. Wal-Mart’s fiscal year runs through January.

Schoewe said Wal-Mart is focused on using the tremendous cash flow generated by its U.S. and international stores more efficiently, including building fewer giant Supercenter stores and managing corporate costs better.

Wal-Mart’s annual square footage growth will decline from 8.8 percent last year to around 6 percent this year and between 5 percent and 6 percent in the next two years, Schoewe said.

In terms of Supercenters, the flagship of Wal-Mart’s U.S. business, executives said the retailer will build 195 this year, about 170 next year and 140 the following year, compared to a historical standard of around 280 a year.

Capital expenditure will be between $13.5 billion and $15.2 billion in the next two fiscal years after about $15 billion this year.

David Abella, an analyst at Rochdale Investment Management in New York, which manages $2.5 billion in assets including Wal-Mart shares, said Wal-Mart’s reduced plans for U.S. store growth are positive news.

“I think focusing on cash flow and profitability is what they need to do at this point,’’ Abella said.

Abella said Wal-Mart’s share price, which has been in the doldrums since early this decade after strong gains in the 1990s, could benefit if investors who focus on cash flow and investment returns embrace Wal-Mart’s new approach.

“There are lots of institutional value investors out there whose metrics focus on return on invested capital and cash flow generation,’’ Abella said.

Schoewe said Wal-Mart still has room for growth and reiterated the retailer’s decision to focus on low prices for cash-strapped shoppers after a brief foray last year into more fashion and higher-end products.

“Tough times are actually a good time for Wal-Mart. Our customers care a lot about price and value, and that’s our business proposition,’’ Schoewe said.

Castro-Wright, the Wal-Mart U.S. chief, said the retailer is still working to improve weak sales in apparel and home decor to catch up with the three strongest areas: electronics, grocery and pharmacy and health. Those three areas account for two-thirds of Wal-Mart’s sales now, he said.

The strategy that has worked for those three areas will be applied to home and apparel, he said. That strategy is based on price leadership combined with brand offerings and improving the look of stores.

“Half of our business at Wal-Mart is done at less than $10 (per item),’’ said Dottie Mattison, head of apparel in the U.S., stressing Wal-Mart’s renewed commitment to low prices.

Shares of Wal-Mart fell almost 3 percent, or $1.32, to close at $43.93.

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