Wal-Mart to reduce expansion outlays

Stock jumps nearly 4% on news of cutback

October 24, 2006|By BLOOMBERG NEWS

NEW YORK -- Wal-Mart Stores Inc., the world's largest retailer, said yesterday that it will reduce the amount of new spending on stores by about 75 percent next year, sending its shares to their highest level in 19 months.

Capital expenses will increase by as much as 4 percent next year, with the United States "approximately flat," down from the 15 percent to 20 percent forecast globally this year, the Bentonville, Ark., company said yesterday in a statement.

Some analysts and investors say Wal-Mart expanded too fast as sales growth slowed. Last month, sales at U.S. stores open at least a year grew 1.3 percent, compared with a 6.7 percent gain by Target Corp.

Chief Financial Officer Tom Schoewe, who called recent results "disappointing," said Wal-Mart wants higher returns from its investments.

"Slowing down the spending had been much discussed, and Wal-Mart did not disappoint," said Daniel Popowics, a Cincinnati-based analyst with Fifth Third Asset Management, which has $21 billion in assets including Wal-Mart shares.

Eduardo Castro-Wright, chief of U.S. stores, said comparable sales in October were showing a gain month-to-date of about 1 percent on slower women's apparel sales and disruption from store remodeling. That is below the company's initial forecast of a 2 percent to 4 percent gain.

Shares of Wal-Mart jumped $1.91, or 3.9 percent, to close at $51.28 on the New York Stock Exchange, after climbing as high as $52.15. They have gained 9.6 percent this year. The retailer had 6,689 stores worldwide as of Oct. 1, including 3,944 locations in the United States

Wal-Mart, with $312.4 billion in sales for the year that ended Jan. 31, said in a regulatory filing that its capital expenses rose 13 percent to $14.6 billion for the year. A 20 percent gain this year would mean about $17.5 billion in spending. Schoewe declined to provide specifics about this year's number.

Global square footage will expand 7.5 percent next year, lower than an 8 percent average earlier in the decade, Wal-Mart said. The retailer expects to open as many as 660 locations globally next year, about half outside the United States.

U.S. store openings are projected to be less than for the year that ends January 2007, during which Wal-Mart has said it might open 335 to 370 locations.

"Our long-term goal is to continue to have our capital expenditures grow at a rate equal to or less than sales growth," Schoewe said.

Construction and land costs have risen sharply, limiting spending on new projects, Schoewe said. Those projects are being studied more thoroughly, and there is an emphasis on obtaining better returns for the amount of money invested, Schoewe said. Wal-Mart would consider adding more projects if costs were lower, he said.

International square footage will increase by 10 percent for the year ending in early 2008 and U.S. store growth will rise 7 percent, Schoewe said.

"Slowing square footage would be a clear indication that Wal-Mart is serious about returns improvement," Adrianne Shapira, an analyst with Goldman, Sachs & Co., wrote in an Oct. 20 research note.

Wal-Mart is remodeling about 1,200 U.S. discount stores this year to remove clutter and upgrade restrooms and changing rooms. Disruption from the remodeling hurt results in September and October, Castro-Wright said yesterday.

Wal-Mart is trying to increase customer traffic to its stores by reducing prices on items ranging from toys to generic drugs.

Last week, the company added 14 states to a program that offers some generic drugs for $4. The program, introduced in September, cut prices on 314 prescriptions containing as many as 143 compounds in varying doses.

"Every aspect of our $4 generic drug program has met or exceeded our expectations," Schoewe said during the conference call. "Our customers love it."

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