UPDATE 2-Wal-Mart cutting U.S. store openings further

Mon Oct 27, 2008 6:09pm EDT

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By Brad Dorfman and Nicole Maestri

CHICAGO/NEW YORK Oct 27 (Reuters) - Wal-Mart Stores Inc (WMT.N) will slow the pace of U.S. store openings and cut back on capital spending, aiming to boost sales by remodeling existing stores and improving its merchandise selection.

The world's largest retailer also said on Monday that it is attracting higher-income shoppers with discounts as the U.S. economy reels from tighter credit, mounting job losses and falling home prices.

Traffic at stores serving households with income above $65,000 has been growing much faster than at the chain as a whole, Wal-Mart U.S. President and Chief Executive Officer Eduardo Castro-Wright said at the retailer's annual analysts' meeting, which was broadcast over the Internet.

"What that means is we are seeing a lot of new customers that did not consider Wal-Mart before, that consider Wal-Mart now," Castro-Wright said.

Wal-Mart is holding its annual two-day analyst meeting in Bentonville, Ark. Its U.S. business is making a comeback after the retailer saturated markets with stores and saw slower growth in recent years.

Cash-strapped shoppers are increasingly heading to its stores for low prices for necessities, such as food and medicine.

Wal-Mart is also benefiting from efforts started in 2006 to slow aggressive expansion plans and focus on improving U.S. sales. After its sales at existing U.S. stores rose 1.4 percent last year -- its lowest annual result in history -- sales have rebounded and gained 2.9 percent through September.

Analysts are watching to see if Wal-Mart can keep its momentum going amid the threat of a global recession. While Castro-Wright provided an update on its U.S. business, Chief Financial Officer Tom Schoewe is expected to outline expansion and capital spending plans for the entire business on Tuesday.

The company's shares closed down 3.4 percent at $49.67

SLOWING NEW U.S. STORES

Wal-Mart's U.S. division plans to open 191 stores in the current fiscal year, which ends in early 2009, and 142 to 157 stores in the next fiscal year, Castro-Wright said. The company opened 218 U.S. stores in fiscal 2008.

Wal-Mart also plans $5.8 billion to $6.4 billion in capital spending this fiscal year for its U.S. division, down from $9.1 billion last year. In fiscal 2010, it plans to spend $6.3 billion to $6.8 billion, Castro-Wright said.

While it reduces overall capital spending, it is putting money toward remodeling stores.

Castro-Wright said the retailer has seen dramatic improvement in its electronics department, where it has done extensive renovations, bringing in name-brands products and expanding space for shoppers to test out video games.

"We're going to increase investment behind remodels so that we can bring all of our fleet up to the same standard as fast as we can," Castro-Wright said.

Joseph Feldman, a retail analyst with Telsey Advisory Group, liked Wal-Mart's decision to shift some capital spending toward remodeling its stores.

"The upgraded store base should generate greater productivity and more satisfied customers due to the more enhanced shopping experience," he said in an email.

Wal-Mart, known for its massive supercenters that combine a full discount store with a grocery store, is also looking at building smaller stores and "fine-tuning" its merchandise.

For instance, it has increased its offering of pet products and beauty care items to draw more frequent trips by shoppers.

"We're becoming a pet care provider, as opposed to a pet food merchant," said John Fleming, its chief merchandising officer.

CONSERVATIVE EFFORTS PAY OFF

To win business in the tough economy, Wal-Mart has been touting its low prices. Wal-Mart Stores Inc CEO Lee Scott, who stressed that "Christmas will come on Dec. 25" despite the economy, said that Wal-Mart will have the best prices in the market for the holiday season.

He said that, in tough economic times, shoppers want to "treat their families right" when they can and that this was evident in sales of children's apparel and Halloween costumes.

Scott also said efforts to manage the company balance sheet and capital spending more conservatively in recent years are now paying off, with low interest rates in the tight market for short-term corporate credit.

In the last several weeks the company has borrowed several hundred million dollars in the commercial paper market as it readies for the holiday season at an interest rate of "substantially less" than 2 percent, Scott said.

The average rate for commercial paper was 1.96 percent in the week ended Oct. 24, down from 2.12 percent a week earlier, the U.S. Federal Reserve said. (Editing by Leslie Gevirtz and Andre Grenon)

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