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Wal-Mart trims inventory in bid to cut costs

As Wal-Mart Stores Inc. looked across its operations recently to find ways of cutting costs, it found it had a problem that afflicts many businesses: too much inventory.
/ Source: The Associated Press

As Wal-Mart Stores Inc. looked across its operations recently to find ways of cutting costs, it found it had a problem that afflicts many businesses: too much inventory.

So the world's biggest retailer is on a campaign to cut the amount of merchandise it buys, a move that's creating some short-term pain for a broad range of suppliers from consumer product makers Procter & Gamble Co. and Spectrum Brands Inc. to cosmetic company Elizabeth Arden Inc.

Wal-Mart declined to offer details of its strategy, which it announced in October and is now implementing. But industry analysts expect it to affect all merchandise categories, from shampoo to toys and jeans. It does carry some risks for Wal-Mart — if it isn't well executed, consumers used to finding their favorite toothbrush or detergent brand may be disappointed.

Wal-Mart's spring cleaning comes as it struggles with slowing sales and disappointing profit growth due in part to higher expenses. Its stock price has fallen 6 percent over the past 12 months.

Leaner inventory will help clear out store clutter and help Wal-Mart focus on specific brands and products that consumers want, company spokeswoman Gail Lavielle said. She described the company as looking at inventory on "a case-by-case basis," but declined to comment further.

Analysts speculated that Wal-Mart will look at ways to eliminate minor brands and not carry as deep a selection of a certain item. For example, it might stock only the most popular brands of batteries, or may not carry as many styles of black jeans. Customers shouldn't see any major changes, though they might notice the selection isn't quite as wide as it was previously.

Wal-Mart is expected to use its savings from reduced inventory to improve store interiors. Less inventory will also help reduce the company's asset base, in turn boosting its return on investment, a key metric that drives stock price, analysts said.

Because many suppliers count Wal-Mart as their largest customer, any change it makes will naturally have the biggest impact.

"It's challenging for everyone," said Michelle Bogan, retail strategist at Kurt Salmon Associates, a global consulting firm. "Whenever Wal-Mart scales back, it is hard for suppliers to be flexible enough to respond quickly. The volumes are big."

That means slower sales for suppliers as they readjust production to meet fewer deliveries to Wal-Mart; it also entails having to rethink their product lines, perhaps focusing on specific packaging sizes that are the most popular.

Whether companies will suffer something more lasting remains to be seen. Most suppliers contacted by The Associated Press declined to comment about the issue.

On March 13, P&G — which counts Wal-Mart as its biggest customer and is the maker of such products as Tide detergent and Pampers diapers — lowered what called an organic sales growth forecast for its fiscal third quarter, citing customer inventory reductions. Organic sales growth excludes the impact of acquisition, divestitures and foreign exchange.

In 2005, sales to Wal-Mart accounted for about 16 percent of P&G's total revenue, according to Securities and Exchange Commission filings. No other customer represents more than 10 percent of its total sales, the filing said.

P&G declined to identify the customers cutting inventory. But analysts say drugstore operator CVS Corp. is taking steps similar to Wal-Mart's.

Last week, Spectrum Brands lowered its second-quarter earnings outlook in part because of inventory cutbacks by retail customers. Wal-Mart, Spectrum's largest customer, accounted for 18 percent of its consolidated sales in 2005, according to SEC filings.

Shares in Spectrum, whose brands include Rayovac batteries, Remington electric shavers and Tetra fish food, fell to a new 52-week low Friday, a day after its announcement.

Meanwhile, Elizabeth Arden stock took a hit last month, falling close to 5 percent following a ratings downgrade from brokerage Brean Murray Carret, which predicted the cosmetic maker's performance would suffer due to inventory destocking at mass retailers. Wal-Mart is Elizabeth Arden's biggest customer, representing 13 percent of the company's total revenue, Gary Giblen, an analyst at Brean Murray Carret, wrote in a research note.

Wal-Mart's goal is to have its sales increases outpace inventory increases, the opposite of the company's trend in some recent quarters, said Bob Buchanan, a retail analyst at A.G. Edwards & Sons. Philip Zahn, senior director at Fitch Ratings Inc. estimated that Wal-Mart is now turning its inventory over an average of 7.8 times a year, slower than the 8.1 times in 2002; the higher the turnover, the faster goods are being sold. This has occurred even as Wal-Mart has expanded further into food, which has a higher turnover rate than less perishable items like apparel.

Rival Target Corp. turns its inventory over an average of 6.2 times a year, though its share of food is much lower than Wal-Mart's, Zahn estimated.

Until Wal-Mart's inventory strategy is more understood, P&G and other vendors will face some uncertainty. But at least one small supplier — Endless Games Inc., a maker of classic games like Family Feud and Password — believes it will benefit from Wal-Mart's inventory cuts. Kevin McNulty, vice president of sales at Endless Games, expects that Wal-Mart will cut down on duplications, which will only help the board game industry.

"I would hope that this would mean you don't need five versions of Twister or Monopoly. That it would open up to other new and innovative games," said McNulty.

McNulty is counting on such moves to make room for the company's latest offering — a spiritual game called Your Best Life Now, based on Joel Olsteen's book "Your Best Life Now: 7 Steps to Living at Your Full Potential."