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

Jefferies 2014 Global Consumer Conference Call

June 19, 2014 09:00 AM ET

Executives

Jeff Davis - EVP & Chief Financial Officer of Wal-Mart U.S.

Carol Schumacher – VP of Global Investor Relations

Analysts

Dan Binder - Jefferies

Operator

Okay, good morning. For those of you that don’t know me, I’m Dan Binder. I cover broad line and hard line retailers for Jefferies. Pleased to have you here today. I wish we could have ordered up a little bit better weather. But we are very pleased to have Wal-Mart here today, both their representation on the International and the U.S. side and today we have in this presentation Jeff Davis. Welcome Jeff.

Jeff is the Executive Vice President and CFO of Wal-Mart U.S. and Carol Schumacher is the Vice President of Global Investor Relations. So we’ll have a presentation for 15 or 20 minutes and we’ll open it up to your good questions and with that we’ll get started. Thanks Jeff.

Jeff Davis

Good morning everyone. Hopefully this presentation will put a little bit of sunshine in our lives here.

Before I get started, I also wanted to just introduce you to a couple of other members of our team that are here with me. We have Brad Sikorsky, who is our Vice President of our segment [FD&A] [ph] and also Christine Allen, who is our Vice President of Finance for Softlines. And of course we’ll be making some forward-looking statements today. We refer you to this disclaimer as well as the fact that you can – if you want to read this later on our website.

All right, as a result of us being in the middle of our second quarter, I’m not going to be providing any updates to our performance so far this quarter. But just to remind you that on August 14 we will have our earnings release and of course you’ll be able to get more of the details for the quarter. So let’s get started.

The Wal-Mart U.S. team as you can see is really focused on four strategic pillars, which we believe are going to help us drive sustainable sales growth and also leverage off of what we believe are strong fundamentals. The first plank that you see up on the slide is with respect to sales and our desire to drive sales, not only in our physical stores but across our digital platform.

It starts off with making sure that we’re in stock in our stores. It carries on to making sure that we have a great fresh presentation and you’ll see that not only in produce and meat, but in Deli, one of the other areas that we are continuing to double down in.

One of the things that you know us for is being a house of brands and providing great brands and services and what you’ll see here on the slide, you’ll see a little asterisks by a number of these items and I’ll go a little bit more in depth in each one of those as we go across the page, as we get further into the presentation. But what I think you are going to see here as I talk a bit more about some of these new disruptive services that we believe we are adding to our offering that will help drive traffic and ultimately sales for our organization.

The second plank it save, and our customers look for us to help them save money, so they can look better. But it all starts for us with respect to this in a productivity loop and we continuously look for ways to improve by keeping our costs low, being a low cost provider. One of the things that we are doing here and we had a recent announcement after having a test in seven markets, an item called Savings Catcher, which is another opportunity for us to provide savings to our customers in a very easy way.

The third plank you see is on service and with us it starts with the customer, in keeping that customer first. For us it’s all about having an engaged, talented associate that’s providing that service and we’re doing some new things in our organization to help make sure that we have the right people in the right place and position and it’s about making sure that we have that right talent.

As we mentioned earlier in the year and at the end of last year that we continue to focus on a small portion of our overall store formats that quite honestly are underperforming, but that we are seeing traction in those particular stores and we’ve actually seen about a 200% increase in the comps in those stores as a result of its very directed efforts.

And finally around selection, Wal-Mart is just known as having a broader selection of product, but we also want to be known as having the ability to provide access and convenience to customers as they change their shopping patterns and behaviors.

As you know we are accelerating in our neighborhood markets, but we also are on a third leg of a test we are doing with Express Stores, which is a small rural supermarket, but it goes beyond that and many of you may have heard of the efforts we are doing with respect to tethering sources together, which will allow us to not only provide greater access to customers, but use the combination of both digital and physical assets, provide a broader array of services and products to customers in the market place.

And then finally one of the things that we’ve just broken ground on is the new test that we’re doing and it’s in the Rogers area in Arkansas, but it’s a drive concept and we’ll take a little bit more about that and what that will provide to our customer.

So let’s get a little deeper into some of these planks and the first one is sales. As I said, we are definitely focused on in-stock. And what we’ve done this past year is we really tried to demystify what we were doing.

Previously we had a number of algorithmic exercises we were asking our associates to go through in order to make sure we have the right product in the right place. We just quite honestly, we got down to the basics and basically went back to simplifying it. It’s about receiving inventory in the evenings and getting it on the shelf. It’s about making sure that if its not on the shelf, then it’s appropriately put into a bin in the back and then if the items are sold, our POS lets us know and it tells us to go pick it and get it back on the shelf, it’s that simple.

And what’s amazing about this is we’ve actually seen a significant improvement, not only in our associate satisfaction or productivity. The customers are also responding and we’re actually seeing a lift in our comps in those stores that are actually executing the best on this, what we call OSA first. And what you’ve seen here is our goal of 95% on-stock availability, has now increased to the upper 90’s, about 96%, 97%. So we are really pleased by what’s happening there, it’s helping us drive our comps in certain key categories.

Okay, we also recognize that our fresh and first impression in the stores really sets the tone for the entire store. So we really focus on improving our quality, specifically our experience in our fresh departments.

One of the things that we’ve done over the last several years is really focused on how we can go up-stream and actually work more directly with our growers, particularly in produce and vegetables. By doing so we’ve been able to increase our specification while reducing our overall cost by continuing to reduce some of those middle costs.

The other thing that we’ve done here is we’ve also allocated additional labor, particularly in these areas to make sure that we are calling our inventory and making sure that it has the right presentation for our customer.

And finally, one of the things that we’ve done is we’ve instituted weekly audits of these particular areas to make sure that we’re executing against our plan and these reviews also identify areas in which we need to improve upon. So the combination of all those things actually has great results, particularly in Produce and many of you know that we came out with our freshness guarantee and that guarantee and the quality of the product that we have is actually driving great results for us in those particular categories.

So on the right hand side of the page here we talk about strategic investments and in the first quarter we’ve seen some pretty significantly cost inflation, particularly in Meat and Produce. One of the things that we’ve done here is we’ve actually not passed on a lot of that cost and inflation to our customers.

Being the agent for the customer was really important for us to be able to hold back on that as best we could. What we’ve seen is actually unit lift and comp increase, particularly in these areas as customers are responding to that quality and that price and that value. But you will also see in the second quarter and as we move through the course of the second quarter here, is that we are focused also on Bakery and Deli and Prepared Meals.

In Bakery we’ve come up with a rollback on our French bread. We’ve rolled that back to $1, everyday price and in Rotisserie chicken, we’ve also reduced that by almost a full $1 also. So our customers are actually seeing great produce, great product being extended beyond and further into our stores and fresh, be it in Deli and Bakery.

I want to talk very quickly about two new services that we’ve added, which I think are great examples of how we are known for EDLP and products, but how we want to also be know for EDLP within services.

Now on the left hand side of the page, here you see new offering that we added called Walmart2Walmart and that back in late April we introduced the opportunity for customers to be able to transfer money from one Wal-Mart Store to another Wal-Mart Store, at a price that on average is less than 50% of the prevailing prices - services in the market place.

We’ve only been out now for about a month and a half and we’ve been able to drive about $7 million worth of savings to those customers already, so as we call it, it’s saving money on money.

Then there is another service that we’ve just started and that was in early May. We opened up a Walmart Care clinic in the front of the store in a tenant lease space and what’s particular about this offering is that for our associates that are on our health plan, they could come in and get primary care services for just $4, and anyone that is not an associate on our healthcare plan or the general public, they can come to these same locations also and get the same services for just $40 per visit.

We believe this is a great opportunity for us to help manage the rising cost of our healthcare, as well as take some of the pressure off some of the health services that you see in the market place, particularly in the emergency rooms, which are often at the higher cost. So we are really excited about just those two new offerings that we have.

The Walmart Care clinic was just the first one that we’ve opened up. It’s in Texas. We anticipate opening up approximately another dozen over the course of the year, so we can get an understanding of what the needs are. Basically an opportunity for our store associates, our individuals working in the distribution centers and transportation centers to gain the services.

To talk a little bit about the Saving Catcher that I had mentioned earlier, this we believe is a great offering. It’s one that is very quickly building trust with our customers; even ad matching for an extended period of time, but this new service, what it allows customers to do is not have to worry about going from one store to another, having someone’s advertised price versus the other. They can come to our stores and shop.

They can take the receipt, go online either to Walmart.com or to an app and actually input their receipt and then based upon the items that they’ve purchased, we go through and actually do the match for them and we match against not only our prices in the marketplace, but the customers, competitors prices and in doing so it’s an expense -there is an additional saving that they would have qualified for. We give it to them immediately on a gift card.

So what we’ve seen here, very quickly in the tests that we’ve done in seven markets, that we’ve been able to improve our pricing and progression as you see in the bottom of the slide. We’re seeing more frequent trips and ultimately increased spending along the way. So we are really excited about this and we’ll be rolling this out nationally later this summer.

We talked earlier about the need, especially with our customer to make sure we have the right talented associates and engaging associates. So recently here we opened up in Irving, Texas, a Central Hiring Center. In doing so, this center has a focus and attention on once again getting the right talent in the right positions and being able to hire to a particular standard that is consistent within the market place.

What we find is that, in doing so this center also allows individuals to be appropriately on-board and understand the culture of what Wal-Mart does and actually getting training before they actually get to the stores.

So this facility is equipped with authentic training capabilities such that hourly associates and management can actually do hands on training, gain a level of proficiency in the store environment before actually being assigned to a store, and we believe these are the types of things that will help us improve associate engagements when they first get to the store and make sure we have the right people in the right places as it relates to maybe evening stocking or those jobs that are more customer facing.

You hear us talk about tethering from time to time and I just wanted to spend a moment here to talk a little bit about what that concept is. Here also in the month of May we opened up a Express Store that was tethered or connected to if you will, a Supercenter that was about 30 to 40 miles away. That Supercenter was in New Bern, North Carolina, the Express Store was in Oriental, North Carolina, a town of about 1,000 people.

And what customers can do, is they can go into this essential rural supermarket and have the capability of ordering anything that is in that Supercenter. If they order by noon, they can get it same day. If they order an item through our dotcom network, they can get it within two days. We believe that’s very powerful.

The other thing that we are doing here in tethering the Express Store at the neighborhood market is we’re being able to actually move product specifically in Deli and Prepared Meals from the Supercenter that has the capability of producing that, doing it fresh daily, getting it to the Express Store that would not normally have either the space or the capabilities because of the capital requirement to do so. They can now provide the same services their customers as a result of being tethered to that Supercenter.

So at the end of the day customers in a rural area have access to over millions of items that gives you – considering everything that’s available on dot com and they do all this within a 10,000 square foot facility.

We talked about creating convenience and as you know, once again with the neighborhood markets and the ability to use that format to fill in certain markets where we already have Supercenters, providing ease and access to our customers for that fill-in trip, we are going one step further, two steps further.

The first item that we have is the ability and that we’re looking at a concept called Drive and many of you may be familiar with what’s happening in Europe, particularly in France, but basically what we are looking and testing is the customer will be able go online and build a basket. In doing so, they can also select in the time that they want to pick up their item. They would then drive to our drive depot and upon arrival be able to receive their merchandize without getting out of the car.

So once again, we look at this as an opportunity to allow customers to shop how they want to, when they want to. Within this depot it will have access to about 10,000 items. Many of those items are driving the majority of the volume in the neighborhood market. So as you can imagine, these are high volume items and it’s not only in grocery and fresh and dry, but also it includes anything in our overall the counter market also. The beautiful thing about this is it’s the same everyday low pricing, so it’s the same pricing they will be able to get if they had gone to a neighborhood market or a Supercenter.

So just to wrap-up, hopefully you’ll see the Wal-Mart U.S. leadership team, that we are definitely focused on driving sustainable sales and the sales growth not only in our physical stores, but using the conversions of our digitals assets or our physical assets. We are committed to being that trusted price leader and we want to be the agent for our customer.

As we relate to services, it’s so important that we have a dedicated team of engaged associates and what we are doing there to ensure that we continue to bring those associates onboard, get them well trained and ready to service our customers.

And finally it’s about bringing innovation and bring that innovation to allow us to expand access and convenience once again to that customer. His shopping patterns and behaviors are changing every day. We want to be able to be in a Wal-Mart not only for today, tomorrow, but for the future.

And with that I’ll take any questions.

Questions-and-Answer Session

Dan Binder - Jefferies

We’ll start with any questions from the audience, okay. John?

Unidentified Participant

Can you talk a little bit more about the (Inaudible). It is hard for me to figure out how you can actually get supply to the stores, and let the customer know about it and do that in a cost effective manner. What is behind your ability to do that? Or what (inaudible).

Jeff Davis

Like anything else, it’s around the cost to serve. But currently today in North West Arkansas, we have an express store tethered to Supercenter and what they are actually doing; it’s a small carrier that actually has the ability to carry not only ambience or frozen, but general merchandize also.

So when a customer comes in and places that order, once again through that kiosk, they are placing that order and they know that if they order by a certain time, they’ll be able to pick up later that day and they’ll get an estimate of what that time would be.

But what’s interesting about this is that you already have labor at the Supercenter that is preparing pick ups and deliveries in some situation. That same labor is pulling that merchandize for other orders. These orders, instead of it going to a customer’s home is actually going to the Express Store.

But one of the things that we have to determine is one, what’s going to be the level of demand, the frequency of demand and size of the basket, but what we’re seeing currently is a very good acceptance of this and especially when you look at some of the rural areas where individuals today don’t have as much access and/or they require a much longer drive. So those are the types of things we’re looking at and quite honestly our finance teams want to make sure that as we’re working through this, we’re reducing our overall cost.

Unidentified Participant

(Inaudible).

Jeff Davis

So in the (inaudible) today we really are only operating this in tow markets. We are going to expand to three or four other markets. We want to know first Arkansas, the range is less than 10 miles and then the one in North Carolina today, the first test that we’re doing there is about 30 to 40 miles. So one of the things that’s important for us to understand and maybe getting back to John’s point is, where is that appropriate tethering point? Is it six miles, 10 miles, 30 miles? What’s the appropriate level and where can we be effective, where is the demand for those types of products? But those are the reasons why we test these things before necessarily going to a full roll out.

Dan Binder - Jefferies

Any other questions in the audience? Yes.

Unidentified Participant

(Inaudible).

Jeff Davis

We haven’t necessarily broken down between what elements are most profitable, but when we look at the project itself and the opportunity for us is to have our associates being able to get services at a low cost. It also takes pressure off of them, the services that we would otherwise be paying for if they were going to their other primary care. So having the access, having the quality care and which is important at that lower price.

The other ancillary things that happens is that you have individuals. It’s now a traffic driver if you will to that Supercenter. So it may not only be for opportunities for health and wellness services and either optical or pharmacy, but the idea, they are now coming to our store also and the opportunity to pick up an item on our grocery or GM side, so its all of the above.

Dan Binder - Jefferies

Any other questions in the audience? Jeff, I had a question for you. As you make these price investments, particularly or specifically to your example on the protein price increases and the slower pace at which your passing it through, it makes a lot of sense to stand out in the market in that kind of an environment.

But I’m curious, do you get a halo effect where aside from the customer coming in and it’s just a cherry picking you on those items where they can get below market price. Are you seeing a transfer of shopping to other parts of the store, because it seems like that would be really the main point of doing that, so that you’re not giving away too much margin?

Jeff Davis

Sure. So first and foremost, one of the things that’s important is that we actually see the elasticity as a result of dropping those prices or holding our cost for our customers. And as we’re seeing that, we’re not only seeing it in a particular item, but more importantly in the category.

So one of the things that we hope to see is that as we continue and improve our quality and price that as people look at Wal-Mart as a retailer that has strong presence in these particular areas, that will continue to increase the purchases.

One of the things that’s really hard to determine for us is as a result of the pricing that we may take and grocery how its impacting other general merchandize, but we don’t necessary have those direst correlations but we are seeing the traffic, particularly increase in those baskets that now include not only the items that are marked down, but items elsewhere in the store.

Dan Binder - Jefferies

Another question for you. I get a lot of questions about the small format strategy and ultimately what it means for Supercenters and cannibalization as you accelerate small formats. It is been such a small piece today that it hasn’t really shown up in the numbers but maybe you could discuss with us a little bit based on the stores that you have had open for a while, what type of cannibalization do you see in neighboring stores particular the Supercenters as you bring those Supercenter prices more local to the customer?

Jeff Davis

Sure. One of the things that we do recognize is that our smaller formats, if they are in very close proximity; when I say very close proximity, I’m talking about one to two miles and that’s here and far between, but to the extent that we have small formats within that diameter of the Supercenter, we are seeing some impact, but that’s one of the things that was important for us as we were looking at rolling out the neighborhood markets and understanding our learnings is that we needed to stay necessarily outside of those business to have less of an impact on the Supercenter.

But also, I think what we were seeing is that many times when you’re dropping in, our neighborhood markets or our Express stores, we were taking market share from other competitors in the market place, not necessarily the Supercenter and that what’s really important for us and we understood that the opportunity for us was not necessarily to impact of our own source, but to impact of the competition in the marketplace.

Dan Binder - Jefferies

So what does that radius look like in terms of where you want to put those stores relative to the center, as you think about that cannibalization equation?

Jeff Davis

What we’ve determined is that it’s important to be outside of that one to two miles of a Supercenter.

Dan Binder - Jefferies

And should we expect that going forward? Is that sort of the part of the bigger strategy or do you think you’ll…

Jeff Davis

Well, I think the markets going to take what – I mean if there’s an opportunity for us to be closer as a result of market share against our competitors we would consider it, but as we think about once again sort of the core criteria if you will, that’s one of the criteria that we would use, is that we’d be outside of a sort of radius of that Supercenter.

Dan Binder - Jefferies

Then just jumping back to price investment again, you’ve unveiled the Savings Catcher program recently. I mean this just goes a little bit beyond your typical price matching programs and my impression is talking to a lot of retailers, that a relatively small, very small piece of their business ever is done on price matching.

So your program I think is more interesting and because it goes a step further. But I’m just thinking from a margin perspective, can you sort of outline how you fund that program? Is it just a reduction of other price investments elsewhere to balance that out and what you expect the – what you’ve seen so far in terms of percentage of transactions that will go through that program or any statistics you can share with us on that.

Jeff Davis

What’s really important here is that Savings Catcher is really an opportunity for us to build a deeper level of trust with our customers, because today as other competitors are using high-low on particular items and customers are having to run to one store versus another, that’s very inconvenient and time consuming.

Today our stores on a local basis, we’re very aware of what the advertised prices are and many times what we’re doing is trying to figure out do you keep, are you comping against one competitor one week and another on a second week and at the end of the day they are all the same items.

What this allows us to do is for us to set that everyday low prices we believe is important for our customer. To the extent that there is a lower price in the marketplace. There’s always some other action being below us on a high low strategy. That customer has the assurance that they can actually get that from us.

So as we see it, it’s marginally incremental to our overall margin as a result of these additional items that are below our everyday low price. We today already are investing in price and on a local perspective and keeping those prices low, but it is something that for us, as we understand also what are the low price elastic items, where we need to bring our prices down we’ll make sure we do so.

Dan Binder - Jefferies

If think that’s about all the time we have for Q&A. We do you have one on ones for you the whole throughout the day, so you can ask your questions.

Jeff Davis

Thank you very much.

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