Mood festive at Wal-Mart before event

Retailer sees lot to celebrate

Doug McMillon, chief executive officer, stops to talk with employees from India at the company’s 2015 shareholder meeting. This year’s meeting will take place Friday.
Doug McMillon, chief executive officer, stops to talk with employees from India at the company’s 2015 shareholder meeting. This year’s meeting will take place Friday.

Wal-Mart Stores Inc. executives say there is plenty to celebrate this week as thousands of shareholders and employees from around the world arrive in Northwest Arkansas for the retailer's elaborate and star-studded business party.

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Arkansas Democrat-Gazette

A Timeline for Wal-Mart Stores Inc over the past year.

The company's ongoing transformation under Chief Executive Officer Doug McMillon, which Wal-Mart views as a necessity for success in the changing retail landscape, continues to require heavy investments that have affected profits. But after posting surprising first-quarter revenue growth in what has largely been a gloomy retail environment, executives say it's a sign the decision to spend billions in efforts to raise wages for employees, improve the shopping experience for customers and build up its e-commerce capabilities are starting to pay off.

"We are continuing to do what we said we'd do on our strategic plan, and we are getting traction as a result," McMillon said during a prerecorded call for investors earlier this month.

Wal-Mart's progress, and its plans over the coming quarters, are expected to be among the major topics of discussion during the retailer's weeklong celebration. The annual gathering will culminate with Wal-Mart's shareholder meeting Friday morning in the University of Arkansas' Bud Walton Arena, an event that blends business -- the election of 12 board members and consideration of three shareholder proposals-- with entertainment. Celebrities such as Reese Witherspoon, Justin Timberlake, Hugh Jackman, Will Smith and Harry Connick Jr. have hosted the festivities in recent years.

While employees and executives alike are typically in a good mood throughout the week, there is reason for optimism after Wal-Mart recently reported $115.9 billion in revenue and earnings per share of 98 cents for the first quarter of the fiscal year. The performance topped Wall Street's expectations and lifted the company's sagging stock, which rose 9 percent the day of its earnings release May 19.

Wal-Mart's net income was down nearly 8 percent in the quarter largely because of investments in wages and e-commerce, but the retailer reported 4.3 percent growth in net sales at U.S. stores, a 1 percent increase in same-store sales and a 1.5 percent improvement in traffic. It was the seventh-consecutive quarter of same-store sales increases and sixth-straight for traffic growth.

Executives touted the performance as a solid start to the fiscal year, but analysts remained more cautious about the progress as Wal-Mart continues to invest in strategies it believes are vital to the company's long-term health. Still, they acknowledged the results were encouraging.

"Those numbers are really important because they suggest to us their brand is intact, for one, despite all the concerns about what is going on," Morningstar analyst Ken Perkins said. "So I think we're more positive on that because when you think about the wages and everything else, in order for those to pay off you need the top line to keep growing and so far they're working in the U.S."

IN-STORE IMPROVEMENT

Wal-Mart is in the second year of a $2.7 billion investment in its employees, which includes pay increases and other benefits designed to boost morale, improve customer service and increase sales.

The investment has had an effect on profits. The retailer told investors in October that its earnings per share for fiscal 2017 could fall as much as 12 percent because of its spending on employees and e-commerce. But Wal-Mart believes the minimum-wage raise to $10 an hour earlier this year -- the second bump in two years -- and improved training are making a difference in stores.

Greg Foran, CEO of U.S. Stores, said Wal-Mart also is seeing progress in other key areas as it works to improve the shopping experience. According to Foran, Wal-Mart's stores are "looking and feeling better." They're cleaner, customers are moving through checkout lines faster, the assortment of products have improved and items are more regularly kept in stock for customers to find.

Foran believes the uptick in traffic -- and sales -- is a sign customers recognize the effort.

"I think it's fair to say that if customers don't commit to your brand, then eventually your sales are going to suffer," Foran said. "What we're starting to see is customers are becoming more advocates of Wal-Mart stores than they were previously."

Members of the Organization United for Respect at Wal-Mart don't agree. Wal-Mart ranked last among department and discount scores in customer service in the American Customer Satisfaction Index earlier this year, and the organization pointed to the survey as proof Wal-Mart must do more.

The group has been pressing for the retailer to raise the minimum wage to $15 an hour.

"We see it every day -- dirty stores, where customers can't find what they're looking for because we're out of stock, and then are forced to wait in long lines just to check out," Cynthia Murray, a Wal-Mart employee and OUR Wal-Mart member, said in a statement. "A new commitment to supporting employees with fair wages and full-time hours would make a world of difference."

Foran acknowledged that, despite the improvements, Wal-Mart has a long way to go with plenty of stores still short of the retailer's "clean, fast and friendly" standards.

"We still lag many of our competitors in terms of shopping experience and, frankly, we should never rest," Foran said. "Even if we end up being ahead of them we're not going to rest."

E-COMMERCE ADVANCES

Wal-Mart also remains tireless in its ambition to strengthen its e-commerce business to rival competitors like Amazon.com, who are thriving as more customers shop online.

The retailer is investing in technologies designed to blend its in-store and online capabilities into one, creating what it describes as a "seamless" shopping experience.

"The e-commerce piece is something they are investing a lot in and longer term that's going to be a critical component to the company's success and the investment success as well," Perkins said.

Wal-Mart's grocery-pickup service, in which customers order online, drive to the store and have the products delivered to their cars, has been one of its best success stories. The company recently announced that it was expanding the service to 40 more markets.

Another service -- the mobile payment service called Walmart Pay -- was rolled out to a handful of markets earlier this year. Walmart Pay is on schedule to be available in most stores by the end of June, and Chief Financial Officer Brett Biggs said it's another way to achieve the retailer's long-term goals.

Wal-Mart has made investments to strengthen its fulfillment infrastructure and, earlier this month, announced plans to shift its ShippingPass pilot program from three-day to two-day delivery for subscribers. The online assortment has grown to include more than 10 million items. It doesn't come close to Amazon's offerings, but Wal-Mart believes it is better positioned to compete.

"In the ecosystem that we're building, we want people shopping at Wal-Mart whether that's in our stores, whether that's with pickup, whether that's getting things delivered to their home," Biggs said. "You can see the different ways we continue to allow the customer to do that."

Despite the efforts, Wal-Mart's e-commerce sales continue to slow. The retailer reported a 7 percent increase in e-commerce sales growth from the previous quarter, but it represented another period of deceleration and concerned some analysts because of the billions Wal-Mart has invested.

"What I keep going back to is are they ever going to get a decent return on all these investments in e-commerce?" Edward Jones retail analyst Brian Yarbrough said. "I know e-commerce is important. I know a lot of the business is shifting there. But there's been an awful lot of money [invested] and e-commerce continues to decelerate. The growth rates continue to be less and less each quarter."

LOOKING AHEAD

Both McMillon and Biggs acknowledged the sales growth in e-commerce has been too slow and must improve. But the company is confident growth is coming with the infrastructure in place and as customers get a better understanding of the items available online.

"I think our customers are still getting a sense of how deep our assortment is online and sometimes you do get a lag between the perception of that and when customers do understand what your assortment is," Biggs said. "So those are the kind of things you'll continue to see going forward."

Wal-Mart also said its progress in U.S. stores led it to move forward on the initial phase of price investments earlier than planned. The company began lowering prices on key items in select geographic markets during the first quarter.

Yarbrough said the retailer hasn't provided many details about where the emphasis on lowering prices will occur, but predicted the grocery business because that's where Wal-Mart faces some of its greatest challenges in being recognized as a low-price leader.

"Ten years ago you used to be able to save 15 [percent] to 20 percent by shopping at Wal-Mart on groceries," Yarbrough said. "All the core traditional grocers have gotten much sharper on their price points and now you probably save 4 [percent] or 5 percent shopping at Wal-Mart. ... To get back to that it's going to be difficult without lowering prices, which is going to weigh on profitability."

So while Wal-Mart will be in a celebratory mood this week, its future plans remain of interest to analysts, investors and others. The first-quarter results were solid, but Yarbrough believes Wal-Mart remains in a critical period as it competes to retain its place in retail.

"They've still got a tough road ahead of them in my opinion," Yarbrough said.

SundayMonday Business on 05/29/2016

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