Wal-Mart Stores (NYSE:WMT) Chief Financial Officer and Executive Vice President Brett Biggs spoke recently at the Bank of America Consumer and Retail Conference. He touched on many points, ranging from Wal-Mart's transition to clean, fast, friendly stores and the company's investments in wages and e-commerce.
A customer clothed in economic health yet reluctant to spend
According to Biggs, Wal-Mart customers are enjoying tailwinds from low fuel prices, interest rates and unemployment rates, but they aren't opening their wallets.
"The customer, though, we continue to see one trend that was prevalent in 2015, which is customers were paying down more debt; they continue to save money," he said. "We're continuing to see that, and you've read reports where you continue to see that some into 2016, so I think that's a trend that continues."
Biggs attributed this consumer behavior to uncertainty over the current U.S. election and an imprecise understanding as to how macroeconomic events affect them.
Ultimately, he characterized this customer dichotomy, a composite of economic tailwinds coupled with a reluctance to spend, as a mixed bag. A customer in good economic shape should be the ultimate good guy for Wal-Mart, but this one is buttressing the balance sheet and keeping the wallet pinched tight.
A stock price at the turn of the century
The conference was not an utter love-fest replete with toss-ups such as "tell us again why Wal-Mart is so great," as one analyst pointed out that the stock price of Wal-Mart isn't any higher than it was at the start of the century:
"So it's 16 years of lower ROICs that partly was due to the international spending. In your defense, you haven't thrown money at Russia. You haven't -- you got out of Germany."
In Germany, consumers viewed Wal-Mart's anti-labor union practices as undemocratic, shoppers were turned off by strangers bagging their purchases, and male customers thought smiling female clerks were flirting with them. In Russia, the company closed down its Moscow office in 2010 after it failed to find a merger partner.
Ultimately, the analyst asked how Wal-Mart's e-commerce spending would be any better than its international spending.
"I think it's tough to compare international necessarily with e-commerce. In all respects, no matter what we do, what decisions we made in the past or decisions we make in the future, it is about taking care of our customers and doing what we think is right to serve them today as well as in the future. And in doing that, believe that's serving our shareholder as well," Biggs responded.
Lessons learned from Express stores
In January, Wal-Mart closed all of its 102 Wal-Mart Express stores, a smaller-format located close to customers' homes and ranging in size from 12,000 to 15,000 feet compared to a Supercenter average size of 180,000 feet. These stores failed in part because they didn't carry higher-margin items due to limited space.
When asked about lessons learned from the Express store failure, Biggs indicated that Wal-Mart needed to do things with scale and that bigger stores probably would have worked in place of Express stores. He also indicated management's optimism in Wal-Mart's Neigborhood Markets format.
"When you look at what we're doing with Neighborhood Markets, and we feel good about Neighborhood Markets, we think that there's a customer that can be served with the Neighborhood Market that maybe necessarily doesn't have to be served with a different format," he said.
Neighborhood Markets sell groceries, household supplies, health and beauty, and pharmacy items and range in size between 38,000 to 40,000 square feet. For 2015, Neighborhood Market same-store sales growth was 6% compared to overall Wal-Mart comparable store sales growth of 0.6%.
In the key of "if"
Wal-Mart is going through a transformational year in which it is making sizable investments in its wages, stores, and online strategy. The retailer is also staring down an economically healthy customer who doesn't seem keen on spending.
If customers start opening their wallets, the company's online and store initiatives pay off, and Neighborhood Markets continue to flourish, then investors may find momentum in place of stagnation. This is a lot of "ifs" but something well-worth monitoring given the company's turn-of-the-century stock price.