New York, May 30 - Wal-Mart Stores Inc CEO Lee Scott's back-to-basics strategy for guiding the big-box retailer through the U.S. economic downturn has jump-started sales, boosting its bottom line and share price alike.
Now the challenge for Scott, who will lead Wal-Mart's annual shareholder meeting on June 6, is to prove that the approach has built loyalty among new customers and will keep them coming back when the economy rebounds.
Scott comes into this year's meeting with the wind at his back. Last June, Wal-Mart faced anemic U.S. sales growth, it was trying to clear through heaps of unsold apparel, and it was battered by negative publicity, including a legal battle with ex-marketing communications chief Julie Roehm, who was fired after less than a year on the job.
A year later, the scandals have largely faded, and Wal-Mart is showing renewed vigor. It has slowed its U.S. expansion plans and gone back to basics, emphasizing low prices as U.S. consumers try to eke more out of every dollar. Through Thursday, its stock was up 22 percent this year.
Analysts expect the world's largest retailer to emphasize ways it can grow by exploiting overseas opportunities or building new, smaller store formats in the United States.
But they also want to know that the improvement Wal-Mart is showing is not simply a function of a tough economy driving cash-strapped shoppers into its U.S. stores, but a real turnaround that will stick when times get better.
"What they need to show in the meeting is that what they've done up until now is really just the beginning," said Morningstar analyst Joseph Beaulieu.
SUPERCENTER PULLBACK
At last year's annual meeting, Wal-Mart faced pressure from Wall Street to rein in U.S. expansion plans as sales at its existing stores slowed and it saturated many markets.
It responded to the pleas, cutting the number of supercenters it planned to open last year and this year.
But with sales continuing to falter, it cut its capital expenditure forecast in October and again scaled back plans to build supercenters, which combine grocery and discount stores.
Analysts said the slower expansion was giving Wal-Mart breathing room to get U.S. sales back on track.
After attempts to sell trendy clothes backfired, the company has revamped its clothing department and is now focused on basic items, like shorts or tank tops, at low prices.
Wal-Mart also is tailoring stores to meet local demand, cutting prices ahead of big events like the U.S. Super Bowl football game, and touting its mantra, "Save Money. Live Better."
In the first quarter ended on April 30, U.S. customer traffic was "positive for the first time in a very long time," Wal-Mart said.
SKIPPING A TRIP TO THE SUPERCENTER
But hurdles abound. Soaring fuel prices are boosting the cost Wal-Mart incurs to transport the thousands of items that it sells around the globe, pressuring its margins and its ability to keep prices low. Rising fuel prices could also keep shoppers from driving to its stores.
"That consumer may feel that he or she ...(can) only pay for the gas to go to a supercenter once or twice a month instead of once a week, and in between stock-up trips will happen at a CVS or a Kroger or a Costco that's closer to a consumer's home," said Burt Flickinger III, managing director of consulting firm Strategic Resource Group.
Wal-Mart is also facing new forms of competition. British rival Tesco has entered the United States, opening Fresh & Easy Neighborhood Markets stores in some western states. Wal-Mart is now hiring store managers for Marketside, new smaller format stores it is preparing to open in Arizona.
Analysts wonder what is next on the horizon for international operations, which are taking on growing importance. The division accounted for 24 percent of Wal-Mart's $374.53 billion in net sales in the last fiscal year.
Wal-Mart has shown an interest in expanding into Russia, saying in April that it hired an executive to explore business opportunities there and in neighboring markets.
But the central question is whether new U.S. customers will return to their former favorite retailers once the economy improves.
"What they've been benefiting from recently is picking up incremental customers that maybe would have shopped at a Kohl's or J.C. Penney or a Target and may have traded down," said Walter Todd, a portfolio manager with Greenwood Capital, which owns Wal-Mart shares. "The question is ... can they keep some of those customers if there's an upturn in 2009? We'll see."