Wal-Mart's woeful sales tale

NEW YORK (CNNMoney.com) -- With its U.S. sales growth expected to slow further over the next three years, Wal-Mart executives told analysts Tuesday that the retailer will open fewer stores at home and instead boost its expansion overseas.

Wal-Mart's chief financial officer Tom Schoewe said the world's largest retailer expects overall sales to grow about 9 percent this year, slower than last year's increase of 11.7 percent.

Wal-Mart CEO Lee Scott.

More important, Schoewe said Wal-Mart's sales growth will further slow, to between 5 and 8 percent growth over the next two years.

"These are pretty trying times for us in an unusual macroeconomic environment," Schoewe said on the first day of Wal-Mart's two-day annual analyst and investor meeting. CNNMoney monitored the meeting in Rogers, Ark., via Webcast in New York.

Investors weren't happy with the sales guidance, pushing Wal-Mart's (Charts, Fortune 500) stock down almost 3 percent in afternoon trading.

Wal-Mart warned last month that its core low-to-middle-income customers "remain concerned about their finances, especially the cost of living," in light of the housing slowdown and a tighter credit market.

'Sure we care about the Federal Reserve's policy, but what's most important to us is what's on the minds of our customers, especially when they are living paycheck to paycheck," Schoewe said.

But Wall Street has also long complained that the discounter overexpanded in the United States, and that each new store it opened was eating into sales at existing stores.

To that end, Schoewe said Wal-Mart will slow U.S. square footage growth to 6 percent this year from an 8.8 percent increase last year, and will further reduce that pace to 5 to 6 percent growth over the next two years.

Additionally, Schoewe said Wal-Mart was cutting its U.S. capital expenditures for its current fiscal year to between $14.7 billion and $15.4 billion, from its earlier forecast of $15 billion to $17 billion.

For 2009 and 2010, the company has budgeted between $13.5 billion and $15.2 billion in U.S. capital expenditures.

In terms of new stores, he said Wal-Mart would open between 190 to 200 new U.S. supercenters this year, down from its typical expansion rate of about 280 a year.

The company is cutting new U.S. store investment significantly to between $4.9 billion and $5 billion over the next two years from its current level of between $6.7 and $7 billion.

But Schoewe talked up Wal-Mart's international plans.

"We have an opportunity to make good investments overseas, and we're planning to offset [slowing square footage growth] in the U.S. with [a square footage] increase in our international markets," he said.

Wal-Mart's international operations currently account for 23 percent of its total annual sales of $348 billion, but analysts expect overseas markets to help fuel Wal-Mart's growth in the future.

Schoewe said Wal-Mart would invest between $3 billion and $3.6 billion in opening new stores overseas over the next two years.

Eduardo Castro-Wright, CEO of Wal-Mart Stores U.S.A. echoed Schoewe's concerns about Wal-Mart's consumers feeling tapped out.

"Late last year, people were already facing rising costs of living, higher healthcare costs and higher energy and gas prices," Castro-Wright said. 'So people were living on easy access to credit."

"But with the mortgage crisis and housing slump, everyone feels poorer," he said. "We feel this burden on shoppers earlier than other retailers because we serve every working family."

However, as the spending crunch travels up the income ladder from low-income households to impact mid-income shoppers, Castro-Wright said Wal-Mart expects to see benefits from those shoppers "trading down" to value retailers like Wal-Mart.

In terms of merchandising opportunities, Castro-Wright said health & wellness (including pharmacy), groceries and electronics are Wal-Mart best bets, while the retailer is struggling with poor home furnishing and apparel sales.

Wal-Mart said its $4 generic prescription drug program has significantly boosted its pharmacy sales. Year-to-date, the company said prescription drug unit volume is up 30 percent at Wal-Mart, versus a 4 percent increase in unit volume increase for the industry.

Going forward, executives said they plan to introduce more generic prescriptions drugs faster to Wal-Mart's customers as branded drugs come off patent over the next 5 years.

Electronics is another hot area for Wal-Mart. After years of carrying no-name electronics that were ignored by its shoppers, Wal-Mart has recently made a concerted push into offering name-brand electronics like Toshiba, Dell, Nintendo, Apple (Charts, Fortune 500) and Sony.

Citing a three-month same-store sales comparison, Castro-Wright said electronics sales at Wal-Mart are up 4.6 percent this year, compared to a 1.7 percent increase for Best Buy (Charts, Fortune 500) and a 8 percent sales decline for Circuit City (Charts, Fortune 500).

"We think we are winning here," he said.

Castro-Wright conceded that Wal-Mart still has a lot of work to do to make its clothing more appealing to shoppers. In home furnishings, the retailer announced it would introduce a new private label brand called "Canopy" next spring, and is adding the "Better Homes and Gardens" home collection in fall 2008.

Wal-Mart CEO Lee Scott can expect some tart questioning at the meeting.

"Since Lee Scott took over as Wal-Mart CEO in January 2000, the stock [is down] 5 percent versus a 104 percent gain in Target," J.P. Morgan analyst Charles Grom wrote in a note to clients Monday.

Indeed, Wal-Mart's stock price has been stuck between $45 and $60 for the past seven years. Since January, Wal-Mart shares are down 2 percent, while rival Target's (Charts, Fortune 500) stock has risen 8 percent.

"While it's hard to put all the blame on Mr. Scott, ultimately someone needs to be held accountable," he said.

Scott gets his chance to respond when he addresses the gathering Wednesday.

As Wal-Mart saturates its home market, its same-store sales have slowed considerably, to an average increase of 1 to 3 percent from around 6.5 percent in 2001.

For October, the retailer expects same-store sales will be flat to up by 2 percent.

More importantly, analysts are worried that slowing sales trends don't bode well for November and December, which can account for as much as 50 percent of retailers' annual profits and sales.

Goldman Sachs analyst Adrienne Shapira wants to know if Wal-Mart will be even more aggressive this year with holiday promotions in light of a tougher macroeconomic backdrop.

Wal-Mart already chopped prices on toys on Oct. 1, and announced a second round of price cuts last week.

"We've always struggled with Wal-Mart's [pricing] rollback strategy, given that most U.S. consumers already see the retailer as the low-cost leader," wrote J.P. Morgan's Grom. Wal-Mart in recent years has gained only a "lackluster comparable sales lift" when it resorted to heavy discounting.

"With 15,000 rollbacks in stores today, which is likely to go higher as we get closer to Black Friday, we want to know what sales gain Wal-Mart has internally budgeted to break even on this initiative," Grom said.

Black Friday, Nov. 23, the day after Thanksgiving, is the traditional kickoff of the holiday shopping season.