Walmart's Troubles Are Far More Serious Than Its Execs Will Admit

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Walmart's Troubles Are Far More Serious Than Its Execs Will Admit

Taken together, the annual meeting presentations made by Walmart (WMT) vice chairman Eduardo Castro-Wright and CFO Tom Schoewe suggest that the retailer may have more problems than its results otherwise indicate.

The results didn’t get worse. In fact, some are good, particularly as regards its ability to squeeze profits out of operations. What’s troubling is that Walmart executives went some distance to gloss over the company’s real challenge, which is driving comparable store sales when opportunities in its most important market, the United States, are narrowing. Walmart’s annual meeting presentations were so vague about how it would get back on a more solid sales footing that the retailer seemed adrift.

With its recent emphasis on cutting expenses and store growth, Walmart is banking money but not building sales, so it’s supporting its share price by buying back stock. Remarks from Walmart CEO Mike Duke suggested that Walmart was readying itself for an international growth push as a logical response to its maturing position in the U.S. marketplace.

The presentations by Castro-Wright and Schoewe, however, left the impression that the retailer’s management had been caught by surprise, in that it appears that Walmart was counting on considerably more time to advance its growth initiatives. In particular, Walmart seems to have figured that the soft economy would provide some breathing room, given that anxious consumers had been beating a path to its discount doors.

Unfortunately for Walmart, the flood of customers that traded down to its stores in the recession dried up and, in some cases, flowed back to into old, familiar patterns of supermarket and general merchandise store shopping. In other cases, consumers trickled past Walmart to other discount retailers whether warehouse clubs, dollar stores, or bargain grocery operations such as Aldi and Save-A-Lot.

In their own way, those retailers provide a slightly different balance of price and quality that provides an alternative to Walmart. The comparable store sales slide doesn’t yet indicate that established or even new shoppers are abandoning Walmart wholesale - just that they’re exercising their options more frequently.

Castro-Wright insisted that Walmart would respond to the situation the way it usually does, by providing customers with better prices. The effort will include old-fashioned Walmart price-cutting on everyday prices that reinforces the retailer’s position as price leader. But he also noted that the company is expanding the promotional discounts, or rollbacks, that it has conspicuously deployed

“We have taken our promotional activity to a whole new level,” he said.

That isn’t necessarily a good thing. Walmart cost cutting can actually diminish sales. It can even hurt store visits. For example, Castro-Wright admitted that overzealous trimming of merchandise assortments implemented to boost efficiencies had driven some shoppers from the retailer’s stores. Walmart has backtracked and added some merchandise it had deleted, but the damage was done. Consumers went to other stores to secure favorite items and experienced the various value propositions they are offering these days. Some won’t be back.

Schoewe’s presentation focused on shining up the retailer’s performance. He did his best to make the numbers looked good, and the adoring audience of associates assembled for the presentations cheered his every sunny conclusion. Included in the exercise was commentary on comparable store sales that conveniently covered two years and so included Walmart’s recessionary sales boost.

Schoewe even provided a chart that graphically demonstrated the favorable gap between Walmart’s comps and the retail average and over the period. Yet, he glossed over the fact that, as the sales trend lines approached the present, they got closer to convergence. Approaching mediocrity isn’t something Walmart traditionally celebrates.