Wal-Mart Plans Further Cost Cuts as Competition With Amazon Intensifies -- Update

By Sarah Nassauer and Austen Hufford Features Dow Jones Newswires

Wal-Mart Stores Inc. said it would deepen its cost-cutting and introduce zero-based budgeting in some units, efforts to free up funds for new e-commerce and store improvements in an increasingly competitive retail environment.

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At an investor meeting on Tuesday at the retailer's Bentonville, Ark., headquarters, executives said they planned to keep U.S. store openings to a minimum and lower the company's expenses as a percentage of sales from 21%, where it stands this fiscal year.

"We are not where we want to be from an expenses standpoint," Brett Biggs, chief financial officer, told analysts.

Wal-Mart will open fewer than 25 new U.S. stores in the 2019 fiscal year, which ends in January 2019. Instead, it will remodel existing ones and work on e-commerce infrastructure and services like expanded home grocery delivery, areas that should keep sales moving upward online and off, executives said. Next year, the company says it expects to see U.S. revenue from online purchases rising about 40%.

The number of U.S. store openings is down from the 216 it opened during the 2016 fiscal year and 111 in 2017. Meanwhile, the company said it would open 255 new stores in other countries with a focus on Mexico and China.

Wal-Mart has kept sales growing with improved stores and online investments, in contrast with retailers that have struggled to fend off discount rivals and Amazon.com Inc. But Wal-Mart's e-commerce plans have become more urgent in the wake of Amazon's purchase of Whole Foods Market. The acquisition gave Amazon a foothold in the brick-and-mortar supermarket business, a direct threat to Wal-Mart, the country's largest seller of groceries.

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Wal-Mart Chief Executive Doug McMillon said the company plans several ways of delivering groceries to shoppers' homes, including using employees, contract delivery workers and third-party services such as Deliv that have their own teams. Mr. McMillon added, however, "I believe the vast majority of grocery shopping will happen in stores for a long time."

The retailer has invested heavily in online grocery pickup at its stores, when shoppers order online and pick up in a store parking lot. Executives said Tuesday that by the end of this year it will offer the service at 2,000 U.S. stores, roughly double the number of stores where it is currently available.

Last year, Wal-Mart purchased online retailer Jet.com for $3.3 billion, placing founder Marc Lore at the head of its U.S. e-commerce operations. Mr. Lore has pushed the behemoth to buy a number of smaller e-commerce players, offer two-day shipping on more online sales and craft a more upscale online image that will attract premium product manufactures.

Those expenses, as well as store improvements, will mean further cost cuts across the business, Mr. Biggs said. Wal-Mart will institute zero-based budgeting -- a technique in which each business expense must be justified every quarter -- in many parts of the business "above store level," Mr. Biggs said. For example, Wal-Mart shortened the length of its store receipts saving more than $7 million so far this year, he said. Over the past two years, Wal-Mart has already cut costs by eliminating thousands of corporate and store jobs, increasing the fees charged to its suppliers to deliver goods to stores and demanding lower prices on goods.

Zero-based budgeting is used more widely in the consumer-products and packaged-foods sectors, though some other companies, including Verizon Communications Inc. and Sprint Corp., have deployed the technique.

Wal-Mart said it expects adjusted earnings per share growth of 5% in its 2019 fiscal year to outpace sales growth of about 3%, confirming its profit goals laid out last year.

The company maintained its adjusted earnings per share guidance in the current fiscal year of $4.30 to $4.40.

Wal-Mart shares rose 4.5% to $84.15 in morning trading.

The company also announced a new $20 billion share buyback program, which it intends to use over the next two years. The new buyback authorization replaces another $20 billion one, announced in October 2015.

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Austen Hufford at austen.hufford@wsj.com

Wal-Mart Stores Inc. plans to open fewer U.S. stores than it has in at least 25 years and deepen its cost-cutting efforts, attempting to free up cash for e-commerce and store improvements in an increasingly competitive retail environment.

The strategy is central to Wal-Mart's plan to fend off Amazon.com Inc. and a sign that executives believe the profitable, cavernous stores Wal-Mart built rapidly for decades won't grow through expansion.

At an investor meeting on Tuesday at the retailer's Bentonville, Ark., headquarters, executives said they would open about two-dozen U.S. stores in the 2019 fiscal year. Instead, Wal-Mart will remodel existing buildings and spend on its e-commerce infrastructure and services like home grocery delivery.

Though Wal-Mart's "supercenters" have long been the most profitable part of its business, Amazon is grabbing a larger percentage of sales of many of the easily shippable products that line the aisle of Wal-Mart's large-format stores.

Now Wal-Mart must find more ways to pay for the retail battle.

On Tuesday it outlined plans to lower expenses as a percentage of sales from 21%, where it stands this fiscal year. Wal-Mart has started using zero-based budgeting in some corporate units and has made cost cuts as mundane as printing receipts on smaller strips of paper -- a change that has saved $7 million so far this year.

"We are not where we want to be from an expenses standpoint," Brett Biggs, chief financial officer, told analysts.

Wal-Mart shares climbed 4.5% to $84.13 on Tuesday, their highest close in more than two years. The stock price is up 22% so far this year.

Early last year Wal-Mart closed more than 150 U.S. stores, and said it would slow down on opening new stores. In the 2017 fiscal year that ended in January, it opened 111 U.S. stores, down from 216 the previous year.

The company said it would open 255 new stores outside the U.S., with a focus on Mexico and China, during the 2019 fiscal year.

Wal-Mart has already dug in on expenses, eliminating thousands of corporate and store jobs, increasing the fees it charges suppliers to deliver goods to stores and demanding lower prices on goods.

Wal-Mart expects to save $20 million this year by using slightly smaller plastic shopping bags, Mr. Biggs said.

It will now institute zero-based budgeting -- a technique in which each business expense must be justified -- in many parts of the business "above store level," he said.

Zero-based budgeting is used more widely in the consumer-products and packaged-foods sectors, though some other companies, including Verizon Communications Inc. and Sprint Corp., have deployed the technique.

Wal-Mart has kept sales growing with improved stores and online investments, in contrast with retailers that have struggled to fend off discount and online rivals.

Wal-Mart's e-commerce plans have become more urgent in the wake of Amazon's purchase of Whole Foods Market. The acquisition gave the e-commerce giant a foothold in the brick-and-mortar supermarket business, and became a larger direct threat to Wal-Mart, the country's largest seller of groceries.

Wal-Mart Chief Executive Doug McMillon said the company plans several ways of delivering groceries to shoppers' homes, including using employees, contract delivery workers and third-party services such as Deliv that have their own teams. Mr. McMillon added, however, "I believe the vast majority of grocery shopping will happen in stores for a long time."

The retailer has invested heavily in online grocery pickup at its stores, when shoppers order online and pick up in a store parking lot. Executives said Tuesday that by the end of this year it will offer the service at 2,000 U.S. stores, roughly double the number of stores where it is currently available.

Last year, Wal-Mart purchased online retailer Jet.com for $3.3 billion, placing founder Marc Lore at the head of its U.S. e-commerce operations. Mr. Lore has pushed the behemoth to buy a number of smaller e-commerce players, offer two-day shipping on more online sales and craft a more upscale online image that will attract premium product manufacturers.

Since the Jet acquisition U.S. online sales have accelerated. Next year, the company says it expects to see U.S. revenue from online purchases rising by roughly 40%.

Wal-Mart said it expects adjusted earnings per share growth of 5% in its 2019 fiscal year to outpace sales growth of about 3%, confirming its profit goals laid out last year.

The company maintained its adjusted earnings per share guidance in the current fiscal year of $4.30 to $4.40.

The company also announced a new $20 billion share-buyback program, which it intends to use over the next two years.

The new buyback authorization replaces a $20 billion program announced in October 2015.

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

October 10, 2017 18:43 ET (22:43 GMT)