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Wal-Mart Stores, Inc. (NYSE:WMT)

Raymond James Institutional Investors Conference Call

March 5, 2013 11:35 am ET

Executives

William S. Simon – President and Chief Executive Officer

Brett Biggs – Executive Vice President, Chief Financial Officer

Carol Schumacher – Vice President of Investor Relations

Analysts

Budd Bugatch – Raymond James & Associates, Inc.

Budd Bugatch – Raymond James & Associates, Inc.

Good morning again, my name is Budd Bugatch, I am with Raymond James and it’s my pleasure to welcome you to the Wal-Mart Presentation at our 34th Annual Institutional Investors Conference. With us today from Wal-Mart we have Bill Simon, President and CEO of Walmart U.S.; Brett Biggs is EVP and CFO of Walmart U.S.; and Carol Schumacher, Vice President of Investor Relations for Wal-Mart Stores, Inc.

We’re happy to welcome Bill back to the State of Florida, where he served as a Secretary of Florida’s Department of Management Services during Jeb Bush’s tenure as Governor. He joined Wal-Mart in 2006 from Brinker International, Bill was named President and CEO of Walmart U.S. in 2010, Bill without out any further ado the floor is yours.

William S. Simon

Thank you, Budd. I appreciate it and glad to be here with you today. It’s an opportunity for us to take about our business which we like to do, particularly, given we just released our earnings on 21st not too long ago, I’m going to take a moment if I can to recap some of that for you and then spend some time talking about some of the initiatives that we have. I’ll give you little more insight into some of the things that we’re thinking.

But first of course, the forward-looking statement, the statement, we will be making forward-looking statements I think that’s why hopefully some of you are here. So you can hear what we think about what the business and how it’s going, if you like more details, it’s on our website and you can take a look at it.

Just to recap, our business at Wal-Mart Stores, Inc. the corporation is strong and growing. We added $22 billion for the fiscal year that we just completed added a Fortune 50 company in any year. Leverage of the business in fact all three of the operating segments delivered operating leverage for this year and this is the third consecutive year.

Free cash flow of about $13 billion, returned about $13 billion to shareholders in part with a fairly substantial dividend increase. A great result for the year and a part of it for me representing the Walmart U.S. team is a bit of pride because the Walmart U.S. team was contributed to that great result.

And if I can, I’ll just really just bring it up-to-date on the strategy in U.S. and you’ve seen this it’s our productivity loop, that’s the business model that we operate, that’s the business model that’s been successful for us that’s the business model that delivered a great result in the U.S. this last year and for us it starts with leverage, if we can leverage our expenses and this year we did drop down our expenses by 27 basis points. It freeze up cash for us to invest in price and we did very broadly invest in price, primarily in food and consumables, because we know that’s a traffic driver in our business and a result was a growth in our sales and we’re back around to the beginning with initiatives and prepare to drive leverage for the year. Just a little bit more detail. The U.S. segment finished the fiscal year at $275 billion in sales very, very strong earning 1.8% comp. We added about $10 billion in top line for the business. And you all may know that we recently began to resubscribe after about a 10 year hiatus to Nielsen and IRI point of sale data.

And that data is indicating that we grew 50 basis points in food and consumables, and the health and wellness over the counter areas that we measure, 50 basis points on a strong share, so a great performance driven primarily by traffic. Facilitated all that as I said was operating expenses and our operating expenses increased by 2.5% on out of 4%, just under 4% sales growth, the net of which is $22 billion in operating income, a $1billion increase in the U.S. and operating income for the year, profit growing faster than sales in each and every quarter, a very good result for us.

We and the company have a history of established by our founder of sharing that success with our associates. And in addition to the normal wages that we pay, our field and management teams, we paid this year nearly $1.5 billion in field-level incentives. Every hourly associated in our store is eligible for bonus, quarterly bonus, and we paid out $1.5 billion in bonuses this year, just to the field base folks. Additionally, they have access to discount cards about $550 million that they took advantage of discounts at our stores, and over $800 million in contributions to 401(k), and stock purchase plans. So combined in addition to regular base pay of nearly $3 billion given back to the people who made this happen for us, and we’re proud to be able to do that, particularly in a time where the economy is remains challenging.

Well, the questions we get asked and so I thought I’d address this upfront as what’s around the top of mine of our customers are proximity to the customer base that we served with about a 140 million customers that coming into our stores every week, and the polling in Walmart Moms Groups that we manage. It gave us a pretty good window into what folks are thinking. And now more than ever, they’re telling us what they rely on us for that low price, every day low price promise particularly as things get a little bit uncertain.

Customer continues to be pressured by jobs, jobs, jobs, jobs, unemployment and security; they tell us is top of mine. They started to mention the payroll tax increase. They notice that 2% in their paycheck. Most of them say they’re adapting to it and are figuring out how to work their way through that, maybe a lesson for those in certain parts of the government. Our customers can figure it out, well maybe there is a, gas prices are also they’re very sensitive to that rapid run up in gas prices that we’ve all seen is something that it’s on their mind.

What we know though and what they tell us is they continue to rely on us in difficult times. And we’re well positioned really in any marketplace to serve the customer, and the strategy of everyday low price is fueled by that productivity loop is what runs our business.

It’s really pretty simple, it’s the program that Sam Walton developed and was expounded on over the years and now it’s evolved into grocery for us. If we can invest in price on food and consumables would drive traffic to our stores which will give us leverage, which then allows us to continue to invest in price. And those price investments and lots of folks who’re out there and they do price surveys and we do well in most of them, some of them are better than others, our price investments are very, very broad based, they’re not KVI or known value item driven not milk, bread and eggs particularly, but more broadly against items that drive a basket savings, and there can be sometimes difficult to read if you’re out there doing a survey on 50 items or so.

And, the unique position that we have in the marketplace has showed up in the market share increases that we have. We’re also talking to the customer about that many of you would have seen the ad campaign that we’re running now it’s a, there is a national campaign that’s more broaden, and it’s claimed, and then we’ll be expanding into 50 markets in the first quarter with direct market specific basket claims, and above what it.

[Advertisement]

Those ads as I said running in 50 markets you’ll notice that was inhibited market and I’ll talk a little bit more about that later we’re increasingly rolling out that format and that’s been very successful for us, but those challenge campaigns are real baskets, real customers taking and shopping in the same list.

So we don’t pick the items and there could be anything from milk, bread, eggs and there to black shoe polish. Whatever they bought, we run the comparison against and we do very, very well.

We also have made a lot of progress this year in anytime, anywhere shopping, driven by our online business, and we occupy a unique position in eCommerce. Based on the 4,000 plus store infrastructure that we have in a place and our logistics infrastructure, we have the ability to do things that the customer finds a lot of value, and a couple of examples of that, I will give you because they are very top on mind given the recent holiday season. We are able to stay in stock and in business through Walmart.com really all the way up till Christmas Eve, when most traditional eCommerce players are out of business because of the shipping deadlines. Because of the 4,000 stores we can fulfill the orders from our business on the ground either through a ship, a fulfillment from store or a pick up in store opportunity that others might not be able to do.

Another great example was many of you would have heard about the one hour guarantee that we gave our customers on the most sought-after items on Black Friday. We were able to oversell what we had in the store and fulfill it within days through Walmart.com, so the customers who came in and wanted that 32 inch TV for a 148 bucks we sold about 600,000 of them in about an hour in the stores. But we actually sold more than that, another 100,000 or so and then fulfill them through Walmart.com. So that integration of physical and digital retail is placed where we believe we have a huge opportunity and we’ll continue to expand on that.

We’ve also online but innovating to deliver the customers’ needs, you would have hopefully read about our new Polaris search engine, which by the way was completely developed internally. So we now have the engineers with the capability to develop a world-class search engine that’s resulting in conversions from Walmart.com and all our eCommerce businesses at a much higher rate. We launched this past year Pay With Cash and had some really interesting results with it. Pay With Cash was away for customers who we thought without credit to participate in eCommerce sales and [indiscernible] and we found out that a substantial portion of the Pay With Cash business was actually paid with a credit card. Pay With Cash, you go online and you order a product, and then you go to a store and you pay. Well when they showed up in the store to pay substantial number of them uses credit cards to pay in the store, which will give you that idea about there is still some people out there who are not quite sure about the whole Internet credit card thing. This is what we believe.

Site of store has been expanded for us is with pickup as early as today we call it. So now you can order online and get it now in the store. We were very, very fortunate and pleased to named Mobile Retailer of the Year. Some of the activity that we’ve been able to generate through our mobile application, things like Scan and Go that’s in pilot now where you can mobile self checkout on your Smartphone. And as you all know you heard we launched Same-day Delivery pilot and are very, very interested in that as a concept to service for customer. The bottom-line is anytime, anywhere and we are able to do that, the idea is that we can expand our reach and deliver our low price, everyday low price promise to customers wherever they might be.

I’m going to transition a little bit and talk to you about our real estate portfolio and how we think about supercenters and small formats. And it’s important because you’ll see us as the chart on the bottom indicates increasingly moving into smaller formats and just to be clear, when we talk about smaller formats we’re talking about anything below say 50,000 square feet or 60,000 square feet non-supercenters.

So, Neighborhood markets and Express stores would fall into that category. Just so, everybody is aware as well, 90% of our fleet is our supercenters and supercenters are still a great growth vehicle for us from a dollar perspective and we’ll continue to build those where we see the opportunities and we’ve given you those real estate numbers and they are on this chart as well, we’ll add about 125 new supercenters this year.

You can see the rate in which we’re expanding our small formats and it’s very a rapid ramp up and I’m going to explain to you in more detail, why and why we’re so excited about that. We’ll build as many as 115 small formats this year and we’ve seen that fleet road as I said to be about 40% of our new openings.

We’re excited about it, because they compete really well against multiple channels, you might think of Neighborhood market as a drug store or a grocery store competitor or express as you thought about it as a dollar store competitor, well, they are not really, they are more hybrid stores than you would think, because they have obviously our low price promise, but they all have fresh food and pharmacy and the Walmart everyday low price promise, they are all enabled with.com capabilities, Site-To-Store capabilities, so you have that endless aisle that we can offer that others might not be able to offer.

And so, if you sort of put it up against each of these channels that they compete with against the dollar stores, while the prices of dollar stores we still have a price advantage against them, they are known for their price as well, but we can deliver price and assortment and fresh food and Rx and the Walmart EDLP promise and then give you anything that we can get online in the store that digital capability is a deal breaker.

Against grocery our prices are, our traditional grocery our prices are much, much and as you see in the advertising campaign that we’re running, Wal-Mart brand is also very important and again enabled with e-commerce capabilities that most traditional grocers can’t, can’t and don’t compete against.

And then against drugs, obvious price advantage, fresh foods and then the.com piece, so we’ve seen our small formats compete very well against every one of these channels, and deliver sales that we’re very, very proud of. Just as an example and pharmacy and over-the-counter, we’ve had single-digit positive comps in these small stores with strengthened of OTC and RX, RX driven by our $4 million generic program.

On the grocery side, the small stores are mid single-digits with strength, fresh and deli, bakery were exactly where you would think they would be. And our GM business, and the consumable parts of GM like light bulbs and air filters and things like that we’re able to fulfill the order right then and there. But some of our stores, these small stores have a very, very high percentage of site to store sales. There is a store in downtown Chicago, a neighborhood market to the bottom of the tower that has the times of the Europe to 20% or 25% of its sales were done through walmart.com and site to store. In fact, so such volumes down there that we had to rent more space from the landlord just to be able to store the products that we’re shift to the store through walmart.com.

It’s a terrific story. For us that’s resulted in very, very good growth across our format. Neighborhood market for fiscal 2013 delivered mid single-digit positive comps against the competitive set that you would think as good as or better than everybody in the traditional grocery space. Traffic is up 2% every quarter, strength in every one of the categories.

And for those who know the history of neighborhood markets, we started in the late 90s with neighborhood markets and built them in year groups, for example all the way through this recent year. And the growth and the positive comps that we’ve been delivering have, at this year we’re in every single year group, so even if you go back to that 1999 year group had positive comps. In 2010 three year group, they had positive comps. And of course the more recent ones because of the velocity and build up had better comps, but we’re really pleased with the entire fleet and the comps that they’ve been able to deliver.

Walmart expressed double-digit positive comps and while they’re not a lot of them on comp yet we’re very, very pleased with the result that they’ve been delivering, positive traffic every single quarter. The RX portion of this, it has been very, very important. If you can deliver descriptions to markets access to low price prescriptions into markets that haven’t had access to them before. It’s very, very compelling from a traffic than a customer perspective.

And the assortment in these stores is really interesting to if you think about it. If you’re in 12,000 square foot or 15,000 square foot say drug or dollar chain, and you have the ability to assort your store based on your distribution network, which might be two times the number of SKUs. So say, we carried 10,000 SKUs in the store you may have 20,000 or 25,000 in your distribution system. So when you go through your assortment calculations and you try to figure out how you should assort that small store, you’re limited to what you carry in your system. At Wal-Mart, we can assort a 12 or 15,000 square foot store with the entire assortment from a Supercenter 600,000 distribution system.

So the best selling items at adjacent Supercenter can be assorted into a Neighborhood market or an Express Store and that’s the capability that we have that others don’t. And then when you take that to the next level with the digital capability through walmart.com that has been a very, very powerful customer proposition.

Neighborhood markets we’re going to, in a rollout mode on this we have direct line say to 500 by fiscal 2016 and we’ve been able to decrease the building cost, we’re seeing as I said improved sales trends, productivity because as we scale these things is built the return, so that they’re now in line with approaching Supercenter level returns.

So very, very pleased with this and you can see geographically where they are will be building out penetration in many of these markets and there is a few new markets that we’ll be going into this year as well. This is a great opportunity for us 500 is by no means the end, it’s merely just the beginning of what we think the opportunity might be for this format.

With Express, we were in the middle of a density test and if you’ve been in North Carolina, in North Carolina recently run Raleigh-Durham you would have seen us building a lot of these, what we’re trying to understand here is what happens when you put a lot of these in close proximity.

Again these are not dollar stores as you would think, little more drug stores they have a volume, sales volume that’s fairly substantial compared to a dollar store five to eight times what a dollar store might do. But only say 30% or 40% of what a Neighborhood market might do and so the density test for us is to try to decide where and how many we can put these and use them as a favor strategy or penetration strategy. One of the things that we want to make sure that we don’t do is put a 15,000 square foot, where we should have put at 35,000 square foot store. And so we’re learning a lot in this and we’re actually learning a lot from expressing – we’re now applying to neighborhood markets about our building costs and discipline with capital, and that’s making us better in all of our small formats.

I’ll have you as a captive group, I’m going to take the opportunity to talk to you very briefly about some of things I am most proud of over with our company and that is the things that we’re doing to read on issues that matter to our customer.

In January, we announced that we are going to step up our commitment to U.S. manufacturing by adding $50 billion over the next 10 years in U.S. manufactured products. But the equation is changing very, very rapidly with higher oil cost, transportation cost, and emerging demand in markets that are outside of the U.S. So that manufacturing equation is changing and there are categories of products that are ready to come back to the U.S., and as with our access and visibility to a lot of manufacturers in the U.S. and then in the world, and lot of the state and local governments, we believe we’re in a position to make some commitments, longer-term purchases, working with state and local governments to bring this manufacturing back. In fact later this week, we’ll be a sum up with our suppliers where we’re going to be discussing this in detail and that it’s a very, very exciting opportunity for us. And we’re focused on it.

We also talked about Veteran’s jobs initiatives. We believe, like everybody in this country that if you fight for your country, you soon have to fight for a job. Veterans are great workers, we know that. They deserve an opportunity; we’re going to give him that. But we believe that if you think back on one of the history of our company, every single time, we he had a conflict, the veterans have been the ones that lead an economic boom after the conflict that’s happened after World War I, happened after World War II, happened after Vietnam, and we have 10 years worth of veterans right now and they are one of our best hopes for the next phase of growth in the U.S.

So if you left back the duty within 12 months with an honorable discharge, and you want to work for Wal-Mart we are going to give you job, we’ll also call upon the top 50 employers and many of whom are already very heavily engaged in this and we are going to see if we can get a broader commitment from Americas business to start employ our veterans because that’s one of the way that we are going to get the economy growing again, of course, we are still very, very focused on sustainability, we are very proud of the zero wasted issues.

Our journey towards zero waste were at about 85% and we’ve been able to divert 85% from landfills today, we are now the largest onsite user of renewable energy in solar, fuel and wind and of course, we are still focused on women’s empowerment our ability to attract and retain internally, top female talent and then the establishment and the development of women and women owned businesses all around the world is something that we are focused on as a company.

Briefly wrapping up, we had a great year both for the corporation and the Walmart U.S. segment, our strategy of the U.S. is right on and working, we are very pleased with productivity loop and how it continues to move forward, we think whatever the economy does we are the best positioned retailer in the U.S. to serve our customers, and we are very, very excited about the opportunity to reach more customers with our every day low price promise at the small formats give us.

So with that Budd, let’s see, if we got any questions.

Question-and-Answer Session

Budd Bugatch – Raymond James & Associates, Inc.

We do have time for some questions from the audience, who would like to start this off, anybody, well, Bill, let me ask you a question on, here we got…

Unidentified Analyst

Let’s start at the end of last comment about, I think you’re the biggest user of renewable energy sources, how do you calculate that is that just leverage your size or is this the energy that you generate onsite?

William S. Simon

It’s I guess, If I understand the question. We have solar installations at well over 100 and plus of our stores today, we’re just expanded it our solar installations in Ohio. The roofs are big spaces, where we can gather a lot of solar. We’re one of the initial customers of a company called Bloom Energy, which is fuel cell technology in the Bay Area, where we’ve not got, I think more installations than anybody does and that’s a fuel cells sort of generation of power onsite. And we don’t, we’re business peoples, so these are great business opportunities and returns for us they’re not. While they’re great for the environment, we believe in the long-term we’ll result in a cleaner, cleaner planet, it’s good business for us, we generate this power onsite and they’re in different forms and fashions with power usage agreements with the owners of the products. So there is a not lot a capital outlay and some of the deals are slightly different. But by and large, we have solar, wind and fuel cell installations on our property stores, clubs and distribution centers.

Brett Biggs

And I presume these are generating returns, this is cheaper than buying off the grid.

William S. Simon

Yes

Unidentified Analyst

I’m just curious going back to the slide where you are showing evolution of what percentage of your stores are going to be under the large versus the smaller format. Do you foresee your square footage in total staying about flat or do you think that it will be in decline?

William S. Simon

I think what we’re trying to do is to do more with less, so we’re trying to become more efficient in the use of capital, so the square footage will roughly stay the same, but you’ll see more doors open because we’re going to be opening smaller stores instead of Supercenters.

Budd Bugatch – Raymond James & Associates, Inc.

Can you talk a little bit about the impact to labor costs over the next say three years from Obamacare and will that be significant to the company?

William S. Simon

The Affordable Care Act is if you like it or don’t like it, it’s the law the land it’s been argued all the way to the Supreme Court and we’re prepared to implement it. Our healthcare benefits were well above what was required by the act anyway and while there is some bulges that are not, where we were spending the money we feel like we can absorb that in our business.

Budd Bugatch – Raymond James & Associates, Inc.

On the other side of that, is there anyway you can benefit either from mini-clinics or Rx from the Healthcare Reform?

William S. Simon

There probably is and we’re working towards figuring what that is but I don’t know if it’s benefit from the change in the legislation so much as it is, the opportunity to benefit from the increased demand and relative scarcity and high cost of healthcare in general.

If you think about our business model, we’ve any time that there is an inefficiency in the system and there is no better poster child for inefficiency than the U.S. healthcare system. We believe there is an opportunity for Wal-Mart, so I’m not sure that I can answer your question that as a result of the law there is a big opportunity for us, but there is a huge opportunity for us in that space and we’re pursuing it.

Budd Bugatch – Raymond James & Associates, Inc.

You’re incremental in the $4 prescription, what’s the progress of that now. It has been in place for what five or six years?

William S. Simon

Yes. We launched that in the fall of 2006 and up. Our market share in NRx increased substantially with that. And I don’t have the latest dollar amount but we have saved billions of dollars in healthcare cost. If you really think about it and if you really, really honest, it’s the only thing you can point to that’s actually lowered the cost of healthcare in the U.S. Everything else just moved it around, the Affordable Care Act and changes to Medicare, Medicaid, and everything, this just lowered the cost of healthcare, because we did this in about 30,000 other locations in the U.S. maxed us. And that’s great. That’s a wonderful thing.

Before 2006, the timeframe if you’d recall, people were talking about having to cut pills in half and going to importing drugs from Canada because it were too expensive in the U.S.; not talking about that anymore. We just lowered the price, and by the way, we still make really good money at $4. The cost of goods of those things are not, is not all that complicated. And so there is an opportunity for us to take that same mindset into the healthcare space and frankly other services as well where there is disjointed and then nature and inefficiencies.

Unidentified Analyst

One last question, there was an article, I think one of the reporting services yesterday about you are doing something with Amazon or trying to get through the partnership. Is there anything you can talk about on that at this point in time? Or…

William S. Simon

No. I think that article, and that particular publication, and that particular reporter got a hold of something that now about six weeks old, that I think she is just trying to continue to write about. That was the same story that you read about an e-mail that they got out of our company. By the way, just for perspective, we generate, this is shocking to me when I found out, about 10 million e-mails, external e-mails, not even the ones that I send to Carol or Brett, 10 million a week. So, since that person got a hold of that e-mail, we had got 50 million more e-mails, and that was a snapshot at a day in time, that isn’t even really relevant anymore. So the Amazon story I would tell you is probably an interpolation of an interpolation.

Budd Bugatch – Raymond James & Associates, Inc.

Okay. Well, thank you very much. We’ll continue it at the break out. Thank you, Bill.

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