A statement by Lee Scott, President and Chief Executive Officer of Wal-Mart Stores is given below. The statement has been taken from the company’s 2008 annual report.
When I look back over this past year, one thing stands out very clearly. The hard work and exceptional efforts of our two million associates, managers and leaders around the world paid off by year-end. In fact, the year really took off during the second half. What brought it all together was Wal-Mart living the mission of saving people money so they can live better. Whether it was in the United States, the United Kingdom, Mexico or Brazil, we positioned ourselves as the unbeatable price leader. Our customers appreciated it and our shareholders understood it.
In a more challenging economic and competitive environment, we drove the right strategy for our customers and for our business. And with the economic environment unlikely to change this year, the same opportunity is continuing to present itself.
Fiscal year 2008 ended as another record year for your Company. Total net sales increased 8.6 percent to $375 billion. We added about $30 billion in sales, which is equal to adding the annual sales of a Fortune 75 business. Even more impressive, Wal-Mart exceeded $100 billion in sales during the fourth quarter – a first for any global retailer. And, we accomplished this during a quarter when most of retail was going in the other direction.
Our earnings were strong. Earnings per share from continuing operations for the fiscal year were $3.16 per share, up from $2.92 per share last year. We also delivered a record return to our shareholders through more than $11 billion in share repurchases and dividends. In addition to our pricing strategy, we were able to deliver a record year by making progress in a number of other areas. The management team began implementing a new capital efficiency model and is now being more precise in deciding which projects we pursue and how those projects drive value for our shareholders.
Wal-Mart Stores U.S. finished the year with a strong second half, particularly in grocery, health and wellness and entertainment. Apparel and home are expected to continue to improve steadily this year. Eduardo Castro-Wright and his team put a real emphasis on improving operations and merchandising management. Eduardo’s management team was strengthened through internal promotions and external recruitment. Improvements in U.S. marketing also were a very positive force. In the United States, the team executed in a way that followed some of Sam Walton’s best advice: “The secret of successful retailing is to give your customers what they want.”
Sam’s Club made a strong contribution to the Company’s results and, under Doug McMillon’s leadership, had a record year in its own right. Wal-Mart’s mission of saving people money so they can live better applies equally to Sam’s Club. Small businesses have always relied on Sam’s Club to thrive and did so even more in the past year to get through some tough times.
In Wal-Mart International, Mike Duke and his team continued to drive exceptional sales growth around the world, totaling $90.6 billion at year’s end. The strongest underlying sales performance in the fourth quarter came from Canada, China, Brazil and Argentina. ASDA in the United Kingdom also continued to deliver positive results. Internationally, the management teams in each country have significant expertise in their markets. Each individual country president has strength behind them, and this will help us continue to grow the Wal-Mart markets outside the United States.
Making a Difference
While achieving all of this in our business, Wal-Mart also made progress on societal issues that are important to our associates, our customers and the communities we serve. We have a greater responsibility in the world. Costs for energy and healthcare continue to rise. Concern about our planet’s future is discussed in every corner of the globe.
Wal-Mart became a much more environmentally responsible Company through our “Sustainability 360” approach. Just one example is that during the past 15 months, our U.S. stores and clubs sold 145 million energy-efficient bulbs – enough to eliminate the need for nearly three new coal-fired power plants in the United States. Only Wal-Mart can have this kind of an impact. We will follow through on the commitments I made earlier this year on energy efficiency and sourcing.
In healthcare, I am especially proud of the effort to improve our associate benefits in the United States. We have increased significantly the number of associates with some form of health insurance, from 90.4 percent last year to 92.7 percent this year. We also know healthcare is a huge challenge facing our customers, and Wal-Mart has a role to play through offering more efficient services to employers, helping customers save money through our $4 prescription program, opening health clinics in our stores and engaging in the broader public policy debate.
It is important for a company like Wal-Mart to step up to make a difference in our communities. Even if governments can’t or won’t address key issues, it is critical for corporations to take the lead. Our associates and our customers expect nothing less. And they should have high expectations when they go to the polls in the United States this election year.
As the world’s largest private employer, Wal-Mart has the responsibility to lead in important areas such as diversity. Our teams must reflect the communities we serve. Our associates deserve to succeed as far as their hard work and skills can take them. In the past year, we have continued to provide real opportunity in the workplace around the world. For example, China continues to make progress in hiring and promoting women. We strive to achieve a more diverse workforce in all demographic groups in the United States. Regardless of race, gender or where you live, each associate has the opportunity to grow and succeed at Wal-Mart.
Because we are a global company, Wal-Mart is better positioned today than ever before to deliver on our mission. I am optimistic about our future because I know that customers everywhere will continue to depend on Wal-Mart to save them money so they can live better, whether they are among the aging population or the growing middle class. Our price leadership position helps those willing to improve their lives through hard work move up the economic ladder.
Above all, however, I am optimistic about Wal-Mart’s future because of our associates. What they have been able to achieve during this period of transformation for our Company is remarkable. Never once have they wavered. And because of that devotion to our Company, our shareholders, and the customers and communities we serve, I know that we have only just begun.
Wal-Mart Stores (Wal-Mart) is the largest retail company in the world with a strong market position in the US. The company derives almost 75% of its revenues from the US. Revenues from the US are largely instrumental in making Wal-Mart one of the leading corporations of the world. The company advanced its position in the Fortune 500 ranking from the second largest company (2006) to the largest company (2007) in the world in terms of revenues. The company’s strong market position in the US provides economies of scale and enhances the brand image to the company. It also enables the company to penetrate the market more effectively and serve a wider range of customers. However, the company faces stiff competition in the industry from players like Target, Costco and Sears Holdings. Intense competition could adversely affect the revenues and profitability of Wal-Mart.
Strong market position in the US Balanced brand mix Strong marketing capabilities
Exit from South-Korean and German markets Product recall Numerous legal issues
Expanding brand portfolio Rising US healthcare spending Increasing online sales Increasing store network
Opposition and resistance from communities
Affects of the sub prime crisis
Strong market position in the US
Wal-Mart has a strong market position in the US. The company derives almost 75% of its revenues from the US. Revenues from the US are largely instrumental in making Wal-Mart one of the leading corporations of the world. The company advanced its position in the Fortune 500 ranking from the second largest company (2006) to the largest company (2007) in the world in terms of revenues.
Wal-Mart operates 971 discount stores in 47 states in the US; 2,447 Wal-Mart supercenters in 48 US states; 132 neighborhood markets in about 15 US states; and 591 Sam’s Clubs in 48 US states. These stores serve over 127 million customers per week in the US. A strong market position in the US provides economies of scale, and enhances the brand image of the company. It also enables the company to penetrate the market more effectively and serve a wider range of customers.
Balanced brand mix
Wal-Mart has a balanced brand mix, comprising private labels and external brands. The company sells merchandise under its private label brands such as Sam’s Choice, Great Value, Everstart, Ol’ Roy, Puritan, Equate, No Boundaries, George, Athletic Works, Durabrand, HomeTrends, Mainstays, Metro 7, Parent’s Choice, Ozark Trail, ReliOn, White Stag, Sand N Sun, Canopy and Kid Connection. Additionally, the company stocks prominent brands. Moreover, the company sells merchandise under licensed brands including General Electric, Disney, McDonald’s, Mary-Kate and Ashley and Starter. A balanced brand mix allows the company to provide greater choice to customers and encourages customer loyalty.
Strong marketing capabilities
Wal-Mart has strong marketing capabilities. The company employs many programs designed to meet competitive pressures within the retail industry.These programs include Every day Low Prices (EDLP), Rollbacks, Store Within a Store, and Store of the Community. EDLP is Wal-Mart’s pricing philosophy under which the company prices items at a low price every day so that the customers trust that prices will not change erratically under frequent promotional activity. Rollbacks is an instance of Wal-Mart’s commitment to pass on its internal and external cost savings to the customer by lowering prices on selected goods. Store Within a Store is a program to provide accountability to assistant managers and department managers for merchandise planning and overall department performance.While, Store of the Community is a program to ensure that the merchandise assortment in a particular store fits the demographic needs of the local community in which it is located. Such strong marketing capabilities of the company offer value and service to its customers, largely adding to the company’s competitive position within the retail industry.
Exit from South-Korean and German markets
Wal-Mart disposed its underperforming business in South-Korea and Germany in fiscal 2007. The company sold its South-Korean retail outlets to Shinsegae, a local retailer. The company had to exit from the South-Korean market because of its inability to cater to the taste of the South Korean consumers. Moreover, the company failed to win more customers as it was slow to open retail outlets in the South-Korean market. This put Wal-Mart at a disadvantage with respect to bargaining power with suppliers. Another cause for Wal-Mart’s failure in South-Korea was its inability to compete with aggressive Korean discounters. By contrast, Tesco, a major UK based retailer has been successful in the South-Korean market as it adapted its outlets to the local taste and culture. Tesco entered the South-Korean market in a joint venture with Samsung. The joint venture of Tesco-Samsung generates about a third of Tesco’s overseas sales revenue. Inability to adapt to new market conditions would restrict the growth of the company.
Wal-Mart was involved in several product recalls lately. In April 2008, Wal-Mart recalled in cooperation with the US Consumer Product Safety Commission (CPSC) recalled ‘Holiday Times’ candleholders. The product was recalled as the candle holder could tip over and result in a fire hazard. Further, the glass holder could break and pose the danger of a scratch to customers. In the same month, the company recalled around ‘Hip Charm’ key chains.The product was recalled as it contains high levels of lead, which could be toxic if ingested resulting adverse health. Frequent product recalls indicate lax quality control measures. Further, they could damage the consumer’s perception about the company leading to a fall in number of customers to its stores.
Numerous legal issues
Wal-Mart is involved in a number of legal issues. The company is currently a defendant in various class action suits pertaining to deviation from federal and state wager laws. Wal-Mart is presently involved in a class action suit, Dukes vs Wal-Mart Stores. The suit was laid down on behalf of the former and current female employees across its US retail and warehouse club store operations. These employees totaling to 1.6 million alleged that the company is showed gender discrimination at the time of promotions, pay, training and job assignments. The claimants sought $11.5 billion for injunctive relief, front pay, back pay, punitive damages and attorney’s fees. The suit, which is one of the biggest gender discrimination cases in the US, was retained as a class-action suit by the three-judge panel of 9th Circuit Court of Appeals.
In another suit, the company was accused of violating California labor law with respect to provision of lunch and meal breaks to employees working over six hours in a shift. The court in April 2008 declared a compensation of more than $170 million. Such proceedings may adversely affect employees’ perception about the company. Any unfavorable outcome from the investigations could affect the company’s brand image. Further, it could also result in additional expenditure to the company brining pressure on the company’s margins.
Expanding brand portfolio
Wal-Mart offers products under a number of private labels such as Great Value, Puritan and Athletic Works. The company plans to increase is private label portfolio. In March 2008, the company expanded its private labels in the home category by launching Canopy. The Canopy line comprises comforter sets, bed linens, dec pillows; shower curtains, bath towels and accessories; tabletop; furniture; dinnerware; and décor. The company is expected to price these goods at 40% lower than its competitors. In the apparel category, the company launched two new private labels: Garanimals, OP and l.e.i. In comparison with national brands the company has a greater control over the private brands. As a result, Wal-Mart incurs lower operational costs. Further, as private brands are high-quality low price alternatives to national brands, they have greater demand. These factors benefit the company in gaining higher margins.
Rising US healthcare spending
The US has the highest per capita health care spending in the industrialized world. The US health care spending is expected to reach $4 trillion by 2015, led by an aging population using more drugs. The US Census Bureau and the National Institute on Aging have predicted that by 2030, one in every five US citizens will be aged 65 or above. The 65-and-above age demographic segment represents a prime consumer segment for pharmaceuticals.
Wal-Mart, in February 2008, announced plans to open its first co-branded in-store clinic, ‘The Clinic at Wal-Mart’.These clinics are expected to be connected to the local hospitals in communities where the company has presence.The company plans to open around 400 co-branded convenience clinics by 2010. It entered into an agreement with RediClinic and local hospitals to open co-branded walk-in clinics in 200 Wal-Mart Supercenters. The company could leverage rising health care spending in the US to boost revenues of its pharmacies and health clinics.
Increasing online sales
Online shopping has steadily grown in popularity in the US. During the second quarter of 2005 e-commerce sales grew 26% as compared with the same period a year ago. US online retail sales are expected to have reached $130 billion in 2006 from $104 billion in 2005. US online retail sales are expected to grow annually by 17% through 2008.The online retail sales in the US are expected to reach $329 billion in 2010.
In addition to physical store operations, Wal-Mart sells its merchandise through online portals. The Wal-Mart Stores segment operates the online portal www.walmart.com. Sam’s club also operates an online portal www.samsclub.com. Besides offering the facility of online shopping, the company has upgraded its online site to enable online purchase of products, which are not available at Wal-Mart stores. Online sales, while offering convenience to customers, also improve a company’s margins by cutting down its operating costs. Wal-Mart is well poised to benefit from the expected increase in online sales.
Increasing store network
Wal-Mart plans to increase its store network in the near future. In the fiscal year 2008, the company opened seven discount stores, 191 supercenters, 20 neighborhood stores and 12 Sam’s Clubs in the US. In March 2008, the company opened 81 stores and clubs across 30 US states. Wal-Mart announced its plans to open around 170 supercenters by the end of the fiscal year 2009 and 140 supercenters by the end of the fiscal year 2010. The increase in store network would increase the proximity to customers. This would lead to increase in customer traffic stores and in turn result in more revenues to the company.
Wal-Mart is facing stiff competition from a large number of companies in the retail market worldwide including Carrefour, Tesco, Target, Home Depot, Sears and local companies. The company’s Wal-Mart Stores segment competes with retailers operating discount, department, drug, variety and specialty stores; supermarkets, super center-type stores; and hyper marts, as well as internet-based retailers and catalog businesses. Sam’s Club segment competes with other wholesale club operators, as well as discount retailers, retail and wholesale grocers, and general merchandise wholesalers and distributors. It also competes with internet-based retailers, wholesalers and catalog businesses. Internationally, the company competes with retailers who operate department, drug, variety and specialty stores, supermarkets, super center-type stores, hypermarts, wholesale clubs, internet-based retailers and catalog businesses. Such retailers and wholesale club operators compete in a variety of ways, including merchandise selection and availability, services offered to customers, location, store hours, in-store amenities and price. Intense competition could adversely affect the revenues and profitability of Wal-Mart.
Opposition and resistance from communities
Wal-Mart’s plans to open new retail stores in the US may run into opposition from local communities. Small retailers fear that the low price offered by Wal-Mart may force them out of business. In some of the states, residents and local governments are raising concerns about congestion due to increased traffic and the need to preserve open space. Opposition against Wal-Mart has begun in international market like India. In August 2007, a number of shopkeepers in India gathered in the country’s capital Delhi’s largest bazaar, Chandni Chowk to protest against the entry of the company into the Indian retail market. Growing opposition to new stores from local communities and entry into international markets is likely to hold back the company’s expansion plans.
Affects of the sub prime crisis
According to data compiled by the National Retail Federation, a retail trade association in the US, rising home equity was one of the significant reasons for growth in retail sales in 2005 and 2006. High home prices had allowed customers in the US to sustain spending under conditions of economic stagnation. Since the onset of sub-prime crisis, housing prices have dropped. Median price of homes sold in February 2008 fell by 8.2%, over the previous month. Currently, homeowners in the US have more debt than their homes are worth, leading to foreclosures.This has caused consumer spending to dwindle forcing not only sub-prime borrowers but also other classes of borrowers to defer discretionary spending to meet rising debt repayments. As a result, the big retailers in the US have experienced fall in sales.This is apparent from the slowing growth rate registered by the retail industry sales. According to the National Retail Federation, retail industry sales (excluding gas stations, restaurants and automobiles) are expected to record a year-on-year increase of 3.5 % in 2008 as compared with 6.3% in 2006. If the sub-prime crisis spreads to other classes of assets, then the impact could be even bigger on retail industry, and, on leading retailers such as Wal-Mart.
The company recorded revenues of $378,799 million in the fiscal year ended January 2008, an increase of 8.6% over 2007. For the fiscal year 2008, the US, the company’s largest geographic market, accounted for 75.8% of the total revenues.
Wal-Mart generates revenues through three business divisions: Wal-Mart Stores (63.2% of the total revenues during fiscal year 2008), Sam’s Club (11.7%), International (23.9%) and others (1.1%).
Revenue by Division
In the fiscal year 2008, Wal-Mart Stores recorded revenues of $239,529 million, an increase of 5.8% over 2007.
Sam’s Club recorded revenues of $44,357 million in the fiscal year 2008, an increase of 6.7% over 2007.
The International division recorded revenues of $90,640 million in the fiscal year 2008, an increase of 17.5% over 2007.
The Others* division recorded revenues of $4,273 million in the fiscal year 2008, an increase of 16.8% over 2007.
*Relates to unallocated overhead items.
Revenue by Geography
The US, Wal-Mart’s largest geographical market, accounted for 75.8% of the total revenues in the fiscal year 2008. Revenues from the US reached $283,886 million in 2008, an increase of 6% over 2007.
International accounted for 24.2% of the total revenues in the fiscal year 2008. Revenues from International reached $90,640 million in 2008, an increase of 17.5% over 2007.
The Others division recorded revenues of $4,273 million in the fiscal year 2008, an increase of 16.8% over 2007.