updated 10/23/2007 7:18:57 PM ET 2007-10-23T23:18:57

Wal-Mart Stores Inc. will cut back on spending to build new stores and tighten cost controls as sales growth slows over the next three years, Chief Financial Officer Tom Schoewe told investors and analysts at a conference Tuesday.

Schoewe trimmed plans for capital expenditures for the second time this year, to about $15 billion from a June forecast of $15.5 billion. The original projection was $17 billion.

Analysts welcomed the move to focus on keeping more of the cash Wal-Mart generates rather than spending furiously on new stores.

Increased free cash flow, or the money left over after a company pays its expenses including capital expenditures, could make Wal-Mart shares more attractive by funding higher dividends, new technologies or acquisitions, analysts said.

“Strong free cash flow is the key to corporate flexibility and potential growth. The highest quality companies, in my opinion, are able to self-finance their future growth from their free cash flow,” said Patricia Edwards, managing director and retail analyst at Wentworth, Hauser and Violich in Seattle, which manages about $12 billion in assets and holds about 35,700 Wal-Mart shares.

Wal-Mart, which is finding fewer places to build new stores and faces tougher competition from other retailers, said sales will continue to slow after years of strong double-digit growth. Schoewe said sales growth will fall to 9 percent this fiscal year from nearly 12 percent the year before and then be between 5 and 8 percent the next two years. Wal-Mart’s fiscal year runs through January. Wal-Mart is also faced with tougher economic challenges as its shoppers struggle with higher food and gas prices and a widening credit crunch.

“No doubt that our work has been made more difficult by the current economic environment,” said Eduardo Castro-Wright, head of Wal-Mart’s U.S. stores.

Schoewe said Wal-Mart is focused on using the tremendous cash flow generated by its U.S. and international stores more efficiently, including building fewer giant Supercenter stores and managing corporate costs better.

Wal-Mart’s annual square footage growth will decline from 8.8 percent last year to around 6 percent this year and between 5 percent and 6 percent in the next two years, Schoewe said.

In terms of Supercenters, the flagship of Wal-Mart’s U.S. business, Schoewe said the retailer will build around 190 to 200 this year and about 170 a year in the future, compared to a historical standard of around 280 a year.

Capital expenditure will be between $13.5 billion and $15.2 billion in the next two fiscal years after about $15 billion this year.

David Abella, an analyst at Rochdale Investment Management in New York, which manages $2.5 billion in assets including Wal-Mart shares, said Wal-Mart’s reduced plans for U.S. store growth are positive news.

“I think focusing on cash flow and profitability is what they need to do at this point,” Abella said.

Abella said Wal-Mart’s share price, which has been in the doldrums since early this decade after strong gains in the 1990s, could benefit if investors who focus on cash flow and investment returns embrace Wal-Mart’s new approach.

“There are lots of institutional value investors out there whose metrics focus on return on invested capital and cash flow generation,” Abella said.

Schoewe said Wal-Mart still has room for growth and reiterated the retailer’s decision to focus on low prices for cash-strapped shoppers after a brief foray last year into more fashion and higher-end products.

“Tough times are actually a good time for Wal-Mart. Our customers care a lot about price and value, and that’s our business proposition,” Schoewe said.

As part of its strategy to turn around its home business, Wal-Mart announced on Tuesday a multi-year licensing agreement with Meredith Corp. to develop a wide range of home products based on the Better Homes and Gardens brand. The line is expected to be available exclusively at Wal-Mart stores by next fall.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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