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3 Reasons Wal-Mart Went "International" With Its New CEO

http://www.fool.com/investing/general/2013/11/25/3-reasons-walmart-went-international-with-its-new.aspx

Alex Dumortier, CFA
November 25, 2013

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Despite what looks like a historic – albeit interim – agreement with Iran on its nuclear program, stocks weren't able to sustain their early gains, and the S&P 500 closed down 0.13% on Monday. The narrower, price-weighted Dow Jones Industrial Average (INDEX: ^DJI) did manage to squeak out a 0.05% gain to achieve another record high above 16,000.

When it comes to naming CEOs, Wal-Mart Stores (NYSE: WMT) likes to keep it in the (corporate) family. Today, the company announced that Doug McMillon, who currently oversees Wal-Mart International, will succeed Mike Duke as president and CEO, effective Feb. 1. McMillon joins the company's board, effective immediately. Here are three reasons the company went with McMillon over the other internal candidate, Bill Simon, who runs Wal-Mart U.S.

1. Wal-Mart's international activity is critical to its future growth
McMillon took over Wal-Mart International from Mike Duke when he was named CEO in 2009, so the "foreign route" to the top spot is not a new one at Wal-Mart. With cause: If it is to burnish its growth credentials, international markets are critical to Wal-Mart's future.

Wal-Mart International contributed 29% of the company's revenues in the fiscal year ended in January, but it ponied up 42% of the increase in total revenues. Under McMillon's tenure, Wal-Mart International grew profits before taxes at annualized rate of 8.5%, compared with just 1.3% for Wal-Mart U.S. It can be no coincidence that, in commenting, on his appointment, McMillon said [emphasis mine]: "Our company has a rich history of delivering value to customers across the globe and, as their needs grow and change, we will be there to serve them."

Wal-Mart's international expansion has hardly been without its hiccups. In fact, McMillon has been steering Wal-Mart out of a bribery scandal at Wal-Mart de Mexico, the company's largest subsidiary, that relates to practices dating back to the middle of the last decade. However, faced with a saturating, slow-growth domestic market, foreign markets remain a priority for Wal-Mart.

(Incidentally, foreign markets are challenging for other retailers, too. Last week, Target (NYSE: TGT) missed its earnings estimate because of a wider-than-expected loss at its Canadian operations.)

2. McMillon is a Wal-Mart veteran and insider
Wal-Mart is a company with a strong corporate culture that promotes from within. The following table shows the tenure of the three CEOs that have led Wal-Mart Stores since it became a public company (all except for founder Sam Walton) and the year in which each joined the company.

CEO

Tenure

Joined Wal-Mart

Mike Duke

2009-2014

1995

Lee Scott

2000-2009

1979

David Glass

1988-2000

1976

Sources: Company website, media reports.

All three men had put in more than a decade with the company before being named chief executive, and in the case of Lee Scott, it was more than two decades.

McMillon is, it's worth mentioning, an Arkansas native and a University of Arkansas graduate with a long Wal-Mart pedigree behind him. Indeed, he started his career as a summer associate in a Wal-Mart distribution center, before rejoining the