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The words no investor wants to hear

It may be the right thing to do long-term, but Walmart’s plans to slow growth in China, Mexico and Brazil didn’t sit well with investors this week.

The revelation that Walmart would add between 21 and 23 million square feet of space versus the previously planned addition of 30 to 33 million square feet will result in Walmart International spending between $4.6 billion and $5 billion compared to a previously budgeted amount of $5 billion to $5.5 billion.

As Walmart International president and CEO Doug McMillon noted, "Our (capital expenditure) dollars do not decrease in direct correlation with the square footage, due to the effect of leasing in China and timing of construction costs incurred in Mexico."

The company didn’t disclose how the reduction in square footage would translate to the number of stores affected by market, but McMillon did share additional thoughts regarding individual countries and the rationale for the decision.

Regarding China, where growth was cut in half, McMillon said a decision was made earlier this year to moderate growth to improve site selection and store design.

"In the past, we may have been too flexible and accepted stores that were located on too many levels or had difficult configurations. We now will open fewer stores this year than our original plan, with only about half the new store square footage than we had forecast."

In Mexico and Central America, an announcement was made in late June that Walmex was applying greater rigor to its real estate processes and that would delay store openings by as much as 90 days, effectively shifting some current year openings into the following fiscal year.

"The revisions to the expansion program are partially due to additional steps Walmex is adding to its real estate process that extend the average time required to open a store," McMillon said without specifically mentioning the ongoing investigation into alleged violations of the Foreign Corrupt Practices Act stemming from the company’s Mexican operations. "These steps include reinforcing documentation that supports real estate projects and enhancing processes with our business partners."

Regarding Brazil, McMillon said the company announced last quarter that it planned to slow growth in South America’s largest economy based on a decision made the prior year.

"As we mentioned last quarter, we decided to slow down our new store growth in Brazil to ensure we are building a solid foundation to grow comp sales and to have EDLP in place. We made this decision last year and so this year’s growth has been slower than it would’ve been otherwise. Accordingly, we expect to decrease our square footage growth from our original plan."

Walmart’s decision to moderate growth and implement new controls in key international markets doesn’t diminish the fact that global expansion remains the company’s key driver of future growth. International sales increased 6.4% on a constant currency basis to $32 billion and operating profits increased 5.4% to nearly $1.5 billion in the second quarter. However, a strengthening of the U.S. dollar had a major impact on the comparisons to the prior year and made the performance look weaker than it was when measured in local currencies. On a constant currency basis sales would have increased by 7.2% to $32.3 billion and operating profits would have increased 11.9% to $1.6 billion.

"Every market delivered positive comps, and I’m pleased that our largest markets, the United Kingdom, Mexico and Canada, collectively delivered stable growth, solid margins and expense leverage, despite challenging environments," McMillon said.

 

 

 

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