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Wal-Mart Shares Jump on Spending Plan

Rob Lenihan

Wal-Mart's(WMT Quote) struggling shares got a boost Friday as the world's largest retailer announced plans to cut capital spending and slow its store-opening pace.

The Bentonville, Ark., behemoth also said it would buy back $15 billion worth of stock with money freed up by the spending slowdown. Shares, which have been stuck in the mid-40s for much of the past year, were up $1.79, or 3.8%, to $49.39 in recent trading.

The steps come as Wal-Mart is facing stagnant growth amid tepid sales. The company also has also been embroiled in a very public legal battle with former marketing executive Julie Roehm, and it continues to face complaints about underpaid workers and overpaid corporate officers.

"We are committed to improving return on investment, while continuing to grow in the United States," CEO Lee Scott, who has been under fire for the stock's poor performance in recent years, said in statement. "Today's announcement of this strategy and the share repurchase program underscores Wal-Mart's commitment to returning value to our shareholders."

The company said it expects to add 190 to 200 new U.S. supercenters during this fiscal year and about 170 supercenters each year for the next three fiscal years. Wal-Mart had earlier targeted the opening of between 265 and 270 U.S. supercenters this year.

Some 80 of the supercenters originally scheduled to open in January 2008 now will open in early fiscal year 2009.

The move is expected to reduce Wal-Mart's capital expenditures this year to $15.5 billion, down from the previously projected $17 billion.

"The stock buybacks come at a time when cash flow creation is not what is was, so they are going to have to make big compromises in order to reward shareholders and buy back stock," points out Richard Hastings, senior retail sector analyst with Smyth-Bernard Sands.

Wal-Mart said it is working on improving store productivity through a three-year plan being implemented by U.S. chief Eduardo Castro-Wright.

"Through our strategy, we are pursuing high return opportunities by focusing on markets where our customer segmentation approach offers the best opportunity to create a more competitive position for Wal-Mart and drive higher comparable store sales," said Castro-Wright in a statement. "In addition, our U.S. plan includes a variety of initiatives designed to improve labor productivity and enhance margins."

The company is also trying to reduce so-called cannibalization by tightening its real estate standards.

Wal-Mart also elected new directors to its board, including former J.C. Penney Chairman and CEO Allen Questrom. Brian Sozzi, equity research analyst at Wall Street Strategies, sees Questrom's addition as a positive step.

"For Wal-Mart, granted he would not have involvement in day to day operations, but I believe he brings deep merchandising knowledge, specifically on the apparel front," he says. "Any help Wal-Mart could get on apparel would be welcome, especially if they look to add private labels, a la Target (TGT Quote) and J.C. Penney."

Hastings says Questrom has made his name as a turnaround leader and is unlikely to remain in the background.

"It would be encouraging to see Questrom as the authoritative leader of the Wal-Mart stores division where he could reshape the entire division into something closer to Target," he says.

Scott Rothbort, founder of LakeView Asset Management and a contributor to Street Insight, is doubtful that Questrom's election would have much of an impact at Wal-Mart.

"Is it really going to change the culture there?" he asks. "To me it looks like a publicity stunt more than anything else. Are they really going to allow him to change the company's entrenched culture? I don't think so."