Wal-Mart waltzes ahead of competition
By Rachel Katz
Bloomberg News Service
BENTONVILLE, Ark. — Wal-Mart Stores Inc.'s H. Lee Scott opened 17 stores in 12 states the day after Kmart Corp. filed Chapter 11. A week later, he added five more.
Advertiser library photo • January 2000
The expansion shows how much distance Scott has put between Wal-Mart and Kmart since he became chief executive in January 2000, four months before Chuck Conaway took Kmart's helm, investors said.
Wal-Mart stores did big business over the holidays, driving sales growth during that period to more than double the rate of other retailers. While Wal-Mart has opened more stores, rival Kmart has cut back.
When Conaway tried to revive business by cutting prices on thousands of products, Scott matched him penny for penny, they said. Now, as Kmart prepares to close some stores, Scott has the opportunity to raise prices and increase profits — if he dares to risk alienating customers, investors said.
Wal-Mart "will be able to move toward more of a monopoly," said Joe Engebretson, who helps manage $300 million for Engebretson Capital Management, which owns 260,000 shares.
Scott already impressed investors by driving Wal-Mart's holiday sales growth to more than double the rate of other retailers, in what some analysts had feared would be the worst season in years. Quarterly profit surged higher than Scott forecast. Investors responded by pushing up Wal-Mart's stock price 13 percent since mid-December.
"They are constantly outperforming," said Britt Beemer, chairman of America's Research Group.
'Everyday living'
Low prices are a promise Scott, 52, has said he's keeping as part of the legacy of founder Sam Walton. Scott sustains Wal-Mart's reputation with consumers by discounting mainly snacks, health and beauty aids, medicine sold over the counter, household cleaners and small appliances.
"Those are the five most important categories to create a price image for a discount store," said Beemer, who added that Wal-Mart's prices on these goods generally are as much as 15 percent less than Kmart's or Target Corp.'s.
Reducing prices isn't enough, as Kmart's Conaway learned in the months before filing Chapter 11, investors said.
"The customer is very interested in those things they need for everyday living," Scott said in a November interview. "We make sure we're in stock, make sure we have items the customer wants and good customer service."
When Conaway in August said he would lower prices on more than 38,000 products, Scott was one step ahead of him, said Robertson Stephens Inc. analyst Bill Dreher.
Scott requires employees to visit a Wal-Mart store and a rival every week to compare prices, Dreher said. He does it, too, Wal-Mart spokesman Tom Williams said.
"Even before Kmart was crowing about the BlueLight Special, Wal-Mart came out and told us they were reducing prices," said Dreher, who rates the shares "buy" and doesn't own any.
Sending a message
Conaway trimmed newspaper advertising, cutting off consumers trained to wait for specials in weekly circulars. Shoppers also often complained stores were out of goods, Beemer said.
Kmart's BlueLight Always program, which promised everyday low prices, confused customers since in past years the BlueLight referred to in-store specials, investors said.
Analysts said Scott kept shelves stocked and his message consistent: "Always Low Prices."
Growth's price
In his first year at the helm, Scott's compensation totaled about $17 million, including his $2.7 million in salary and bonuses, according to regulatory filings.
Bentonville, Ark.-based Wal-Mart said net income in the quarter ended Jan. 31 rose 9.2 percent to $2.19 billion, or 49 cents a share, from $2 billion, or 45 cents, a year earlier. Total sales rose 14 percent to $64.2 billion.
Sales at stores open at least a year rose an average 6.9 percent in November, December and January, outpacing the industry's average 3.1 percent rise, said Bank of Tokyo-Mitsubishi Ltd.
Growth hasn't come without a price, investors said. Profit margins at its main division narrowed last quarter, the fifth straight decline. Some investors want Scott to widen margins because earnings growth is trailing sales.
"Your improved sales aren't being fully reflected in your income," said Rose Papp, whose L. Roy Papp & Associates owns about 350,000 Wal-Mart shares.
Scott may tighten distribution systems with new technology or increase sales of household goods and clothing that are more profitable than food, investors said.
Several of the stores Kmart is expected to close may be near Wal-Marts, and once they are liquidated, Scott won't have to keep prices as low, they said.
