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Wal-Mart Stores Inc. (NYSE:WMT)

Raymond James 35th Annual Institutional Investors Conference Transcript

March 4, 2014 10:25 AM ET

Executives

Bill Simon - President and CEO

Carol Schumacher - Vice President, IR

Analysts

Budd Bugatch - Raymond James

Budd Bugatch - Raymond James

Good morning. Welcome to the Wal-Mart Stores presentation. I am Budd Bugatch with Raymond James. With us today we’ve got Bill Simon, President and CEO of Wal-Mart U.S.; and Carol Schumacher, Vice President of Investor Relations.

Without any further ado, Bill, the floor is yours.

Bill Simon

Thank you, Budd. Appreciate it. Thank you all for having me. It is great to be here today in warm Orlando and very happy to be have escape the freezing weather and ice that’s chased us out of Bentonville.

We will be making forward-looking statements, so please refer to the website for additional information. Hopefully, this will be the dullest portion of the presentation and not one of the highlights.

So let's move on, I feel, let’s say, this one, yeah, here we go, let’s start there. Compelled just talk about what happened year, we will just start with a bit of an overview, but I don’t want to dwell on it very long for a lot of reason not the least of which is that hopefully you will have quote over the results.

Clearly, we could have done better in sales comp, sales particularly, though total topline in the U.S. was around 2% for the year. So make external headwinds and we talked about those snap, weather was a real challenge all the way through the fourth quarter into this week in fact.

Some internal issues, we started the year out with some challenges around processes that led to staffing and in-stock challenges that we caught up with about mid-year, but nonetheless, always an opportunity to get better and we are focused on that. We were able to learn a lot and grow a lot about our current fleet.

And it isn’t all bad news, we are working on improving, I gave this number out at our Analyst conference in October and it’s still hold true today, about 10%, bottom 10% of our fleet have an impact between 90 and 100 basis points on the whole year.

So if we just had the top 90 and not the bottom 10, we would have been about 100 basis points better in comp then we recorded. So we are working on that bottom 10, making improvements in that area and we saw improvements in the fourth quarter in those stores and that, expect that to continue.

Several bright spots, we grew market share according to NPD and Nielsen in every category that we measure, despite flattish comps and we had some real highlights in our Small Stores, Neighborhood Markets and Express, in our E-commerce business, in our Fresh areas and in our Home and Apparel businesses. So not all bad, lots of opportunity to get better and we are going to be working on that.

I showed this chart in our October and its something that I use to remind myself and others that we are company of innovation, innovation in retail started when Sam, started the five and 10 and moved to discount, broke the model and rebuild it with supercenters, replacing the discount stores.

We launched two formats, Neighborhood Markets and E-commerce business around 1999 and now we are on -- and excited to be on the edge of a new transformation in retail that we believe is gong to be a new inflection point.

As we move forward, we expect the supercenter to remain vital. This is a powerful beast in profitability and in sales, and it is healthy, has its opportunity to get better. Clearly, we talked about that and we are working on that. But about 3,200 units, 80% of the fleet and they really perform well particularly in this stock-up occasion that is about we valued to be about $585 billion. We have the ability to reflect prototypes all the way up to 200 all the way down to 70,000 square feet and we're doing a really good job with affiliate -- with the stock-up trip.

Where we’ve been challenged, is in the fill-in trip. The -- in between shopping trip, midweek shopping trip and this growth and quick trips about $415 billion in sales has been interrupted our growth, supercenter growth and this area has been interrupted by a rapid growth in smaller stores, dollar, drug, hard discounters and others.

Our number show about 11,000 in the last three years, 16,000 new doors open since 2005. We now have an opportunity with Neighborhood Markets immediately and Express in the medium to longer term to really, really make an impact in this area and I’d like to spend some time today that I have with you, talking a little more detail about these two formats that collectively we've been calling small formats, but individually are really just Wal-Mart stores, little betty supercenters, medium-sized supercenters, all the way up to our large supercenter fleet.

Neighborhood Markets for us in the fiscal year that we just finished, grew 40%, about four comp for the year, five comp in the fourth quarter. I'm not sure I know any other retail format that grew at 40% and had comps like this, real pleased. This fiscal year, we project to do over $8 billion in sales in Neighborhood Markets.

Interestingly enough, when you compare sales per square foot of these stores to the major leading grocery chains, we top the major grocery chains in sales per square foot. Also interesting stat for you is that every fleet year of Neighborhood Markets that we have from the first year right on through the last year that our comp had positive comps last year. So there -- this isn't being driven by the recency of the build of the comp sales, every year group of the fleet was positive comps.

Customers love the format, its Wal-Mart prices with easy access and we are describing the store as a hybrid store and I will get into it more about that in a minute. It's designed to not only compete in the grocery space, but across a much broader space. Internal data shows that a traceable tender in other source, sales sources show us that we are capturing new sales dollars, new trips and new customers when we put these stores in.

Interestingly enough, you can put a neighborhood market in close proximity to a supercenter and we see an additional $300 a year from customer spent based on traceable tenders. So, it’s just additive to our business because they are different trips, because they shop differently, stock-up trip at the supercenter on the weekend, fill-in trip at the neighborhood market during the week.

We also have had great success in new markets and with new customers who are now accessing our brand in a more convenient way right in their neighborhood. As I said, performances has been really good and build throughout the year, very solid in traffic gains, great pharmacy business. Our producers been doing very, very well. Every metric that we have been looking at is good in the stores, so we are very pleased with performance.

We had previously given guidance that we would be at a $10 billion by fiscal ’16. I think we’re going to easily meet or exceed that. So, I’m not changing that. I want to talk to you about the hybrid nature of the store and this is really what’s exciting about it. It plays across a wide spectrum. They will all be enabled with fresh food, fuel and pharmacy as we go forward.

Those are the decisions that we’ve been made. Very effective in urban and suburban locations for us and they complete against a wide variety of formats, sort of see a little chart across the bottom, dollar, grocery, drug in ecommerce. We have Wal-Mart prices. We have gas for the trip, pharmacy in each and every taste. So it’s a pick dollar as an example.

They have got prices but we’ve got fuel and pharmacy and fresh and connectivity to our Walmart.com, E-commerce network, which we believe is a competitive advantage, so just sort of think about it. You can order from Walmart.com and pick up what you like when you stop and guess at one of these locations, very differentiated. We see this as a great opportunity going forward. This format has a long runway in front of it and you will see us and you would heard us more recently talk about the acceleration in this format.

Let me shift quickly to where we are on Wal-Mart Express is stages of learning for us. When we build the first, opened the first group of them in our fiscal 2013, it was kind of if you build it, will they come. Will there be topline, what sort of traffic can you generate and what will sales be? Answer, yes, they will. It will become sales of exceeded what we had projected and we are very, very pleased with the topline.

During that timeframe, we also tested a few other things, urban and rural. We tested with gas, without gas, with pharmacy, without pharmacy. We have the best results in rural and the likes of suburban with pharmacy and with gas, and that’s exciting for us, a very nice model there.

The next step for us was to understand whether we can build it and they will come. Second question is, okay, can you make any money off of it? So we built a bench group of them in eastern part of North Carolina. And the answer is yes, we can engineer the supply chain and operations to the point where we like the profitability, so we are pleased with that. And by the way in the second year, they did really nice in comp sales.

Project tour, we are headed for now is we have a paper model of what we think this will be nationally and it’s significant. We now on a go-to-markets and determine whether that invalidate that paper model of how many stores this will be, by learning how they interact and intersect in high share markets, low share markets, high competitive density, low competitive density and various ethnic skewed markets. So that we can then take paper model, validate it with real world learning and determine where and how fast to go forward. We are very excited about the format, particularly the top line and we believe we can continue to progress on the bottom line.

This is again -- this is a full capability store, has fuel and pharmacy and fresh and 10,000 SKUs right in your neighborhood, right in your zipcode and fundamentally different and differentiated from the other formats that would compete in that space because of the breadth of the offering and the connectivity that we have through walmart.com. That we believe we can build and are building into a competitive advantage against the entire spectrum of retail from pure physical to pure digital. That intersection is the space that we believe is very strong for us.

Similar chart to what you would have seen in Neighborhood Markets because we believe this two is a hybrid store, again competes well against all of the relative set of retail competitors that they would have with a bit of rural skew because we can reach customers one more concentric ring out that we weren’t otherwise able to do. The connectivity that we’re working at online is truly fascinating, it’s worked that we have from learnings at Asda in our market -- in the market in the UK where we operate and we are bringing this capability to the U.S.

We have started as many of you have heard in Denver and I cover that later with the grocery pickup opportunity at our supercenters. Later this year we will be evolving into building the capabilities and opening three markets where we have a fully tethered distribution system and a fully tethered retail operation. And I will just take a moment to explain what that is.

A small store connected to our Walmart network is the biggest which means the distribution system, the E-commerce system, and the supercenter network. So if you are on your way home today from wherever you are, you can and you know you need to stop for gas, you can place your grocery order to be picked up when you get your gas. And if you want to shovel or to shovel your way out of the driveway when you get home because it’s not just warm everywhere in the country, you can also order that and it will be available for you.

We can do that by May. We will have one market up later in the year. We will have two other markets up. And that’s a very, very exciting proposition for us. We are testing and building new muscles in our real estate group as you build Small Stores fast and transition from supercenters where we still build some supercenters next year, though a large percentage of those will be relocations and expansions.

But the muscle that we need to build in real estates, lower cost CapEx, speed to market, shorten construction time has allowed us to accelerate the build-out of some of these stores. They have done a terrific job in that group. And so when we met in October at the Analyst Conference we talked about. I was asked the question, would you accelerate this or can you accelerate it? And we said, we are looking at it all the time and we will if we can. We saw that opportunity and we added as you would have heard at our earnings release -- around our earnings release a double -- doubling of the planned growth.

So we are going to add about 300 or so Small Stores next year that consists of about 200 Neighborhood Markets and about 100 more Express stores. The Neighborhood Markets are pull forward of an establish pipeline from -- that was scheduled to be built next year and the Express stores are much more easy to cite. And you will be see those open in that -- in that pattern of those -- of that I described to earlier in density and modeling what would the national rollout look like.

It's exciting. We think that we have come a long, long way in this -- with these two formats over the last three years. We’re excited about that opportunity. We believe they represent tremendous growth potential for the company in a retail space that is defined on one end by digital and on the other end by pure physical. These provide the ability to compete as I have talked across the wide array of competitors -- wide array of competitors in many, many different spaces.

No need to build the drug store, we have these. No need to build the dollar store, we have these. No need to build the grocery store, we have these. And as we were describing it, there are Wal-Marts, you can call them Express or you can call them little supercenters. 10,00 items are available immediately, the rest of the assortment is available through our logistics and digital network you wanted in an hour, we can get it to you. You want it in a day, we hope to be able to get it to you, the way you want it, where you want it.

Neighborhood Markets have about 25,000 SKUs supercenters more but all connected one Wal-Mart from the smallest store to the digital realm. It’s a very exciting, very exciting time for us as I said another inflection point opportunity in our business. In order to deliver this, we need to continue to build skills and muscles and strengths and you would have heard us talk a lot about each one of these things or some of them, maybe not lot about all of them but these are the components that have gone into and will go into how we go forward with these small formats and opportunities for us to continue to learn.

Building each and everyone of these things potentially is modules that could be dropped in to large stores or in different locations or in new places or maybe just totally virtually Scan & Go mobile self-checkout, you heard us talk about that. That's beyond the test phases and the data phases and the implementation.

We have lockers that we use effectively in the U.K. and we roll them out in the DC Metro market. Customer response has been very good. Grocery delivery and pickup is something we have the capability to do. We had in -- at our business in the U.K. for a long time and we believe that the U.S. market -- when the U.S. market is ready for that, we’ll be able to roll that out at a rapid pace.

We’re really excited about a drive-through format where you saw us launching attacks to a supercenter in Denver. We’re going to try some other interesting things with that standalone attached to smaller stores, lots of opportunities for us to look at that. Wal-Mart on campus, we have a few of these, interesting, wonderful little stores that give us a lot of learning about how young people shop and how they carry their habits forward when they leave the store. And convenience is an emerging area that interests us as well.

So lot of exciting things, all coming together around one customer, one brand, all the way from one end of the physical realm to the other end on the digital realm and our opportunity to serve customers, the way they want to be served, where they want to be served and more importantly -- most importantly when they wanted to be served, all at the Wal-Mart, all at the Wal-Mart price.

One last little bit here and I feel compelled because I won’t go anyway of these days without talking about the transformation that’s going on in the U.S. economy today, around -- the opportunity that we have as a country to reestablish the manufacturing base here in the U.S. For us, this is in a program, although it's manifested itself that way. This is real. It's economic, it’s math, it’s working and almost generational shift because of the land, labor, transportation and energy components that exist today around the world.

There is an opportunity for us to rebuild the manufacturing sector, not in every category, not in every place but right now we’re working on 140 active projects. And we’re not doing this as I said is a PR program. If you can meet our standards and our cost requirements, you can make -- and make money, you can do it in the U.S. and we’re seeing suppliers come to us.

Emergence of the middle class in China and Indonesia in general has increased the demand over there for locally made products. This is to take the factory from one place and close down and move it to another place. The next factory should be built closest to the point in consumption and if you think about that, that's where we are. We’ve had great success in certain categories.

The biggest -- best example I can give you because that was the first one we announced was a towel manufacturer, who -- 1888 mills we used in one of our conference -- at our first conference. They were one of the early movers in this. And so a year later here we are, we’ve now got that product in about 1200 stores. We were able to get it to the customer fully loaded all the way for the same cost and the sales of the products are up 24% over the item that we placed. So customers want it. They don’t need to pay more for it, made in the U.S. is viable and capable and we are really excited about it.

Let me end the presentation before I take some questions with one of the best television commercials I have seen in my business career. We aired this, the first one on the Olympics and it is -- for me its stunning and I think it describes the problem and more people that we can get that are involved in this effort in industry, in analyst and in our fellow retailers, the better off we’re going to be as a country and let’s see if we can run that.

[Advertisement]

Thank you.

Question-And-Answer Session

Budd Bugatch - Raymond James

We do have about 10 minutes for questions and so let’s take them from the audience.

Unidentified Analyst

So I am curious about the Express format, the thought of it being more of a rural market, you obviously have a disproportionate share in rural market, that's where you dominate. So I would have thought that the opportunity would have been more, you can get real estate in Express format much easier than city centres where your share is significantly lower, so just help me bridge those too?

Bill Simon

I am not saying that it’s not an urban play. The neighbourhood market is really effective in that space because of the extra square footage. And so we’ve been looking for opportunities to build that format out in those spaces before you get into the real Small Stores.

In those kind of rural markets as we have described them for Express. The model when the supercenters were build and this is 10 miles from a supercenter would have been not no retail between here and there, right, or maybe its, some local retail. But in the intervening period there has been dollar and drug intercepting that trip. So the rural market is a great example of what I was trying to describe.

We have no problem with the stock-up trip in the rural market. Weekends and evenings are really terrific. The basket sizes are up. Our market share is pretty strong. The mid-week fill-in trip for 15 mile drive for a gallon of milk is now been intercepted by other competitors who built some of the Small Stores.

And so we thought, well, lets go built a small store that takes that back. We didn’t really want to do that. What we wanted to be able to do was provide the same experience that you get at a big store and a small store closer to the customers.

So, now I just view them, you call them Express and we have internally debated about what we call them. There are many digital supercenters, virtual supercenters, the fuel, food, pharmacy is available immediately along with 10,000 fast moving SKUs, everything else we sale is available digitally.

So it’s the full supercenter offering, in fact its a full online offering with the portion available immediately, a portion available on an hour or one day and the portion available in a day.

And we are viewing Neighborhood Markets similarly for -- so you understand the trade area build the rightsize box, keep a portion of the fast moving items right there and then carry the rest through your digital platform, that sort of how we are looking at it.

Budd Bugatch - Raymond James

Is the pricing the same between the large format and the small format or are you charging more for the convenience that you provide?

Bill Simon

It starts out the same. Let me put it to you that way. The aim is for it to be the same and we don’t charge more for the convenience. Some times we actually charge less for the competitive nature.

So we are thinking and our plan is that, we are an EDLP retailer and we built trust that you can get the product for the lowest price. And in a market where, so we set the price, the price is, I won’t say nationally, but we set them based on the cost delivered to store by large category areas, right.

So if you have a supercenter 10 miles away, we start out with the same price in those two stores. If the supercenter is hypercompetitive against a store across the street to the point where they -- we meet and receive competition, we meet competition's pricing all the time. We may lower the price at a particular store and so it might actually be less here than it is here, but it’s not because this is higher, it’s because the urban or the hype and more competitive intense store has lower prices where competitors have lowered the price for an ad or a week or a period. If the pressures would go off there from a competitive standpoint, the prices would be the same.

Bill Simon

We match locally and same thing with the small store, if we have local competitor who are selling a product for less than us, we will match that price. That's our business model. So we start the same and then we match where we need to.

Budd Bugatch - Raymond James

Bill, when you described the tethering concept at the Analyst Day, I though it was one of the most innovative things I’ve heard in a long time. And that project is supposed to start this month I think. Is that correct?

Bill Simon

We’ll open the first completely tethered store on May 2nd.

Budd Bugatch - Raymond James

On May 2nd, okay. And explain that, can you talk about how that works and maybe also give us a little bit of idea of the progress of the Denver and the San Francisco test?

Bill Simon

Sure. The tethering is the full connectivity. I guess, it’s a short-hand for fully connected and fully connected to everything, fully connected to our distribution system, fully connected from an associate labor store assignment perspective, fully connected from a supply chain perspective. And it’s the digital thinking of physical retail. So in digital, somebody order something online, you find out where it is and you figure out how to get it to them the quickest way, the most effective way.

So from a distribution perspective, the Small Stores, you don’t want to bring everything to it on a 53-foot trailer that last 10 miles for one pellet or two pellets would be very expensive. Yet on the fresh side for example, we have enough to be able to send the truck there. So hypothetically, the algorithm could tell you that we’ll send pellets in 53-foot trailers for the fresh product, but for the dry product we will cross dock it from the supercenter. And for the slow-moving items, we could ship it from the Walmart.com DC to the small store to be stocked on shelf.

So you could ship it from a fulfillment center, dotcom fulfillment center to a small store to be stocked in inventory because it's about widgets and cost from a logistics perspective. That’s the least expensive way to get the item to the store, to the customer or to the customer that we possibly have. And we have lots of different methods to do it, the fulfillment center, the current distribution network, and the development of the cross-dock operation from supercenter.

From an associate perspective, we’re tethering today some of the functions in a small store to a big store. The back-office function where you consolidate receivables and cash and all the functions. You don't need to staff that capability at a big store. At a small store, you can do it from a large store.

We expect in the model to be able to assign associates should they choose to, three shifts in a supercenter and two at the small store that might be near to their homes, should they want to do that. All of those abilities for us, I think are going to be innovative and serve to lower the costs to serve.

Budd Bugatch - Raymond James

And the other one was on the direct cash on the --

Bill Simon

The numbers are in early stages. The customer satisfaction and the customer response to those have been very, very good. We’ve had about 90% satisfaction on the service. Again, we’re not charging more for the service. On the delivery side, we do have a very low delivery cost, no subscription on the delivery side. And on the pickup, there's no cost. So, Wal-Mart prices are with convenience of online and that's really what we’re trying to deliver and we are well on our way to that.

Budd Bugatch - Raymond James

And any timing on decisions on that?

Bill Simon

Yeah, we’re going to move as quickly as we can. We’re going to move as quickly as the customer demand is there. You'll see us -- the tethering model in those three markets is an extension of that test. It’s just done at a new location instead of an existing location, so you can pick up at a small store or you can -- in Denver, you can pick up groceries at a large store. So it’s all kind of in the evolution of it. And when we reach a model or a module and this is really important. If that’s effective, we’re going to roll it out pretty quickly.

So in Denver, we went and put pickup locations into existing supercentres, sort of kind of a module. We’re going to try at some point, the pickup module without a supercenter, right just to drive through, like, I don’t know like, kind of like a sonic, right. And we’re going to try that pickup at a very small store in this tethering model in the Express. So, we’re going to build the depot. We’re going to create a depot. We’re going to attach it to a supercenter, testing all of those.

And then some of them will work in certain locations and will go fast there, some of them will work in other locations. We’re sort of looking at is, is a bit of a modular play. We have this thing. We plug it on here at works. We have this thing, we do it here. We have this thing, it standalone and this one is a peer commerce. This one is a peer...

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Source: Wal-Mart's CEO Presents at Raymond James 35th Annual Institutional Investors Conference (Transcript)

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