Monday, April 17, 2006

Wal-Mart Roils P&G, Levi Strauss With Plan to Trim Inventory

April 17 (Bloomberg) -- Wal-Mart Stores Inc., the world's largest retailer, is roiling major suppliers with a plan to buy less of everything from paper towels to jeans.

Procter & Gamble Co., Levi Strauss & Co., battery maker Spectrum Brands Inc. and trucking company YRC Worldwide Inc. have either cut forecasts or lost sales since Wal-Mart outlined plans to reduce inventory in its 3,800 U.S. stores.

Clorox Co., Kellogg Co., Playtex Products Inc., beverage supplier Cott Corp. and health-care product maker Prestige Brands Inc. may also be hurt by the change, Goldman Sachs Group Inc. said in a report last month. Wal-Mart's plan to restrain buying is part of a broader effort to upgrade merchandise and add more exclusive brands to boost sales.

``It will cut across a large group of consumer product and transportation companies,'' said Robert Millen, a money manager at Portland, Oregon-based Jensen Investment Management, with about $2.8 billion in assets including Procter & Gamble shares. ``It's going to slow down Procter & Gamble for a quarter.''

Wal-Mart is focusing on inventory to reduce costs, said Goldman analyst Adrianne Shapira in a March 24 note. Chief Executive Officer H. Lee Scott is also concentrating on luring upscale shoppers with a new advertising campaign and upgraded stores.

Eduardo Castro-Wright, the president and CEO of Wal-Mart Stores USA, told investors and analysts at a retail industry conference on March 22 that the retailer wants to make the stores easier to shop in.

Reducing Clutter

``There will be a very large emphasis on partnering with suppliers to reduce store clutter,'' Castro-Wright said. ``It is driven by what the customer needs.'' Wal-Mart, based in Bentonville, Arkansas, will work with suppliers to determine the right amount of store inventory, he said. Castro-Wright and other Wal-Mart executives will speak at the company's annual two-day media conference starting tomorrow.

Wall Street has taken notice and is beginning to handicap the impact on vendors.

The retailer's ``inventory focus is rippling through its partners,'' said Goldman analyst Shapira.

An 18 percent reduction in inventory could cut Wal-Mart's working capital needs by $6 billion, she said in the report. That could give the company a ``sizable source of capital flexibility and lifts returns by 43 basis points, a key inflection point to drive stock performance,'' she said.

Shares of Wal-Mart fell 13 cents to $45.77 on April 13 in New York Stock Exchange composite trading. The stock has declined 5.8 percent in the past year. It fell 11 percent in 2005, the worst performance in three years.

P&G Cuts Forecast

P&G, the largest U.S. maker of household goods, may be feeling the pain from Wal-Mart's changes. On March 13, the Cincinnati-based maker of Pampers diapers and Bounty paper towels cut its forecast for organic sales growth by 1 percent, citing ``recent customer inventory reductions.'' That sales measure excludes acquisitions and divestitures.

In an interview on April 11, P&G spokesman Doug Shelton confirmed that the customer is Wal-Mart.

Should Wal-Mart buy fewer disposable diapers and paper products, that could also hurt Dallas-based Kimberly-Clark Corp., which makes Huggies diapers and Scott tissue, said William Schmitz, a Greenwich, Connecticut-based analyst at Deutsche Bank Securities. He has a ``hold'' rating on Kimberly-Clark shares.

``There's concern about Wal-Mart reducing inventory,'' said Schmitz. ``Diapers and paper products take up a lot of room and are the first products to be reduced when stores need to make more space.''

Kimberly-Clark spokesman Joey Mooring declined to comment.

`Inventory Adjustments'

In March 23, YRC, the largest U.S. trucking company, cut its first-quarter profit forecast because of a drop in shipments. It forecast net income of up to 70 cents a share, down from an earlier forecast of up to $1.05.

``Some of our largest retail customers have made significant inventory adjustments in the quarter,'' the Overland Park, Kansas-based company said in a statement.

BB&T Capital Markets analyst John Barnes wrote in a report that YRC may have been hurt by Wal-Mart and Home Depot Inc.

Atlanta-based Spectrum Brands Inc., the maker of Rayovac and Varta batteries, said on April 6 second-quarter profit missed forecasts partly because of ``inventory adjustment initiatives'' by one of its largest customers.''

Dave Doolittle, a Spectrum Brands spokesman, would not identify the customer that cut back orders.

``While we were surprised by the magnitude of the inventory impact, the trend is in line with recent commentary from both Procter & Gamble and Wal-Mart,'' wrote William Chappell, an analyst at SunTrust Robinson Humphrey in an April 6 report.

Naming Wal-Mart

While many companies haven't put the blame on any company, at least one hasn't shied away from naming Wal-Mart.

In its April 11 earnings report, jeans maker Levi Strauss said fourth-quarter revenue fell 5.8 in part because of reduced sales to Wal-Mart. Levi Strauss, based in San Francisco, said Wal-Mart gave more space to its private clothing brands, which include George. That reduced sales of the Levi Strauss Signature brand of jeans.

Not everyone is convinced that Wal-Mart is the true culprit for profit and sales cuts at consumer-goods makers.

Merrill Lynch & Co. analyst Christopher Ferrara wrote in a report on April 12 that vendors' fears may be overblown.

``Since P&G's announcement, other companies have noted similar issues,'' he wrote. ``We think the market is overplaying this.''

No comments: