Wal-Mart's Simon: Smaller formats popular

Over the past two decades, Wal-Mart Stores Inc. made huge revenue gains from its still-popular supercenters - the large scale supermarkets that also feature aisles of goods previously sold at the retailer’s discount stores. But the Neighborhood Markets hold Wal-Mart’s greatest potential for growth, the president and chief executive of Wal-Mart U.S., Bill Simon, said Wednesday.

Simon was the lunchtime speaker at Goldman Sachs’ 20th annual Global Retailing Conference in New York. Wal-Mart U.S. is Wal-Mart’s biggest driver of revenue and earnings for the company, said Matt Fassler, a Goldman Sachs analyst who moderated the event.

The Wal-Mart Supercenter created the “stock up” - or one-stop shopping - experience “better than any format we believe [exists] in the marketplace today,” Simon said. However, the smaller, more grocery-oriented Neighborhood Markets have proven successful the past several years. The retailer has 300 or so Neighborhood Markets and expects to open another 200 in the next 18 months.

“I’m sort of declaring here … this is one of the fastest growing formats in retail - 60 percent growth and midsingle digit [same-store sales growth] over the last couple of years,” Simon said. “Customer experience is great. We’re very pleased with the format.”

Making it even more attractive to shareholders, Wal-Mart has been able to reduce building costs with each new store.

“Lower capital means the ability to hit hurdle rates in more markets,” he said. “So the prospect of even more Neighborhood Markets exist.”

Hurdle rates are the minimum return on a project or investment.

A third store format, the new Wal-Mart Express, shows promise as well, he said. Same-store sales for the 20 of these smaller stores are showing double-digit revenue increases.

“They’ve done really well for us,” he added. Each Wal-Mart Express is between10,000 to 15,000 square feet and sells fresh food and gasoline and includes a pharmacy. They compete well against dollar stores, pharmacies and small grocery stores, Simon said. Tweaks in building and servicing the small stores have resulted in more efficient operations.

Goldman Sachs on Monday returned to covering a limited number of discount retail giants, including Wal-Mart, Target Corp. and Costco Wholesale Corp.

“As we resumed our coverage of the big-box discounters, our eyes were wide open about the notion of price transparency and [rise] of e-commerce, and we’re very focused on companies that had sustainable edges when it came to price, cost and defensibility versus e-commerce,” Fassler said.

“Our [analysis] suggested to us that Wal-Mart is quite well positioned along these lines,” he said. Analysts put a “buy” rating on Wal-Mart, with a price target of $83. Stock in the retailer closed Wednesday at $74.05.

Simon said that Wal-Mart’s revenue hasn’t been robust over the past two quarters, but he said the company is poised for a rebound in the second half of the fiscal year. The retailer’s Christmas gift to employees and shoppers this year is free and longer layaway - which opened to workers on Monday, to Wal-Mart’s Facebook followers Wednesday and will be available to the general public Friday.

“We expect layaway … to be an important outlet for us this year,” Simon said.

Mediocre sales of toys and electronics came to light when Wal-Mart released its second-quarter earnings last month. Already thinking ahead, Wal-Mart let consumers of all ages pick the toys the retailer will feature this Christmas shopping season.

“We brought kids together, thousands of kids, young kids, old kids, and had them physically play with all the toys,” he said. Testers then pegged the items they’d want. “So we have kid-chosen products … and bought those deep, and that’s what we’ll be focusing our business on in the toy season.”

Business, Pages 23 on 09/12/2013

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