Conference Call, 03/02/97: Wal-Mart Stores, Inc. Q4 '96

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Wal-Mart Stores, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>
702 SW Eighth Street
Bentonville, AR 72716-8611
(501) 273-4000
http://www.wal-mart.com

UNION CITY, CA (March 2, 1997)/FOOLWIRE/ --- Wal-Mart Stores released fourth quarter and year-end results for 1996 on February 25th. Last year at this time their critics were saying that Wal-Mart was just too big to grow. They think their company proved that indeed they are a $100 billion growth company. They believe they hit on all cylinders last year. They had good sales growth, good earnings gains, better asset management, and a much improved cash flow picture. Their consolidated sales for the quarter were up 12%. Their company domestic comps were up 5.7%. At the Wal-Mart division they were up 5.4%. Their clubs were up very strong, 7%. Their net earnings for the quarter were up over 16% to $1.1 billion which was $0.48 per share versus last year's $0.42 per share, and a penny above analyst estimates. For the full year, their sales were up 12% or $11.2 billion to almost $105 billion. Their net income which was very important to them also, was up 12% which matched their sales growth rate. Their consolidated comps for the year were up 4.9%. The Wal-Mart division was up 5.4% and their clubs were up 3.3%. With their domestic store growth and their comp performance, they continue to build market share, both in the grocery and the discount store segments. Their internal domestic consumer tracking data they have showed that store visits are at record highs, with average customers in their stores twice a week. This is an indication of both their brand strength and their customer loyalty. Their low-price scores nearly doubled their major competitors. For the year, their net income was a record $3.06 billion or $1.33 per share.

HIGHLIGHTS OF THE RESULTS FOR THE QUARTER AND YEAR. Their domestic sales are up 11.4% for the quarter. Their gross margin results included their FIFO. Gross profit improved in each of the retail operating divisions. Their general merchandise and food margins increased for both the quarter and the year. Their clubs improved gross margin by almost 75 basis points during the year due to reduced markdowns and shifting vendor allowances to lower net pricing at Sam's. Although this shift improved margins, it resulted in some decrease in other income. Their business mix reduced their consolidated gross margin gains with food, McLane's, and international growing faster than the discount stores.

OPERATING EXPENSES. Operating expenses were down significantly during the quarter with every operating division showing improvement. Internationally, they showed more than 100 basis point improvement in operating expenses in the quarter and over 50 basis points for the year. A key company focus for this past year was their asset management and cash flow programs. They think they attained outstanding results. This will give them the financial flexibility to continue to enhance shareholder value.

INVENTORY/CASH/DEBT. At January 31st their inventories are down almost $100 million from the prior year in spite of their 12% sales increase. This is the equivalent of over a $2 billion reduction in inventory if compared to their sales growth rate. Their comp store inventories and discount stores were down 8.2%. Their free cash flow, which is after their capital expenditure program, exceeded $3 billion for the year. This drove their net short-term cash position which improved $3.3 billion for the year. They had short-term investments of over $800 million at January 31st this year compared to $2.5 billion of commercial paper borrowings at January 31 last year. Their debt, including total leases, to total cap ratio declined by over 9% to 38.3%.

THINGS THEY'RE DOING TO LOWER EXPENSES. They are very encouraged by their return on assets which improved for the first time in several years and they expect further increases in future periods. Their better management of retail assortments did not come at the expense of their in-stock position or losses in sales. Additionally, through their extensive database, they have begun to enhance their micro-marketing programs. Their goal is to have the right merchandise at the right price to meet a customer's specific needs, to satisfy ethnic tastes and consumer buying habits which will build long-term customer loyalty. They believe opportunities exist for continued inventory reductions through leveraging their existing business practices by focusing on supply-chain management and their inventory control technologies. Over time, their inventory management programs will reduce their markdowns, lower their store labor, improve inventory turnover, and increase sales because of efficient assortments.

SAM'S CLUB RESULTS. Sam's sales accelerated as the year went on with the fourth quarter up 7% both in total and in comps. Sam's operating profits were up 8% for the year on a 4% increase in sales. Membership income was up, driven by strong growth in new Advantage memberships and renewals. Pace sales continue to exceed the growth in the Sam's Club. The Pace Clubs were profitable in the fourth quarter and broke even for the year.

INTERNATIONAL RESULTS. International is now a $5 billion business. They have only been in that business five years. The division made money in the fourth quarter and for the year. Canada, Mexico, and Puerto Rico were profitable in the fourth quarter and the year. They expected international to achieve profitability this year and they did. They anticipate further improvements in profitability in the coming year. Canada had an excellent quarter with operating profit in December as a percent of sales actually better than the solid performance experienced by the domestic discount stores. Comparable sales were up double digits for the fourth quarter and continued to run at this level. Their average check continued to increase, showing good acceptance in Canada. Their discount market share in Canada now exceeds 45% and they believe they are the largest discount store chain in Canada. Their Canadian consumer track shows they have over 96% aided and unaided awareness in that country and more than double the first store score of their major competitors. At the beginning of the fiscal year, they assumed shoe operations from Kinney in Canada and they are experiencing both sales and margin improvements over prior year levels in this specialty department. Mexico was profitable in the quarter but continues to be impacted by high inflation and a recessionary economy. The country was also profitable for the year. Lots of positive signs since the pacto was signed and implemented in December, increasing wages to partially compensate for inflation, the clubs and supercenters are currently showing positive inflation-adjusted comps. They are already the largest retailer in Mexico and they will resume their growth this year by adding 8 supercenters on top of the 4 they added last year.

MCLANE'S. McLane's outside sales increased 14.6% this year and operating income improved to over 2.25% of sales.

OTHER INCOME. Other income was down for the quarter as a percent of sales and up for the year over the similar prior year periods. Other income was reduced by the allowances in Sam's which are reflected in its higher gross margin. Reductions in recycling income and decreases in the minority losses were also booked in this account.

INTEREST EXPENSES/TAXES/SHARE REPURCHASE. Interest expense for the year was down $50 million due to free cash flow. It was down $42 million for the year. The tax rate for both years was 37%. Under their existing repurchase program, they bought a total of 14,242,000 shares for approximately $335 million. Year to date, their average shares outstanding were 2.289 billion versus 2.294 billion last year.

LIFO CREDIT. The LIFO credit for the quarter was $25 million this quarter versus $53 million last year for the same quarter. Total LIFO for the year is a $15 million credit versus a $40 million credit last year. FIFO margin would have been up slightly for the quarter.

RETAIL SPACE. For the year, domestically, they had over 20 billion square feet. The discount stores finished with 181.7 million square feet. Their supercenters had 63.3 million and Sam's had 52.9 square feet. The average size unit for the discount stores is about 120,000 square feet. The supercenters for the year averaged 187,000 square feet. They had a couple of 109,000 square foot stores in the fourth quarter down in Texas and continue to test that concept. The Sam's units averaged about 113,000 square feet. International square footage came in at 37 million square feet and they added over 3 million square feet of international area.

UNALLOCATED EXPENSES. The unallocated expenses are up over last year. One of the key components is the incentive compensation programs which were paid out this year versus last year when accruals were actually reversed based on performance.

GOOD RESULTS FOR Q4 AND 1996. They are very pleased with the fourth quarter. Their sales were good and earnings as well. In fact the strength of the earnings goes across all operating divisions and the fourth quarter continued a trend they were on during the year. They started the year a little soft but gained strength and momentum as they went through the year.

WAL-MART STORES DIVISION. Looking across the Wal-Mart divisions, the Wal-Mart stores division had good expense control, initial margins strengthened. They did a lot this year to reposition their mix and to re-merchandise their stores based on the community they serve. For example, they made major progress in managing their small store division as compared to their metro division. If you look at the individual pieces of it, significant improvement in small town America and significant improvement in all of the metro areas.

SAM'S CLUB/WHOLESALE DIVISION. They are proud of the Sam's division. They have long believed that the wholesale club business was alive and well and had a lot of opportunity and Sam's sort of repositioned itself in its marketplace this year with a different thrust from merchandising. They have good, solid same-club sales growth now, profitable growth. Membership numbers and income are growing well, sales per member are up, and they see some very positive signs in Sam's that should continue for the foreseeable future. They will begin to put in some new Sam's Clubs, expanding that division, as well as upgrading a number of the clubs that they have had around for a period of time.

WAL-MART SUPERCENTERS. Supercenters had a good year and they continue to be very pleased with the performance and will continue to accelerate that program, making it their principle growth vehicle going down the road. They haven't in the past broken out supercenter numbers, but their numbers are very good for the year and they are beginning now the process of combining the Wal-Mart stores division and the supercenter division in certain ways. They still are operating in some areas separately, but they are beginning to combine the merchandise functions and the operating functions to get more of their best people involved in the running of the supercenter division and feel that the timing is right. The supercenters are no longer a test, they have a major commitment there and will continue to roll them out as rapidly as they can.

LEARNING FROM INTERNATIONAL GROWTH. The other big area is international and they have made great progress internationally. The Canadian operations as well as Mexico, Puerto Rico have all had super years. In other parts of the world they continue to grow and improve. What they are learning is that the Wal-Mart culture is exportable, but the Wal-Mart concept needs to be modified. A supercenter works well all over the world but needs to be changed somewhat from the supercenter that they put in the US, so they are learning. They are travelling that learning curve, but utilizing the strengths of their organization -- their technology and merchandising expertise, the culture, the capabilities of their people -- and are adapting it to the local areas. Until they achieve critical mass in some of the countries, they will find themselves in a position where they have a really good supercenter and a really good wholesale club and they will generate profitability at the store level but will not make money in the country because of the cost of the infrastructure to build the base there. It's a small price to pay to position themselves for the unbelievable opportunities that exist internationally. There is a byproduct of that as well and that is that the international competition is tough but there are some very good operators out there and they are learning a lot of lessons in other parts of the world that they can also apply domestically and will help their operations here in the US.

LEVERAGING THEIR TECHNOLOGY. They have begun, really for the first time, this year in a meaningful way to take advantage of the technology they have developed over the last 10 years. They think they have probably spent more on technology than any other retail company they know of and with the systems, the inventory management, the distribution, the logistics, and the opportunities they have to apply the technology has enabled them to do some things that they heretofore haven't been able to make happen. An example, earlier this year the group was challenged to improve inventory turns, inventory is the bulk of the assets for any retailer, and they challenged their people to take a billion dollars out of their inventory levels by improving their turns and utilizing the technology for this whole replenishment process. They not only took the billion dollars out this year, they beat that substantially to where Wal-Mart generated a lot of additional cash flow, improved their return on assets, and began to manage the balance sheet side of their business better than they have in the past. Their people are encouraged by the results and they think that is a trend that can continue in the foreseeable future.

SUMMARY. They are excited about what happened in the past year, not just the operating numbers and what they put on the sales line, the $100 billion number is not all that meaningful although it's a milestone that Sam Walton had predicted for them and their people felt good about hitting it. More importantly, they think they have dramatically strengthened themselves internally. They think that they have repositioned themselves from a merchandising and operations standpoint in all of their divisions and they are excited about the start that they are getting in the new year and their prospects for the new year. They believe they have excellent momentum going into this year. They look forward to the coming year and are confident about continued earnings improvements and increasing their return on investments.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.