Worldwide sourcing will produce gold

BENTONVILLE, AR — Wal-Mart's year-old global sourcing arm will become a key contributor in expanding the $244.5 billion company's profitability over the coming years, president and ceo Lee Scott said last week.

"Where inventory improvement drove our above-plan earnings in the late 1990s, I believe the benefits of global sourcing will be one of the most important factors in earnings growth in the next five years," he told analysts during a conference call to review fourth quarter and fiscal year results.

The global operation officially got under way in late 2001 after Wal-Mart severed its relationships with Hong Kong-based Pacific Resources Export Ltd., which had provided product from Asia, Europe, South America, the Indiana subcontinent and the Middle East.

Scott pointed to the global procurement division — which consists of 20 offices worldwide — as one of Wal-Mart's great success stories in an otherwise challenging 2002. Constantly lowering the bar on pricing is one of Wal-Mart's key strategies, most notably articulated in its rollback campaign. Rollbacks last year totaled $10.4 billion, surpassing the Wal-Mart division goal of $10 billion, according to Tom Schoewe, executive vp and cfo.

For the company overall, product development associates and buyers "greatly improved" the quality, assortment and value last year in such key areas such as domestics, apparel and electronics, Scott said. "They are not only providing great prices, but merchandise that is absolutely relevant to the customer's taste at this time."

Scott also used the call to debunk the notion that Wal-Mart is looking to trade up to a higher-income customer, an idea some analysts and consumer media have been reporting in recent months.

"I'd like to say again to all of you that the truth is that the people who purchase [higher-ticket] merchandise are almost always our existing customers — who were just buying these items at other retailers previously."

He also noted that while the pace of consumer spending slowed over the course of the past year, "We captured a larger share of the available market."

Nonetheless, Wal-Mart ended the year with plumper inventories, up 10.1 percent. Schoewe attributed that to lower than expected holiday sales in the Wal-Mart division; the West Coast dock workers' strike; lagging holiday sales in several countries, which he pointed out end their fiscal years on Dec. 31st, and so do not allow for clearance sales; and the recent purchase of Amigo, which was too late in the quarter to contribute to sales, though inventories were incorporated.

"The inventories are clean," Schoewe said. "The issue is not the quality but one of quantity," and the company was working the excess out of the system to realize Wal-Mart's standard of holding inventory growth at less than half the rate of sales growth.