Wal-Mart curtails expansion as it faces slowing sales growth
The world’s largest retailer is going on a diet.
Beset by shrinking sales growth, Wal-Mart Stores Inc. said Tuesday that it planned to build fewer and smaller stores as it cuts costs to help shore up profit.
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 gasoline prices but also a widening credit crunch that 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 said the retailer 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.
Bentonville, Ark.-based Wal-Mart’s share price took a hit from the slowdown in growth plans. The stock fell $1.32, or almost 3%, to $43.93.
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,” said Patricia Edwards, managing director and retail analyst at Wentworth, Hauser and Violich in Seattle. “The highest quality companies, in my opinion, are able to self- finance their future growth from their free cash flow.”
Wal-Mart said sales would 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. Wal-Mart is also finding fewer places to build stores and it faces tougher competition from other retailers.
Schoewe said sales growth would fall to 9% this fiscal year from nearly 12% the year before and then be 5% to 8% the next two years. Wal-Mart’s fiscal year runs through January.
Schoewe said Wal-Mart would concentrate on using the tremendous cash flow generated by its U.S. and international stores more efficiently.
Wal-Mart’s annual square-footage growth will decline from 8.8% last year to around 6% this year and 5% to 6% in the next two years, Schoewe said.
In terms of Supercenters, the flagship of Wal-Mart’s U.S. business, executives said the retailer would build 195 this year, about 170 next year and 140 the year after, compared with a historical standard of around 280 a year.
Capital expenditure will be $13.5 billion to $15.2 billion in the next two fiscal years after about $15 billion this year.