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Wal-Mart Stores (NYSE:WMT)

Bank of America Merrill Lynch Consumer & Retail Conference

March 13, 2013 12:30 PM ET

Executives

Charles Holley - EVP and CFO

Analysts

Unidentified Analyst

Good afternoon everybody. Welcome to the Bank of America Merrill Lynch Consumer and Retail Conference. This is the first of two key notes we're having over the two day conference. I am Robbie Ohmes; I cover apparel for wear textiles and the large cap discount stores like Wal-Mart for Bank of America Merrill Lynch.

We are very lucky to have Charles Holley, Executive Vice President and CFO of Wal-Mart here with us today here with us today. Mostly in the room are I think pretty familiar with Charles? Prior to taking over the CFO position he was Wal-Mart's EVP of Finance and Treasurer. He is also on Wal-Mart's executive committee. He has been with Wal-Mart since 1994 in several different roles, including the CFO of the International Division where he led some of Wal-Mart's international merger and acquisition activities. In addition to his amazing career so far in Wal-Mart's before that Charles worked more than 10 years at Tandy Corp. and Ernst & Young. He is also on the Dean's Advisory Board from McCombs Business School in Austin and an active board member for the Cancer Challenge of Northwest Arkansas.

I apologize, if I left anything out but I am sure I have, but I want to give Charles some to speak, so with that, I am very pleased to turn over to Charles.

Charles Holley

Thank you, Robby. It’s very kind of you. It’s a pleasure being here today before I get started though I need to ask you to read the obligatory forward-looking statement reminds you that any projections or opinions today may differ materially from actual results. I’m also need to remind you that you should also read and consider our filings with the SEC and junction with your analysis of the company.

With that lets begin, you know I was at this conference a year ago, I said there were four things that need to occur for Wal-Mart to have a successful year. The first one was our Wal-Mart segment and Sam’s segments needed to continue the momentum that they had experience coming end of last year. Our Wal-Mart last increased the revenues over $10 million; Sam’s increased their revenues over $2.5 billion last year. They both grew their operating income faster at a faster rate in sales. We would consider that a very successful year.

The second thing I talked about was that we need to continue to leverage our expenses. We were able to do that despite some headwinds last year with some unanticipated SEPA expenses, labor claims in Brazil. And what I think is may not be known is that we were able to do that, that’s our third year known in a row that we were able to lever expenses. We haven't levered expenses three years in a row since 1992, let that sink in for a moment. We felt very good about that performance the work we just began and you’ll see more of that in the future.

Third, we needed to improve returns in our international segment and we did improve our operating profit margins slightly in international but we know there is more room for and we are particularly focused on Brazil and China.

Last, we needed to continue to grow our global e-commerce business and we needed to make sure that we expanded our capabilities in global e-commerce and I think we were successful in that.

We have initiated our new search engine Polaris; in addition we finalized our investment at the back half of the year and (inaudible) in China. We are very pleased with that and gives us a very strong foothold in the markets that can only be matched by the U.S. in terms of potential. So, we felt like we had a very good year. I feel like we did leave a little on the table and we can do even better.

Turning to the fourth quarter, we felt really good about our holiday season particularly in the Wal-Mart U.S.; actually it was very strong. Our Wal-Mart U.S. business continued to pick up share and food and consumables; Sam's had a weaker quarter than we might have anticipated but there were a lot of investments in prices Sam's in the fourth quarter.

International slowed a little bit in the fourth quarter, quite frankly the economies they operate in were also softened, I think that’s the main reason for the softness in our sales. However, international still very focused on EDLP. And as you are aware we saw slowdown at the end of January at our Wal-Mart U.S. business, it was not disastrous.

As we said in our earnings call February 21st, we saw sales normalize around mid-February. Now I believe this slowdown have a lot to do with delay of the tax refunds and through the first two months or through January and February of last year, we would have seen about $4 billion of those cheques cashed. This year through that same time period, we would have seen about 2.7 billion, so through February we were $1.3 billion behind and cashing those higher IRS refund checks. There is not a lot of information out of the IRS; we do expect that will catch up to the quarter.

Now although the last ten years have been volatile in terms of global economies, I think our results have been very consistent. We've grown our earnings per share on average about 11% over that period and despite that continued volatility in the global markets in the U.S. markets with tax increases, sequestering, delays in refunds, we feel very positive about our ability to continue our very consistent strong results. We believe we can grow our topline 5-7% this year and our operating income should grow very close to that percentage. And it goes back to what we do best, driving the productivity loop through everyday low cost which delivers everyday low price, grow sales and of course that leads to growth in cash flows and profits, helps increase our returns to the shareholders.

Now our free cash flow has continued to increase over the last 10 years and I define free cash flow as operating cash flow less capital expenditures. And as a reminder in this graph you'll see fiscal 10 was a bit of an anomaly, we had a reduction inventory that was greater than we really would have wanted and that really was just an anomaly. But if you take that out you would see, it's been a fairly consistent increase in free cash flow over the last four years.

We would expect to continue to increase this free cash flow, it'll provide us great flexibility with strategic acquisitions dividends and share repurchases. Now obviously the most direct way our shareholders can enjoy the benefits of our returns is through our dividends, it's come to play a very important part in how we return to our shareholders, and over the last 10 years we've returned about 18% on average in dividend increases. We recently announced in fact in March, dividend increase of just over 18% to a $1.88 per share. Now I can't tell you what the dividend increases will be going forward but I can point back to our history and our track record and we're very focused in making sure that we return to shareholders. We also have a strong track record of returning to shareholders, the share repurchases, and if you look at the amount that the company's returned through dividends and share repurchases over the last ten years it's close to a $100 billion, if you look at the last five years it's around $60 billion, that's around 25% of our market cap, and I think that also speaks to our commitment to returning to shareholders.

Now looking forward, there are 6 priorities that we feel are important for both short term and long term success. Our U.S. businesses must continue to deliver strong results. We need to continue to improve our returns in our international segment, we continue to be great stewards of our capital, drive great productivity and efficiency. We need to continue our progress on levering expenses. Need to build a world class global e-commerce business; we need to ensure that we have a world class compliance organization.

Now on our U.S. businesses let me start with Wal-Mart U.S. first, it's a very large business but it still has a lot of growth through both comp and new stores, both large and small formats, and they're still gaining market share, last year if you just look at the food, consumables and over the counter we believe we gained about 50 basis of market share in the U.S. It also still has a lot of leverage opportunities, it doesn’t take a lot to leverage when you have got 4,000 stores and every year I get asked is there any more left I think last year Robby we got asked the same question, is there any more left, I know this morning I’ve been asked that, certainly there is more left. Wal-Mart U.S. levered 27 basis points of SG&A to sales ratio last year, I think that is a great performance. Hopefully that will answer your question there is more to be had.

I don’t think that we can forget though that we did make mistakes with our Wal-Mart U.S. business and our layouts and merchandise and obviously our pricing in the past. Bill Simon and his team have worked very hard to reestablish our EDLP trust with our customer and as you can see in this graph, as you can see in the sales performance, they gained traction back in 2011 and they never looked back.

Now, as Wal-Mart U.S. goes right now so goes the company and I will show you graph in a minute for a total company leveraging and it’s going to look similar to this chart but Wal-Mart as I mentioned levered 27 basis points of expense this year that is a decrease to their expense ratio to sales by 27 bps, that’s our total $275 billion business. That was of course invested in price. Margins declined as we had planned. And it was funded by these expense reductions. I know many of you have been asking but what happened in the fourth quarter, our margins increased a little bit that really was the result mainly at sales mix and some progress we have made in supply chain which is made of more efficient, less marked downs. But just as our leverage go, will not be spread evenly every quarter, every year, our margin will jump around a little bit but we are very clear on our goal of investing cost savings in to price over the long term.

So that results in continued increase profits. Our plan is to continue to drive our expenses down, invest in price, grow our sales, grow our profits. I think the last two years of this graph are a very good representation of what it should look like in accomplishing that goal. It is very consistent.

Now, let me make a couple of comments on Sam’s Club. Sam’s has had a very good record of driving sales and profit. There might be a little bit of slowdown this year in their profit growth as we do more investing in price and you saw some of that in the fourth quarter but we still expect to have solid results. We continue to see our improvement in our Advantage memberships along with upgrades of our Advantage memberships to the Plus membership, I think many of you are aware of our pilot in Texas where we have a cash back plan for membership, it’s still in test, we’re still analyzing the results so stay tuned. The new Sam’s Clubs we’ve opened have performed very well and this year we’ll open 10 new Sam’s Club and then we’ll also have a number of relocations to improve our Sam’s Club experience for our members.

We’re very focused on improving results in our international segment and it remains our growth engine. We believe we can do that and continue to invest. Now, we slow down some of that growth recently but international still has a great amount of growth ahead of us. It’s not just new store growth of 20 million square feet but comp growth from everyday low price in markets like Brazil, China and Chile.

This year, we’re projecting growth from comp stores to be around 40% of the total growth of international, that leads the other 60% to come from new stores whether they were built in the prior year and had a comp share or there were going to be built and open this year.

Our growth allows us to gain market share and last year we grew our market share in every market except China and just a quick comment on China as numbers you see there, we’ve always had a hard time understanding the government’s numbers for market share. What we do know and so this is difficult comparison for us to understand. What we do know is that our sales growth isn’t too far of our foreign competitors. We’d like to do better but we don’t think we’re as far off as the market as this would indicate.

Clearly with growth plans at 20 million square feet for international this year, we remained excited about the potential across those markets. Now, we’ve had consist growth in sales and operating income during the past few years and as you know the majority of revenue and profit comes from our operations in UK, Mexico and Canada particularly high returns in Canada and Mexico. We continue to convert markets to EDLP like I mentioned earlier and we’re making progress over reducing cost. This will help drive sales, profits and returns. Our priorities continue to be in making improvements especial return improvements in Brazil and China. I think this is very important to our long term success.

Before I speak about capital efficiency, I’d like to take a minute everyone how we think about using our capital. The first thing, it’s very simple model, it’s about growing the business. So, we want to use our capital to grow the business, either through building new stores or e-commerce business or could even be setting up and standing up our shared services ready to take cost out of our businesses in Latin America. The last thing in investing we would do is look at acquisitions. Acquisitions you can’t plan and we only want to do them if we think there is a very good probability that we can add value to the investment and we’ll add value to our shareholder.

After that with what’s left over we want to make sure we pay a good dividend to our shareholders and what's left over after the dividends, we want to use for share repurchases. Now all of this is built under a governing double AA credit rating. We've been very consistent with this over the last few years.

We are not a company that believes in accumulating a lot of cash, we want to invest in great opportunities and we want to return what's left over to our shareholders. In reviewing how we used our cash last year, we generated over $25 billion in operating cash flow. We invested $13 billion in capital projects and acquisitions, we paid $5.4 billion in dividends and $7.6 billion in share repurchases.

Our philosophy on the point capital is very simple. Over the last few years, we made a conscientious effort to be more balanced with our capital; you can see of our available cash we produced our cap ex spend to around 50% of the total cash generated, that's down from 70% in 2007. Now looking forward to this year, I will not expect to see a dramatic change in these percentages, however the caveat being that if there were an acquisition it could make this percentages significantly different.

Our total company CapEx this year will be flat to down a little bit from the prior year, we spent about little under $13 billion last year and our guidance is 12-13 billion this year. And in back in 2007 just as reminder our capital expenditures were $15.7 billion. So we continue to deliver greater efficiency with fewer dollars. Now this slide focuses on new store CapEx for the total company.

And it's to make a point that we remain very focused on capital efficiency. You may remember back about six years ago, we really got serious about how we spent our capital, we've created a funnel, a fictitious funnel so to speak. We wanted to make sure that we were building the highest return projects and that hasn't stopped; it's just probably gone up a notch.

And as you can see as we did that, we brought down our capital spending and this is again new stores and you can see now the capital spending coming a little bit but we are really focused on gaining more for our dollar.

And in fact our re models from where they were two years ago, we've actually reduced the cost of remodels by 50% And how we've done that is make sure that our remodels are focused on areas that are very important to the customer; those areas that aren't, we don't want to spend it on. Also we are also very focused on reducing the cost of building stores by 10%, we'd like to do that over the next 12-18 months. Now our expense management has very similar focus. And as I mentioned earlier, we've made a lot of progress over the last three years. As a reminder, we're committed to reducing our SG&A to sales ratio by over 100 basis points in a five year period. We just finished the first year of that five year period. We reduced our SG&A to sales ratio by about 14 basis points and that's despite a lot of headwinds I mentioned earlier plus remember we're investing very heavily in global e-commerce and we're investing right now, heavily in our leverage areas.

Now as I've indicated in the past this is not going to be a linear accomplishment, some years we're going to see more reduction than others, we're still very focused and think that the global 100 basis points are still very achievable in the next four years. So how are we going to achieve this goal, there're many initiatives and there's many different levels of initiatives. I'll just give you a few examples. The first one is my guide system we've had out of 12 - 18 months now, it's in place across all of the U.S. and what that does is for an associate, it tells them where they should be, when they should be there and what they should be doing. In the past, they have to go to their assistant manager or their department manager and find out where they wanted them, what they had to do. It's made us much more efficient in the store.

Second thing, second example I would give you is a workflow management system, it's actually a scheduling system, we've had employees for quite a while, every year we continue to fine tune it to make sure associates are in the store when they're needed when the customer's there, and quite frankly we're still not I think, where we should be, we have more room to get better at that.

Another item the Sam's Club, Sam's as you may have seen the pilot for the self-check out convertible register, that's made us much more efficient and much more productive in the club, our membership scores also have gone up in those clubs along with associate scores.

Another initiative that I think is on a different level is shared services, we started standing up as I mentioned a shared services in Costa Rica, it will serve all of Latin America, that will take out costs out of the back offices of all of our operations in Mexico and South America.

Let's turn to e-commerce for a second, now we've got three clear priorities for e-commerce and the first is to penetrate and expand in key markets. We have a very solid foundation of e-commerce in the U.S. and the UK, we have a new and exciting platform of growth in China, and we have a very fast growing business in Brazil and we'll continue to focus on these important markets driving customer acquisition and retention. We've made a lot greater strides in our Polaris search engine, I mentioned earlier, and also our search engine marketing techniques were much-much more efficient and our conversion rates are much better than they would have been just 18 months ago.

All of this is important but it still comes down to merchandise and price. Our own SKU offerings continues to grow and we continue to grow the SKUs offered by our e-tailors who participate in our marketplace and this means increasing our ability to offer a very wider product assortment that provides great value and choice for the customer. It will continue to get even better. We are miles ahead where we were just two years ago.

Second priority is to develop a global technology platform we call that Pangaea. And to invest in additional technology and other areas of e-commerce, we'll continue to make advancements in mobile. We are already piloting a scan and go mobile application and you are going to see more innovation in the new few months.

Our third priority for this year to develop our next generation fulfillment network and that would be primarily right now the U.S. We will continue to invest not only in how the customer wants to shop but how they want to receive merchandise. We are still in pilot phases of our same day delivery for Wal-Mart U.S. but we know we have a very important advantage in our brand and promise along with the 4,000 stores that are within a very short distance of a large part of the population, we are also going to be using dedicated fulfillment centers.

So, the bottom line is, we want to make sure that Wal-Mart promise to save people money so that they live better carriers over as seamlessly as possible to our e-commerce businesses.

Now last we will continue to strengthen our global compliance organization. We have made significant progress this year and we have also restructured some of our organization that will help strengthen our existing programs, those areas would include the ethics, legal, compliance, finance organizations.

Regarding the cost associated with the FCPA issues in our last earnings release we have mentioned that we believe those cost would be around $40 million to $45 million this quarter. The future quarterly cost many vary some but for now I would expect that to be close to that range.

In concluding, Wal-Mart has and will continue to be a very strong company. We have got a strong balance sheet, very strong merchandize in operations focused everyday low cost and everyday low price, strong growth in our markets, strong cash flows along with strong returns to shareholders in a very strong culture, not to mention very consistent results.

Now, before I take questions, Robby, I have thought, I'd address a couple of questions that I have already had today, if that’s okay with you?

All right, the first one is, I know that somebody out there is going to ask if not multiple people, what are we seeing with the customer in the economy and that kind of segregate that into the U.S. and the international markets, I'll start with international, we have seen some slowdown in some of these international markets, that’s no secret you see the economic numbers coming out of most of countries we operate. However there is still lots of very good growth in lot of these markets like China and Brazil. We’re still very excited about those markets.

But the customer is a little bit more stretched in a market like the UK but we feel like we have a very good offering especially in tough times for those customers. In the U.S., the customer continues to be concerned about the economy, our customer is concerned about jobs, about cost of living, inflation of our gas prices and for the first time we’ve seen in a while they are concerned about taxes that hasn’t shown up. We haven’t seen a large or any kind of dramatic change in our sales patterns with our customers related to increased payroll taxes, I know that’s been a question on people's mind, we think any slowdown we’ve seen has been primarily related to the delay tax refunds. But I think it is interesting that taxes are starting the way is our core customers starting to think about taxes.

What’s the outlook for U.S. food inflation? As you know, we went through a little bit of deflation last year in food, there has been a lot of reports about the drought in Midwest and some thought that there would be re-inflation or some new inflation coming out of that. I think overall, our projections would be we just see moderate inflation, nothing dramatic that would really cause you to change your strategies.

And the last really has to do with our the IRS tax refunds and I think I addressed most of that is that that we saw in January and February, most of last year, we sold most of the $4 billion being cash in our stores, this year it is around 2.7. So, there is still some catch up to do and we have seen a lot of the IRS to know what they are seeing. But I have seen some notes from some of the tax preparers that do release public information and they seem to indicate that they are waiting for the last minute to hire lot of people to put to work file some of these refunds.

So, with that Robby, questions.

Question-and-Answer Session

Unidentified Analyst

Great, I’ll kick off the first one. When you look at the U.S. growth, can you walk us through store format priorities, I think though as at a competitor conference they may be highlighted the Express Store format, you have the neighborhood markets and then you still talking about Super Center as being your best return project. Can you help us sort through what the focus or driver growth is going to be in the U.S.?

Charles Holley

Yes. As you know, we are going to build around 125 Super Centers this year in the US, so it’s still a very good return vehicle. The neighborhood markets though have continued to improve in their returns and they are approaching the new ones are approaching what you would see in the New Super Center so we feel very excited about that. And remember we haven't focused very much on neighborhood markets until probably the last couple of years. So we feel very good; we are going to be looking as you know urban and rural markets and I think one of the surprises is the amount of business we have seen in some of our test with the Express stores in some of the rural areas. So we are very excited about it and I think what we've talked about our pipeline right now for neighborhood markets is about 500 units and that will take us through 2016 and the way we do that we feel our pipeline with projects that we would like to do.

It doesn't mean you are going to do every project, you may not get the approval to do them but we have a line of sight of at least 500 projects. That doesn't mean we are kept to 500, it just means that's our current line of sight. If you ask me that question next year, I will probably go out a year and I will give you a number of what will look like from that point. So we don’t know what the limit is when this neighborhood markets but we feel very good about the prospects of having a number of these over the next few years.

Unidentified Analyst

Afternoon Charles, I had two questions; one on e-commerce and one on International; on e-commerce if you look to your eventual game plan four or five years out, is the penny profit that you are expecting from your e-commerce platform, on a pro item basis going to be better than your U.S. stores. Is there any more efficient than your U.S. stores and what is the merchandise mix look like versus your U.S. stores that maybe enhances that and then on International there has been a lot of disruption over the last several years has not really gone as folks had anticipated and I know you are very generous with analyst stays all over the world and I'd have a chance to (inaudible) one of the two on an international equation but can you just spend some time say like Brazil and what's changed In terms of consumer behavior of preferences or shopping channels that they are utilizing that’s caused some of that disruption. Thanks.

Charles Holley

I will take your first question on the returns on e-commerce, I think e-commerce has the ability to be an extremely efficient channel for us. I think our 4000 stores are actually almost 11,000 stores internationally when you look globally. Or distinct advantage force that we are really focused on how do we leverage those; it's not going to be an instant solution, it will take us sometime there will be some successes and some failures, that's how Wal-Mart grew but we are very committed to it and we are very excited about the prospects for it. I do think it can be an excellent return, how high of returns, I am not really prepared to say, I know Neil thinks we can do well over 20% in the not too distant future, not in the next year or two but he feels that we can do 20 plus percent return to that business pretty easily.

And you're next one on Brazil on what's going with the consumer. Brazil, I think like some other emerging markets, took a little while for the financial meltdown in 2008 to really kind of effect, it's built on a lot of consumer credit, and I think you're just seeing a little bit of a softness, we still saw very healthy sales in Brazil last year and we would expect to see healthy sales this year, maybe not quite at the level that you would have seen in the past but it's a remarkable market. You're still having a lot of conversion with what we call the informal market to the formal market, so even as the overall, the formal economy may soften up a little bit. You're going to get growth just from the conversion of the informal market to the formal market.

Unidentified Analyst

I guess I have three. The first one is when you say that you think e-commerce could achieve a 20% return. I assume that's not an operating margin return, is it a return on invested capital?

Charles Holley

Return on invested capital, 20% plus

Unidentified Analyst

Okay, and with respect to the Wal-Mart stores business, what kind of comp store level must Bill Simon achieve on a secular basis in order to continue leveraging.

Charles Holley

I think they've shown that they can lever even when they have a flat comp, there is a lot of expense still take out, now having said that it's a lot easier to lever with good sales. Last year they had a 1.8% comp and they levered 27 basis points, so we don't have a number that we can tell you that we a sensitivity analysis and say well at this point we just can't lever anymore, that's not really in our DNA, we believe we can lever at almost any level of sales and put in on the bottom line or at least put it in pricing.

Unidentified Analyst

And finally with respect to international, can you in effect, achieve the improvement in international return without getting a positive inflexion on traffic, since traffic I guess has been problematic across most of your markets for quite a few quarters now.

Charles Holley

Especially I think the fourth quarter where we were culling that out, you know it depends on the market, internationals are not all the same, not all markets are the same, if you look in the UK there's very specific reasons why traffic is probably down, a lot of that has to do with the economy there and not with us. I think we have very solid operation there, you know as far as, we're going to make price investments where it makes sense and where it doesn't make sense we won't. So we may hold back some of those price investments where it's not needed, we don't think it's going to be elastic on sales and we're going to go ahead and take it to the bottom line, that is part of our intent in the long term and specially a country like Brazil.

Unidentified Analyst

Two questions. One on the International, you mentioned that you are rolling out EDLP worldwide. Presumably that includes the UK as well and the UK is a significant contributor besides Canada, Mexico to your International profits. It is my understanding that the UK is going through a potential protracted price war with the market leader, Tesco, hurting a lot in terms of its own performance and a new management team at the helm that seems determined to alter some of their management practices. How does that affect you and your strategy there and is there a risk of this protracted price war being a function not just of the weak economy, but of excess capacity in the full retailing industry, which clearly is what you participate in? And the second I’ll hold.

Charles Holley

As far as the UK market, one of the things that we have learned in the UK and other market is that we need to stay true to who we are and what we do best and that’s Every Day Low Price. And if you followed us and ASDA over the last few years, there was a time, I want to think about six years ago that we got offer of very little price and we had to work hard to get back on it. So if learning lesson is, it’s a very tempting to get off an everyday Low Price and start going into high low but we need to stick to our game and always serves as well. There had been retailers in the UK as you know they gave on price that didn’t do well or they gave upon all their margin with some of the high-low activity and they never recovered the profitability. We continue to grow our profitability, continue to grow our sales and we believe that Every Day Low Price is really the way to go.

Unidentified Analyst

So you are not concerned about protracted price war and increasingly promotion on market preventing you from achieving your return objectives in international?

Charles Holley

Well, if you have been around the UK market there always seem to be a price war, whether it’s with (inaudible) Morrison or Tesco. So, I don’t think it’s anything do to us and how we operate.

Unidentified Analyst

All right, the second question I had was on e-commerce and what you mentioned about investing in the next chain of both the technology but also the fulfillment center, could you kind of help us understand, people who followed the traditional retailing formats, online e-commerce is a still in some senses a virgin opportunity for players like yourself and others, how do you intend to compete with the traditional incumbent on that e-commerce space which is Amazon and how should we think about the roadmap that you have in that initiative.

Charles Holley

Well, we think that we have a huge advantage and having 11,000 stores around the globe, not all of our e-commerce competitors can say they have that. We need to make sure we leverage those stores. That would obviously, we have to do a same day delivery. We also know that we have not been good at the technology part of this, but we're catching up quickly with our search engine and how we market on the internet. We know our growth rates and our global e-commerce business far exceed the markets that we operate in on our key markets. So, we think we're competing very well from where we started from. We have a lot of work to do to make sure we’re more efficient and getting the products to the customers but we feel like that we have the tools to go do that. So, we look forward to the competition. And by the way, we think our brand promise speaks very well to internet customer. And that was the first part of your question. Saving people money living better, it’s no different for the internet as is brick and motor.

Unidentified Analyst

All right, Charles a couple of grocery questions, one would be, how are you guys currently viewing private label, any reason to be pushing private label and why or why not? I have another grocery question after that.

Charles Holley

We don’t view private label maybe like some other retailers. We are a brand retailer, we like to sell brands. We use private label to fill in gaps where we see there is a value gap for our customers. So, it’s really very depended on a category or subcategory. Now, having said that, we are improving our private label, you will - at the quality even the packaging is changing. You will see more, I think private label in certain categories later in this year. But it’s not a strategy to replace or pump up profit; it’s really a strategy to have an offering of value that’s just not there right now for the customer.

Unidentified Analyst

Maybe, related to that, a lot of the supermarkets have seen a gross margin tailwind from the shift to generics. Can you kind of frame for us how that has played out for Wal-Mart and how you expect this player going forward?

Charles Holley

Well, as you know that we came up and drove between the $4 generic and that’s been very good for us. It drive royalty, it drives traffic and there will be more of that as more drugs go generic and we feel very good about where we are positioned right now in that game. And I think that that’s place so what we do well, there is heavy traffic, a commodity type approach, there is still a lot of profit in generic as you pointed out as you were kind of pointing out. And we feel like that we can offer the customer just great prices on that and drive a lot of traffic.

Unidentified Analyst

With New York City transit authority and some other agencies coming forward with these trends to release public lands for development. Is there any change in the deck of cards for New York City?

Charles Holley

I have nothing to announce right now, but thank you for asking. New York is a great market and we feel like we can offer the customer just great prices on that and drive a lot of traffic With New York city trans of authority and some other agencies coming forward with these plans to release public lands for development, is there any a change in the deck of cards for New York city? I have nothing to announce right now but thank you for asking.

Unidentified Analyst

Charles, a lot of your food competitors use gasoline as a traffic driver, can you remind us what you guys are doing to compete on that front? And what you could see happening going forward?

Charles Holley

Just a reminder is that we own our own gas stations at Sam's Club; we tend to farm those out to other companies specifically Murphy oil at a lot of our Wal-Mart sites. But it is a good traffic driver and above those channels whether you own it or not and it's interesting on the Sam's Club it's kind of counterintuitive a little bit but you think about it makes sense. If you are really going to be competitive in gas, it's like in Sam's club, you only make money when the price is decreasing. You think you are make money when it is going up, you only making when it is decreasing, if it goes up because the pricing lags goes up you really don't, if the cost goes up your pricing lags that cost, so but it is a good traffic driver we do think it’s a good benefit for both channels, both of our retail channel and our club channel. And you will continue to see us to develop gas sites, whether our own or through others. I think its key, I should also add Robbie I think it's key to being a one stop shop for Wal-Mart.

Unidentified Analyst

And Charles you mentioned a bunch of the macro; you mentioned some macro head wins at the beginning of the conversation ,can you remind us which ones matter the most to your customers, is it gas prices, is it house prices, is it tax increases, is it?

Charles Holley

Yes, the first thing is jobs, number one, the second would be taxes which was the real surprise to us recently because we haven't seen that rise to the top three, I don’t think Carol in a long time if ever. The third would be cost of food and then higher gas pricing. Gas prices typically depending on what's going on can jump up real little quick also. But those will be the top ones.

Unidentified Analyst

We had a slide on investments and technology , I was wondering if you would add a little color on where you will be making these investments and what you are hoping to drive with this, if they are going to be taking away a disadvantage or providing an advantage for you guys going forward.

Charles Holley

I would say providing an advantage for us, you know I talked about our Polaris system, our search engine which has taken us a long way to a short period of term in our search. Also our Pangaea is our platform our global e-commerce platform, and that will take us a while to build out, and it will take some investment, but we want to have a common global platform that can flex to the market, right now we have different-different technology we're using in some of these markets, so we need one common platform and we think that will take us a long way. Mobile technology is another small part of investment but important I think. And it'll go with the scan and go that I talked about, we’ll also work with providers even like our MCX in financial services where we'll use a standard to try to work directly with banks, some debit and things like that, so it's going to go in a lot of different directions.

Our investment in acquisitions we don't talk a lot about it, they're not very big, but we've also been acquiring talent over the last 18 months with small acquisitions. Some of these can be as small as two people acquisitions, but they have expertise that we've not had before and it might help us with mobile, it might help us with how we combine mobile with the checkout experience in the store, might help us with how we use our marketing dollars for search engine, so it's going in a lot of different directions, we're much more sophisticated than we would have been like I said 2 years ago.

Unidentified Analyst

You've flagged investing in your compliance activity as one of priorities for this year, do you expect to have the main bulk of that investments or the main improvement in that process complete by the end of the year or what is the timing?

Charles Holley

I don't know that we'll be complete by the end of the year, and I don't know that I can give you a specific time when it'll be done, I don't expect that we will see continued increased costs for compliance after this year, even more, we've substantially increased costs, we wouldn't think it would be too much more than what we're seeing as far as setting up compliance cost. What we didn't finance for instance really didn't cost us anything; we just reorganized how finance is structured across the world and where it reports, anyway cost us anything. We did set up and have set up more of a formal compliance organization globally, and we've bought in some very good people to help run that and help us with that. That does cost more and you bring in some outside but I think it'll continue through this year and then we'll have to see it next year.

Unidentified Analyst

I was wondering if you could talk a little bit about several categories in the U.S. business, apparel consumer electronics and media, you had good quarter for apparel in the fourth quarter that you are pleased with, what’s your learning there for the go forward and now it’s back to basic and doing basics well. But if you could expand on that, consumer electronics is a category that’s very important for you but from a category prospective it has been disappointing and what’s your outlook for that and what do you think to do with that real estate and then lastly you know media obviously it’s not going to coming back as a category but it had been historically a traffic generator what do you do with that space?

Charles Holley

There are plenty of categories, take the last one, there are plenty of categories that we look at and review and what make sense for us. There are no major plans to readjust the real estate within the store but we are always tweaking it and that will continue. What was your first question?

Unidentified Analyst

Apparel.

Charles Holley

Apparel, yes. You said, you knew about we have got back to basics well that was the lesson and we have learned it painfully now, a couple of times since I have been with the company is when we try to go too far outside of what we are good at which is basics and what I call fashion basics when we start going fashion forward, we lose our customer, that’s not our core capability but when we get in, we really focused on basics, we bring in good brands for those basics and good quality and great value, we do pretty well and we saw that this last year.

Unidentified Analyst

Electronics?

Charles Holley

Electronics has been important. You have mentioned, I think you have mentioned media or music?

Unidentified Analyst

(Inaudible)

Charles Holley

Yes, and it’s amazing to me but the TVs keep getting bigger and bigger and our customers seem to buy them, they are buying 60 and 70 inch TVs a lot other and we sold tablets, as you know do very well for us and you know electronics, I came from electronics industry before I came into Wal-Mart and it really does rely on innovation and (inaudible) particularly, it really relies on getting the price point down so that it can affordable to the average consumer and when we does that when you have innovation that finally gets the price point down, Wal-Mart plays extremely well on that but you do have to have some of that. What’s interesting as you saw probably last year, we started putting back in those dump bins and DDDs which are now DVD (inaudible) now, those two are very well, it’s amazing those $5 dump bins, they do very well.

Unidentified Analyst

Charles could you speak, back there, to Wal-Mart money, your financial side in terms of where the business stands now and what the vision for that is both domestically as well as internationally?

Charles Holley

Sure. First of all it has many different faces to it whether it’s in money cards, with the New American express Bluebird or it’s a MoneyGram’s or whatever it is and the newest one as you probably know is our partnership with the American Express on this Bluebird Card and it’s been very successful still in early days we have about 600,000 of those cards out there. What I think is so great about the card is it’s very-very low cost, you can be able to write checks on that card and for a lot our customers whether they are unbanked that’s a really big deal because a lot of the cards that compete with us out there, there is a monthly charge, service fees and it really eats up and they don’t have a lot of money they can afford which brings me to what we are trying to do in that space in financial services. Its fine where there are value gaps, again kind of like I talked about private label on food, we’re looking for where there is a gap, there is not good value for the customer and how can we provide that? Either our sales or with a partner.

Unidentified Analyst

And can you give us some sense of the metrics of that business?

Charles Holley

We don’t disclose a whole lot about that business. It’s a not a huge part of our operating income, but it continues to grow and be important but it’s not the primary, it’s an ancillary part of our business.

Unidentified Analyst

Charles, on international you mentioned shared services, I think in Latin American and Walmex is one of the ways you can get the profitability of international. Are there other things going on that could get the international operating margin up over the next few years?

Charles Holley

Sure. There, I mean, I talked about Brazil just as reminder that Brazil’s made up of a greenfield startup we did in ’95 with super centers in Sam’s Club then we did an acquisition in the North with the (inaudible) stores and then acquisitions in the south which was (inaudible) but we’ve never fully integrated those three. So, imagine the excess cost that we have that’s a big a focus of our drop now is getting these three entities integrated whether it’s a merchandize systems or whether it’s in financial system.

It’s easier said than done, if anybody has done this is in Brazil the tax structure is the most complicated in the world and it’s not that easy or we’ve would already done it. But it’s very much important. It’s got very important for our long terms success to be able to do that to take cost out. So, that’s just a little mini part of what we’ve got to do.

Working for more and more ways where we can take out redundancy across the company if you want to look at, the shared services is a big part of that. But anyways, that’s to give an idea, I know Brazil where - I think we have some huge opportunities for us.

Unidentified Analyst

Could you talk about the opportunity you have to address providing more value and living better for your consumer in the services space. You have clearly done very good in the goods space but how can you sort of extend and I don’t mean financial services, I realize that’s a very different kind of set up for you. But is there an opportunity for you to extend what you can do for consumers because increasingly of course the U.S. has always been a service economy but what can you bring to the table and how do you think about that opportunity for yourself?

Charles Holley

Well as you mentioned, our core business is about goods; it's about item merchandise. However, I think you hit upon a good point, we do look for an answer like I talked about financial services. That can be very important to our customer, we have such high traffic, a 114 customers in the U.S. right in our stores every week. What else on a one stop shop can we provide; I think health care is one we haven't cracked that yet but that's an opportunity for us, we have tested some clinics and things like that, we have not rolled out anything in a major way but I do think it's things like health care, financial services that a one stop shop can be very helpful to the customer so we will continue to look at those things.

Unidentified Analyst

You commented about one of the things that drive electronics pricing; over Black Friday I believe you offered a 60 inch flat panel for like $699 if you get one. I didn’t but I am wishing I had, it seems like panel pricing in the far east, as moving towards being supportive of a price, you know not far from that, based on your demand for that; could you see a potential upgrade cycle where Americans upgrade their 42 inch living room TV to a six feet.

Charles Holley

I did.

Unidentified Analyst

And I think you are hitting the point, it definitely, I do not know where prices are going to go but one thing is for certain, In my lifetime I think you are going to see consumer electronic continue to be driven to prices driven down every year and that is going to make those kind of 60 inch flat panels very affordable for the average customer and so yes I do think that people have been switching out their 42 and I think that is why we are selling a lot of sixty inch TV right now. Especially around Super Bowl and those kind of events. Otherwise Sam's says a 90 inch in case you are interested.

Unidentified Analyst

Charles, some of your competitors have had success with loyalty programs, companies like Kroger, one of your competitors Target has come out with their red card 5% off, I'm sure you guys have evaluated these programs, can you share with us, what, why or why not those programs would not make, would or would not make sense for Wal-Mart.

Charles Holley

Absolutely, we believe that all of our customers deserve the lowest price possible not just certain customers. Also, those are some very good programs and you learn a lot about those customers that participate but some of them are also very expensive programs and we don't think that that serves everyday low cost and everyday low price. But the bottom line is we think we want to offer everyday low price to all of our customers and they don't have to be in a certain special group.

Unidentified Analyst

Charles, can you talk a little more about what's going on at Sam's Club down in Texas, lot of us don't get down there that often. I think there is a, I think that Sam's was discounting memberships (inaudible) with one point and maybe just give us some color on and also what's the holdup on rolling this out to the rest of the U.S.

Charles Holley

Yes, what Robbie is referring to a couple of things, we did a test on living social I think a week or two ago, last week. Got a lot of interest, it's just a test, I wouldn't read anything into that. Very successful test but then it's our first time to try something like that, and so far early returns that were very good. The Texas test has to do with giving cash back for plus members and what we're doing there. And it's still in test mode, we don't have enough analysis yet to be comfortable to make any assumptions and conclusions on what we ought to do on a national basis but I would stay tuned.

Unidentified Analyst

Bill Simon's not here, but if Bill were here and somebody was asking him why we should feel confident that same store sales in the U.S. after a slow start to February could pick back up and get back into that type of comp range that you were in last year, what would he say to us, would it be further breadth of assortment, would it be price investment, you know what.

Charles Holley

It’s a good question, I think there's a couple of things I think of, first of all regardless Robbie of what's going to happen with the economy, I think we are much better prepared to deal with a customer that's a little concerned about economy, jobs, taxes than we were three years ago, two years ago. Bill Simon and his team has done a fantastic job of regaining that trust and bringing back the SKUs they needed to and so the customers can trust, where they are going to have a product they wanted, when they wanted it at a price that they wanted to it.

Going into this year, one of the exciting things I think you are going to see is, as you know that we have started working with Nelson, data on food consumables and OTC and we are being able to work a lot more surgically with our vendors on items and I think you will see innovation in some of our items coming out here this year, it’s making a lot easier to hone in on where we have gaps in value, where we may have gap in a product assort or a pack size or whatever, so I think you will if you use that much better, much more smart way that we have in the past because we didn’t have that kind of data, we might have known ourselves, we down but we did know that we were doing well for the market share, now we know and I think it’s getting us a lot more information.

Unidentified Analyst

And as you look at store growth, should we expect, you would be targeting the coasts more California, more north east or is it pretty spread out?

Charles Holley

I think it’s pretty spread, I have mentioned earlier, it’s going to be a large format, small format, it’s going to be some urban, it’s going to be some rural and when we see some great opportunities in some areas are quite frankly they are not big cities but I call them a little bit food deserts in a way because the competition there is not very good, it’s never had to be very good and I think it produces some great opportunities for us to have some great stores and great returns in. Same with urban, I think that we still have some great opportunities in urban markets.

Unidentified Analyst

Just back to our grocery question, in the U.S. there is definitely a movement to real food and food with that authenticity and the food that’s good for you, that taste good, just as the largest grocery in the nation, how are you looking to change merchandizing mix in grocery to see those changes in consumer behavior.

Charles Holley

If you watch this over the year, as you know that we have put more organic in our assortments, you also know that we are partnering with a number of vendors in the universities looking at sustainability type, indexes the consumers can rely on to understand the food that they are eating. We’re not for trying to tell consumers to what to eat, but we are defiantly, we want to work with our vendor partners and others in the government to help educate consumers about what they should eat, what’s good for them, we think that’s very important.

Unidentified Analyst

Can you provide just a little more color on your comment that you don’t think that payroll tax has hit your customer or hit yourself, or is it surprising?

Charles Holley

Well, the best way I guess I can tell you, when we saw the slowdown in sales in the end of January, we went back and we were trying to sort out what it was and we knew that checks from the IRS, the refunds checks that we want cash and nears as many if we were. So, we charted daily cash, daily checks that we’ve cashed in the prior year and this year and looked at the comps prior year this year and there is a distinct, I mean very direct correlation on our comps and those checks cash. The payroll tax, if you were to do the same thing, you wouldn’t see near the correlation. So, we’re not sure what impact of any that’s had yet, it’s not been significant. But we defiantly saw the delay in tax refunds, you can definitely see the direct correlation. Does that make sense?

Unidentified Analyst

Okay, terrific thanks Charles.

Charles Holley

Thank you Robbie.

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Source: Wal-Mart Stores Management Presents at Bank of America Merrill Lynch Consumer & Retail Conference (Transcript)
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