Bumps ahead for new CEO of Wal-Mart

Prices, e-commerce, labor among McMillon’s hurdles

BENTONVILLE - Residents in Bentonville woke up Thursday morning to a full-page newspaper ad - an open letter to new Wal-Mart president and chief executive officer Doug McMillon.

The ad, paid for by OUR Walmart (Organization United for Respect at Walmart), congratulated McMillon on his promotion and called for higher wages and better work schedules for Wal-Mart employees. The letter also demanded an end to retaliation against striking workers - action that generated a recent complaint against Wal-Mart by the National Labor Relations Board.

So begins McMillon’s new job as leader of the nation’s largest employer and the world’s largest retailer. On Saturday, he was to attend his first morning meeting as head of the company.

In a challenging economy and increasingly competitive online and brick-and-mortar retail environment, it appears McMillon has his work cut out for him.

As he takes the big chair, analysts and others say there are some key issues McMillon must immediately address: a lag in e-commerce innovation; dwindling food-sales traffic in stores; and stagnant food prices, which hurt same-store sales growth. Grocery sales make up roughly one-fourth of Wal-Mart’s business, said Stacey Widlitz, president of SW Retail Advisors. Her company provides retail market intelligence to investment institutions and corporations from offices in London and New York.

Cameron Smith, a Wal-Mart insider and headhunter for Wal-Mart suppliers, said McMillon is believed to be focusing on keeping costs down, driving business through e-commerce and taking care of Wal-Mart’s employees, known within the corporate culture as “associates.”

“They are no longer the lowest-priced retailer,” Smith said of Wal-Mart. “They have to compete in the dot-com business. They’ve got to.” Mc-Millon, a Jonesboro native and University of Arkansas graduate, is 47 - the youngest of Wal-Mart’s CEOs since founder Sam Walton. McMillon started at a distribution center while working on his master’s in business administration at the University of Tulsa. He has more than 20 years with the company, working in all segments of Wal-Mart’s business, noted Widlitz. Before he became president and CEO of the company, he led the international and Sam’s Club divisions. McMillon also now sits on the retailer’s board of directors. The general consensus among suppliers, said Smith, is that McMillon is smooth, charming and humble all at once. On the same day OUR Walmart’s full-page plea for labor changes was published, McMillon spoke to a gathering of the company’s top hierarchy of product suppliers at an exclusive, early-morning fundraiser for The Cancer Challenge, a 20-year-old organization that supports area cancer-related programs and services. The affair, held at the 21C Museum Hotel in Bentonville, was one of the new CEO’s first speaking engagements since he was promoted last year.

McMillon spoke mostly about philanthropy and little about Wal-Mart. Attendees were asked to give a minimum of $6,000. The event was sponsored by Wal-Mart and hosted by Smith, whose Rogers-based Cameron Smith & Associates is well known as the go-to place for anyone looking to work or change jobs within the Wal-Mart supplier community.

“Everybody working inside that building at Eighth [Street] and Walton [Boulevard] is ecstatic that Doug’s going to manage the ship,” Smith said, referring to Wal-Mart’s home office.

Added Widlitz: “He is the picture of the type of leader you’d want leading a company of this size at this time.”

Requests to interview Mc-Millon and outgoing Wal-Mart president and CEO Mike Duke were denied.

“Neither of them are doing any interviews at this time,” said Wal-Mart spokesman Brooke Buchanan.

After several quarters of stagnant earnings, Wal-Mart has trimmed back its annual forecast for its 2014 fiscal year, which ended Friday. Earnings for the fourth quarter and year are scheduled for release Feb. 20.

Last week, Switzerland-based Credit Suisse upgraded Wal-Mart from “neutral” to “outperform” as McMillon takes over. While the outgoing chief, Duke, spent much of his tenure addressing merchandising, technology and operational issues, McMillon is now in a position to make morestrategic changes, said Credit Suisse analyst Michael Exstein. A shift toward more smaller size stores, a fine-tuning of the company’s international operations and a recommitment to general merchandise is expected, Exstein said in a note to clients. His six-page report includes a disclosure that says Credit Suisse “does and seeks to do business with companies covered in its research reports” and that a conflict of interest can occur. Exstein raised his target per-share stock price from $80 to $87. The stock’s 52-week high was $81.37 with a target estimate of $84.09. Big changes are ahead for retail as big-box merchandisers like Sears, Kmart, J.C. Penney, Toys R Us and Target are showing signs of weakening, Exstein said.

“The question will be who can pick up share as this realignment begins to accelerate,” he said. “We expect Wal-Mart will take advantage of this opportunity by re-engaging in its general merchandise business.”

Some of the economic headwinds Wal-Mart is encountering are out of McMillon’s control.

“The biggest problem they’re facing is the lack of inflation and how that impedes their ability to increase prices,”said Brian Gilmartin, portfolio manager at Trinity Asset Management in Chicago. The situation also makes it difficult for Wal-Mart to extract savings from its suppliers, he said.

Gilmartin boasts that he has a 600-line Excel spreadsheet on Wal-Mart that has data going back to the mid-1990s.

Worker safety conditions in Asia, a national movement by Wal-Mart employees over labor issues and the investigation into Wal-Mart’s alleged violation of the Foreign Corrupt Practices Act in Mexico and other countries have made headlines in recent years. The retailer’s Mexican subsidiary has been accused of making payments to foreign officials to ease the issuance of certain licenses or permits. “I just think because they’re so big and because they’ve been so successful that they’ve become a target for the press,” Gilmartin said. “They’re easy to beat up.” Some 245 million people visit more than 11,000 Wal-Mart stores and Sam’s Clubs in 27 countries and e-commerce websites in 10 countries each week. One large long-term institutional shareholder, the UAW Retiree Medical Benefits Trust, called for the retailer to publicly disclose whether it had clawed back pay from executives whose actions have caused “significant financial harm” to the company and its owners. A clawback is the recoupment of executive pay. The trust’s request was put on the ballot for last year’s annual Wal-Mart shareholders meeting but was turned down - although it got 32.5 percent of the independent-shareholder vote. The majority of Wal-Mart stock is owned by the Walton family and other company insiders. “As we enter this new chapter of leadership for Walmart, it is our hope [McMillon] will re-examine the steps the company is taking to promote an ethical culture including holding its top executives financially accountable for violations of federal and state laws,” said Meredith Miller, chief governance officer for the UAW Retiree Medical Benefits Trust. At this year’s shareholders meeting in June, that particular group of stockholders will again ask the company to publicly disclose if it clawed back any compensation from its executives related to incidents of fraud or corruption, she said. “New leadership always presents new opportunities,” Miller added. “It’s our hope that the new CEO will listen to the request from investors about more disclosure.”

Business, Pages 67 on 02/02/2014

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