Wal-Mart to slow U.S. expansion

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CHICAGO (Reuters) - Wal-Mart Stores Inc. (NYSE:WMT - news) said on Monday it plans to slow U.S. store expansion and spending growth next year in a bid to boost return on investment, sending its stock up more than 2 percentBut the world's biggest retailer said October sales were running below plan, in part because it underestimated how badly remodeling efforts at hundreds of its U.S. stores had disrupted business. That tempered enthusiasm for the stock, which had been up more than 5 percent earlier in the session.Wal-Mart said it expects its retail space to grow by 7.5 percent in the next fiscal year -- which begins February 1 -- a modest slowdown from the 8 percent increases seen in recent years. Capital spending is expected to be up 2 percent to 4 percent, well below the 15 percent to 20 percent increase expected in the current fiscal year. "We're still dedicated to growing the business," Chief Financial Officer Tom Schoewe said at the start of the retailer's two-day analyst meeting in Teaneck, New Jersey. "We're looking at our projects differently. We're prioritizing differently. We can still grow very rapidly but ... there's a lot more concern about capital efficiency," he said. Wall Street has urged the company to slow down its U.S. expansion because of dwindling returns, noting that Wal-Mart's stock has been in a rut for about five years. The Bentonville, Arkansas-based retailer said it would delay opening new stores that are close enough to existing locations to draw away customers, and planned to build smaller ones where possible to reduce costs. Schoewe said construction and real estate costs had soared, making new stores less profitable. He estimated that one dozen to two dozen stores were pared from the list of openings originally planned for next year. The slowdown was not necessarily permanent, however, and Wal-Mart would look to accelerate expansion once again if costs came down, Schoewe said. The company will begin looking at its store opening plans for 2008 in January. BIG-CITY PUSH Richard Hastings, retail analyst with Bernard Sands, said the slowdown comes as 44-year-old Wal-Mart faces a maturing home market and sets its sights on major urban areas, where both costs and community opposition are higher."They've run out of the kinds of rural and suburban inexpensive lease locations that they enjoyed for so many years," Hastings said. The retailer said it plans to open more than 600 new stores worldwide next year, but its real estate projects are now being subjected to a "more rigorous prioritization process." About half of the new stores will be outside the United States. Todd Slater, retail analyst with Lazard Capital Markets, said the decrease in U.S. square footage growth not only improves return on investment, but should also boost sales at stores open at least a year, which have trailed those of rival Target Corp. (NYSE:TGT - news) in recent years. He raised his price target on the stock to $59 from $54. Despite tighter cost controls, the retailer said it was pressing on with efforts to remodel some 1,800 stores, or about half the U.S. chain, but acknowledged that the store disruption was hurting sales in the short term. Wal-Mart said October's same-store sales were up about 1 percent so far, below its forecast for 2 percent to 4 percent growth. Women's apparel sales were lackluster as customers shunned fashionable items such as skinny-leg pants. The stock pared its early gains to trade up $1.22 to $50.59 in afternoon trading on the New York Stock Exchange. The shares had traded as high as $52.15 earlier in the session, the highest level since February 2005. Wal-Mart's stock has been under pressure in recent weeks following disappointing sales growth in September. Its shares trade at 15.1 times analysts' profit forecasts for next year, compared with 16.3 times for Target. Lazard's Slater said despite the near-term sales disappointment, Wall Street's earnings estimates for 2007 may be too low. "With estimates rising and increased focus on return on invested capital and cash flow, the company's multiple should expand" to 18 times earnings, he wrote in a note to clients.