Wal-Mart to slow growth in United States
Expects overall capital expenditure to be up 2-4 percent next year but sees growth in outlets moderating for its home market.
NEW YORK (CNNMoney.com) -- Wal-Mart's shares bounced higher Monday after the world's largest retailer addressed cannibalization concerns by announcing it was slowing growth in its home market.
Wal-Mart's stock rose more than 3 percent on the New York Stock Exchange in afternoon trading. The retailer's shares are up more than 5 percent so far this year.
On day one of its two-day analysts' meeting in New Jersey, the world's largest retailer said it expects capital expenditures to be up between 2 to 4 percent overall next year. That's a significantly lower rate than the 15 to 20 percent capital expenditures in the current fiscal year.
Mark Husson, an analyst with HSBC Securities, said Wall Street would likely welcome Wal-Mart's guidance.
"Wal-Mart is slowing down square footage growth and putting a greater focus on enhancing productivity of its existing stores in the U.S. instead of continuing to grow just for the sake of growth," Husson said.
Investors have fretted that Wal-Mart was being too aggressive with its expansion strategy in its already saturated home market, expressing concern that its new stores were starting to eat into sales at older stores.
To that effect, Wal-Mart's sales at stores open at least a year - a key retail measure known as same-store sales - have slowed considerably to an average increase of between 1 to 3 percent from earlier levels of a more than 5 percent increase per year.
"We plan to decrease the rate of growth in capital expenditures considerably, as compared to our expected sales growth for Wal-Mart's next fiscal year," said Tom Schoewe, Wal-Mart's chief financial officer.
"Our estimate for fiscal 2008 of 2 to 4 percent assumes that capital spending in the U.S. will be approximately flat to the current fiscal year," he said. "This reduction in growth is expected to result from building fewer U.S. units, anticipated flattening of construction costs, improvements in the distribution center network and design efficiency."
"Our long-term goal is to continue to have our capital expenditures grow at a rate equal to or less than sales growth," Schoewe added. "Additionally, over time, we expect our new capital efficiency model to reduce the impact of cannibalization." It should also help improve return on investment, he said.
Supercenters fueling growth
Going forward, Wal-Mart expects its large-format supercenters to fuel expansion in the United States, and plans to open more than 600 new locations in the United States and around the world next year.
U.S. square footage is expected to increase approximately 7 percent, slower than its typical 8 percent annual increase.
Wal-Mart plans to open between 265 and 270 supercenter stores next year, between 5 to 10 discount stores, 15 to 20 neighborhood markets and 20 to 30 Sam's Club locations. Total new U.S. stores should number between 305 and 330 stores. Internationally, the company plans to open between 320 and 330 new stores.
Holiday 2006 strategy
Although Wal-Mart traditionally kicks off its holiday sales season Nov. 1, the retailer this year jump-started its campaign a month early by already setting steep discounts on more than 80 must-have toys.
Wal-Mart's move indicates the retailer intends to be very competitive during the key November-December months, a critical two-month period that accounts for as much as 50 percent of merchants' annual profits and sales.
Executives said Wal-Mart's "Be Bright" 2006 holiday campaign will offer consumers "WOW" gifts and exclusive merchandise.
Wal-Mart will be expanding "rollbacks" or discounts on many more items in the weeks ahead, especially on toys, electronics, jewelry and photo appliances.
In electronics, Wal-Mart said it will host a midnight launch in virtually every store of the much-anticipated Sony (up $0.24 to $40.35, Charts) PlayStation 3. The retailer said it will also be "very aggressive" with laptop prices during the holiday period.
Last year, Wal-Mart's $378 HP Pavilion laptop was one of the hottest deals of the season. The limited quantity of the item led to numerous scuffles in various Wal-Mart locations.
Other than discounts, analysts say Wal-Mart sales could benefit from its planned store remodeling, which includes better product displays, signage and merchandise assortment. The retailer said 1,200 of its 1,800 U.S. stores would have been remodeled by the end of this year, with the remaining one-third scheduled for next year.
On Tuesday, Wal-Mart's online division Walmart.com said it will unveil a significant change to how customers currently shop on the Web site as well as a new initiative in the entertainment arena.
Rival Costco (Charts), which has come under fire for apparent options-granting irregularities, surged Monday to a 1.4 percent gain, while Target Corp. (Charts) posted similar numbers in early trading.