Wal-Mart shrinks U.S. supercenters, sees tepid sales

SAN FRANCISCO Thu Oct 22, 2009 8:27pm EDT

A new Wal-Mart store shows off the company's new logo in Loveland, Colorado July 21, 2009. REUTERS/Rick Wilking

A new Wal-Mart store shows off the company's new logo in Loveland, Colorado July 21, 2009.

Credit: Reuters/Rick Wilking

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SAN FRANCISCO (Reuters) - The Wal-Mart supercenter is getting downsized.

Wal-Mart Stores Inc fueled its aggressive U.S. expansion this decade by opening supercenters that on average have more square footage than three American football fields. But at its analyst meeting on Thursday, Wal-Mart said it will rely on smaller, more efficient stores to drive future U.S. expansion and help it penetrate yet untapped urban markets.

While it shrinks the average size of its U.S. stores, its international operations are gaining in importance and will help fuel future sales. It forecast international square footage growth to outpace U.S. growth this fiscal year and next.

One area of business that Wal-Mart made clear it is not changing is its commitment to discount prices and its intention to defend its turf against rivals.

"We watch the competition," CEO Mike Duke said on the second day of its analyst meeting. "We will be the price leader."

On Wednesday, Wal-Mart outlined plans to slash prices every week until Christmas to fend off rivals and keep newly won market share gains. Online competitor Amazon.com Inc on Thursday forecast what could be a blow-out holiday quarter for its business, sending its shares up 13 percent.

Wal-Mart's price strategy pressured its shares as investors worried the discounts would hurt margins. Wal-Mart's treasurer, Charles Holley, said the retailer is being "thoughtful and strategic" about price cuts to protect margins.

But in response to analysts' questions about how Wal-Mart would respond if rivals slash prices, Duke responded multiple times that the retailer intends to be the "price leader."

TEPID SALES GROWTH SEEN THIS YEAR, THEN A REBOUND

Wal-Mart expects sales to grow 1 percent to 2 percent in the current fiscal year, below the 5 percent to 7 growth projection provided at last year's analyst meeting.

Chief Financial Officer Tom Schoewe attributed the shortfall to currency exchange rates and deflationary pressures. Last year, rising food and gas prices helped boost sales figures, but those forces have eased this year.

Higher growth should resume next year, when the company sees sales rising 4 percent to 6 percent.

It forecast square footage growth up 4 percent this fiscal year and next. For the current fiscal year ending January 31, 2010, it will add approximately 38 million square feet globally, down from 44 million last year. In its next fiscal year, it expects to add approximately 37 million square feet.

Now that Wal-Mart is focused on improving returns instead of chasing U.S. expansion by opening mammoth supercenters, it is opening smaller supercenters that cost less to build and operate.

The average size of a supercenter, which combines a full grocery store with a discount store, has fallen from about 180,000 square feet three to five years ago to 150,000 or 160,000 in the past year or two, Schoewe said.

"Clearly ... that number will continue to come down," Schoewe told reporters on a conference call.

He also said Wal-Mart is trying to develop a smaller store format that could be used to enter urban markets where it does not yet have a presence.

"We are trying to figure out how to make the economics work," he said. "When you go into a major metropolitan area, real estate can be very expensive, so we have to find a way to balance that high cost of real estate and still provide everyday low prices to our customers."

Wal-Mart also expects capital expenditures of $12.5 billion to $13.1 billion in the current fiscal year, which ends in January 2010, and $13 billion to $15 billion for the next fiscal year.

Wal-Mart shares fell 15 cents to $50.48 on the New York Stock Exchange.

(Reporting by Nicole Maestri in San Francisco and Martinne Geller in New York; Editing by Andre Grenon, Richard Chang, Gary Hill)

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