Wal-Mart reported an 8.1 percent rise in first-quarter earnings on Tuesday, but the world’s largest retailer was cautious on its view for the second quarter.
Reuters talked to Wal-Mart CFO Tom Schoewe about the retailer’s results and how its shoppers are holding up in the face of rising gasoline and food prices, and a slowing housing market.
Here is an excerpt from the interview:
Reuters: What is your view on your how your shoppers are digesting the higher gasoline prices? What did you learn last summer with your shoppers facing such high gasoline prices now that it looks like we’re heading for the same thing again this summer?
Schoewe: Clearly our customer is feeling the crunch and I think what we ought to do is think about this…so often we think about this analytically. We’ll say what is the gas price today and how does that compare to a year ago? Well analytically –that’s interesting. But for the individual that’s living paycheck to paycheck, they don’t care what gas prices were a year ago. The fact that the prices today might be something close to what they were a year ago is meaningless.
What’s far more meaningful in my opinion is the slope of the line — the fact that gas prices are up and continue to go up and every single time they pull in to fill up their tank, that’s pulling disposable income out of their pocket. For a customer that’s living paycheck to paycheck — that’s an important customer for us — that clearly has an impact on our business.
Reuters: What are you seeing in terms of the impact of food inflation? We hear of rising prices for a gallon of milk or higher prices for corn products. How is that affecting your shopper?
Schoewe: We’re seeing the inflation that you’re describing. I don’t think that’s having as significant an impact on our customer as gas. Now, you have to take all of this into consideration because at the end of the day, somebody has just so much money to spend, so if there’s inflation in food, if there’s inflation in gas, it’s going to impact them.
I think the raw economics and the psychological impact of gas prices, which are featured only daily in the media, has a psychological impact on our customers as well.
So, yes, food inflation is impacting traffic etc. but in my gut I don’t believe it’s the same impact as petroleum based inflation
Reuters: When you talk about making sure that people know that you are the price leader, how is that being played out to make sure you message is getting out to the consumer?
Schoewe: All you have to do is go into our stores and see we’re working as hard as we can to get that message across, whether it’s the signage in the stores or even the ads that you’ll see on TV. What we’re trying to do is let the customer know that when times are tough, Wal-Mart is the right place to go and that’s the best value that you can get and that value proposition is something that our customer trusts.
Reuters: What about store traffic? Do you give overall quarterly traffic results?
Schoewe: We do not provide specifics. But I can tell you that — for all the reasons we’ve just described — one of the main reasons if not the main reason that our comp (comparable) store sales are below expectations is because traffic is not what we would like in our stores.
Reuters: So if you’re looking at traffic that is not what you want and you may have to emphasize low prices a little bit more, is there a worry that you won’t get the volume you need to post sales gains?
Schoewe: No. If you think about our business model, it’s all about keeping expenses low. If we do that, that means we can provide a good value to our customer at a low price. One of the metrics that we would have released this quarter that’s really most impressive would be selling, general and administrative expenses as a percentage of sales, which were basically flat to the prior year despite the difficult sales environment. So what that tells you is we’re doing everything we can to keep that value proposition in place.
Reuters: How much SG&A can you cut? Do you still have the flexibility there to use SG&A to make up for the lack of sales?
Schoewe: The short answer is yes. We have significant opportunity to do a better job in selling, general and administrative expenses, and that’s across the board. That would include in-store labor and the productivity in store. That would include the headcount and overall expense levels here in our home office. I’d love for you to quote me on that one because that’s a message that I continue to beat pretty hard here at home.
Reuters: That you have flexibility with headcount at the home office?
Schoewe: And productivity in the field as well.
Reuters: So do you see reducing headcount at the home office this year?
Schoewe: No. What we need to do is continue to improve the productivity of the workforce that we have. When you are growing as rapidly as we are, it’s pretty hard to reduce headcount.
Reuters: I know we touched on gas prices, food inflation. What is your view on the housing market and how that is playing into how your customers are shopping?
Schoewe: Clearly it can’t be helpful. And whether it’s unemployment, or just job activity in general, the state of the housing situation is just one more set of headwinds for retailers in general. Not just us, but for everybody. Again what I’d ask you to think about is the demographic inside of our store. We would probably have more in the way of opening price-point shoppers than some of our competition. So as that customer goes, so goes our business.
Reuters: There was talk on your recorded call about home and apparel sales, and hopes that they will get back on track by the back-to-school season. Does that make the second half of the year even more important for you to show you can get U.S. sales back on track?
Schoewe: Short answer: yes. I think the proof is going to be in the numbers when we start reporting Q3 and Q4. There’s an awful lot of activity here and hopefully that will turn into very good results.