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2007-10-25
New York, NY. Wal-Mart Cuts Projected Growth In Half

It turns out that Wal-Mart is its own worst enemy. The retailer has been eating itself for years -- and now has to protect itself -- from itself. In a dramatic sign that Wal-Mart is finally feeling the financial impact from years of cannibalizing its own sales, the world's most voracious retailer told Wall Street analysts this week that the company is slamming the brakes on new store construction. In 2005, Wal-Mart CEO Lee Scott told reporters that America had room for 4,000 more Wal-Marts -- almost double their current store count. Instead of the 280 new superstores a year promised in 2005, Wal-Mart is now rolling back to 170 stores. Founder Sam Walton often bragged of his company's saturation strategy. "We became our own competition," Walton wrote. But over time, Wal-Mart got to be too good at competing with itself, and now is paying the price. By jamming huge superstores less than four miles from each other, the company has weakened its own same stores sales growth -- a key economic indicator in retailing. In 1987, Wal-Mart's "comparative store" sales increase -- from stores open at least a year -- was 13%. Ten years later, it had plummeted to 4%. Last June, at its annual shareholder's meeting, Wal-Mart abruptly announced that during its 2008 fiscal year, it would open between 190 and 200 new stores in the United States. Any of the 18,000 stockholders present -- if they happened to open the company's 2007 Annual Report in their lap -- would have read that Wal-Mart's future expansion plans called for "265 to 270 new supercenters." In just a matter of weeks, Wal-Mart executives had backed off the "Management's Discussion" in their Annual Report, and instead sliced back expansion plans by 26%. Two years ago, Wal-Mart CEO Lee Scott was quoted by the Chicago Tribune as saying, "When we you get as large as we are, you have to paint a picture in people's minds that you can still grow. Otherwise, they think of $285 billion (in sales) and think 'That's the end of that.' Well, it isn't." For several years, Wall Street's reaction to the retailer's overly-aggressive U.S. construction forecast has been less than encouraging. Two months before Scott's speech at the Executive Club in Chicago, Bernstein Research Call issued a 13-page report warning stockholders of the downside of Wal-Mart's superstore plans. The analysts noted that Wal-Mart's growth "is under siege in several regions of the country from growing opposition by local communities... Local opposition has successfully squashed numerous plans among big box players in different parts of the country." Bernstein noted that "heightened resistance could negatively impact these retailers by slowing their square footage growth rates." Even modestly slower long-term square footage growth could have both an earnings per share and valuation impact, researchers said. Because of opposition groups, "it is clear that (discount retailers) will need to pursue a substantially larger number of permits going forward to hit their internal square footage targets given the likelihood of many opportunities failing." Citizen groups' successes grew at a 21% annual rate in 2004 and 2005. Sprawl-Buster's records indicate that 46 Wal-Mart projects alone were defeated or withdrawn in 2006. Not only has Wal-Mart suddenly slammed the brakes for 2008, but the company told shareholders last June that it would open about 170 superstores per year for the next three years. As proof that citizen opposition has thrown Wal-Mart off its production game, the company also admitted that as many as 80 of its supercenters which were expected to have ribbon-cuttings in 2008, have been deferred into 2009. Roughly 30% of its planned stores are not coming in on time, and many of these may never, in fact, open. Hence, the narrowing of the production pipeline for 2008 and out years. But this week, Wal-Mart dropped production levels even further, tamping down U. S. store growth by 2010 to about half the new retail space it added in its fiscal year 2007. Wal-Mart's executive vice president, Tom Shoewe, said on Tuesday that slowing down new store construction would reduce the company's tendency to steal sales from itself. "Obviously, what we're trying to do going forward is to reduce the impact we have on ourselves," he said.

What you can do: Wal-Mart has been phasing out its "smaller" discount stores since 1995, and this coming year will produce no more discount formats -- completing the shift to supercenters. But even the average size of supercenters will shrink as well. 220,000 square foot supercenters are harder to get past local town officials than a 145,000 square foot store. The financial analysts generally don't recognize "citizen opposition" as a factor in projections of capital expenditures, but the fact is, in the words of the Associated Press, "Wal-Mart is finding fewer places to build new stores." The company is not just running out of land -- it's running out of local support. When they do locate a site, they are more likely today to face stiff opposition than they did in 1986. The permitting window for a new Wal-Mart supercenter has stretched from three months to -- in many cases -- three years or longer. These days, all it takes is the shadow of a Wal-Mart proposal to spur a citizen's group into action. Wal-Mart and the analysts will continue to blame tough economic times, gas prices, or hot weather for the retailer's lagging sales -- -- but the bottom line is that citizen battles have affected the company's bottom line. Wal-Mart will be building fewer supercenters in the years ahead, and annual square footage growth will free fall from nearly 9% last year, to around 6% this year, remaining at that reduced level for the next two years. Wal-Mart is reeling from a self-inflicted wound. It would not listen to local officials, it turned a deaf ear to the rising level of community opposition, and it kept building superstores within spitting distance of each other. "Tough times are actually a good time for Wal-Mart," Shoewe told Wall Street analysts. But people on Main Street are the ones having a good time -- celebrating Wal-Mart's tough times.










 
 
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