Wal-Mart doing well by doing good
At holders meeting, CEO says the retailer's efforts to be more responsive to social concerns appears to be paying off at the checkout.
BENTONVILLE, Ark. (Fortune) -- Wal-Mart used the occasion of its annual shareholder meeting Friday to crow about the achievements of the past year, which are considerable: sales, earnings and free cash flow have all been on the rise - at a time when most retailers are struggling.
The mood of the upbeat gathering at the University of Arkansas' Bud Walton Arena - part rock concert (Joss Stone and Tim McGraw were among the performers), part pep rally - contrasted with the darker days of H. Lee Scott's early years as chief executive, when Wal-Mart (WMT, Fortune 500) was battered by critics who accused the giant retailer of everything from gender discrimination to providing sub-par health care for its employees.
Over the past three years, Wal-Mart has set out to repair its image. It has improved employee benefits and used its great might to shrink prices even further - a strategy that is winning over cash-strapped customers.
A recent study by Goldman Sachs showed Wal-Mart to be the clear price leader on a variety of products, from health and beauty aids to food and household cleaners.
These initiatives, among others, have helped to push the stock up 38% from its September low. On Friday, the shares closed at $58.37, down $1.43 or 2.4%.
In the past year, the $374.5 billion in sales retailer has gone well beyond those parameters to address concerns of society as a whole, including environmentalism, where it is on a mission to reduce the carbon footprint of its stores, and the rising cost of health care with its $4 prescription drug plan.
"Regardless of who wins the election in November - and what party they are from - we stand ready to work with the new President and the next Congress," Scott told shareholders.
He acknowledged that when he travels to Washington or London or Mexico and meets with world leaders, the conversation has changed..
"They want to know about our leadership on sustainability and health care," he said. "Leaders who want to get things done will see Wal-Mart as a partner."
Not all of the critics have been quieted. Wal-Mart Watch, for instance, says that one way the retailer is able to lower food costs is by importing a lot of items from China, where safety issues have been a concern.
And although Wal-Mart has made improvements to employee wages and benefits, the watchdog group still considers them sub-par by many measures.
Wal-Mart has perhaps made the greatest strides with customers, who are clamoring for bargains during these days of rising gas and food prices.
The company said Thursday that sales of U.S. stores open at least a year rose 4.4%, one of the retailer's strongest showings in months and one that blew away analyst estimates. The performance is especially remarkable coming at a time when most retailers are struggling.
Wal-Mart tends to benefit during economic downturns when customers become more price conscious, and the current mortgage-related blip is proving no different.
The question, then, is what becomes of Wal-Mart when the economy improves and consumers are willing to pay a little more for higher quality or more fashion-forward goods. Will Wal-Mart's business suffer?
"No," said Scott during a briefing with reporters following the annual meeting, and he then turned to Eduardo Castro-Wright, the president and CEO of Wal-Mart's U.S. stores to explain why.
By the time the economy improves, Castro-Wright said, customers will have experienced many months of a different kind of Wal-Mart, one with stores that are less cluttered and easier to shop, with faster check out aisles and better brand names.
At a time when the store shelves of many retailers are laden with unsold goods that need to be markdown at steep prices (consider Sears (SHLD, Fortune 500)) Wal-Mart is tightly managing inventory so that it grows well below half the rate of sales. In the first quarter, inventory grew by just 1%, far less than the 10% sales increase in that period, which greatly improves profitability.
Of course, Wal-Mart's real opportunity is overseas, and executives took every opportunity to highlight the potential for further peppering the globe with Wal-Mart stores from Brazil to China.
The company has not always had success in foreign markets, notably Germany, but its most recent trouble spot, Japan, appears to be turning a corner. After taking control of the Japanese retailer Seiyu, Wal-Mart says that it is starting to see double digit comp increases in the country.
Asked by a reporter if he was ever concerned about losing the support of the board during Wal-Mart's recent rocky period, Scott replied, "I felt like I should loose it, if I didn't turn things around - but I was never worried."
These days, with Wal-Mart clearly on the rebound, Scott's legacy appears intact. Earlier that morning Rob Walton, the eldest son of founder Sam Walton and the company's chairman, took the stage and wondered whether his father could ever imagine a world in which $4 gasoline was the norm.
Later, flanked by siblings Alice and Jim - the first time in a decade that all the living children took the stage - the clan praised the Wal-Mart of today and said their father would be proud of how the company had evolved.
So how did Scott take a lumbering retailer that was tone-deaf on social issues and transform it into one of the more progressive companies of the day?
For an answer, he referred to mentor Sam Walton who was found of saying, "You can't just keep doing what works one time, because the world is always changing around you." 
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