Did IT Help Wal-Mart’s Quarterly Financial Results?

Wal-Mart released its fourth-quarter sales and earnings this week, and the relative good news was cause for a minor celebration amid gloomy U.S. economic conditions. Profits for the Bentonville, Ark.-based retailer were up 4 percent when compared to last year’s, and it notched $100 billion in sales for the quarter. Same-store U.S-based sales, an important retail metric, were up a modest 1.7 percent, which was considered acceptable by analysts, given the climate.

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Financial experts are predicting an economic downturn, the likes of which have not been seen since the 1991 recession. But retail analysts say Wal-Mart, with its renewed emphasis on low prices, may be positioned to weather the storm. “Other merchants have closed stores, laid off thousands of employees, scaled back store expansions or pared inventories as consumer spending screeches to a halt,” reported The New York Times. One retail analyst graded Wal-Mart’s end-of-year financial performance as a “B” while the rest of the industry got a “C-minus.”

A recent article on the last holiday shopping season noted that Wal-Mart’s chief competitors were less than merry about their results: Same-store sales at Sears fell 2.8 percent in December 2007, Kmart’s same-store sales dropped 4.2 percent, and Target’s declined 5 percent. Wal-Mart’s, however, rose 2.7 percent in December.

In delivering the fourth-quarter financial results on Feb. 19, Wal-Mart President and CEO Lee Scott attributed Wal-Mart’s recent successes to “pricing strategies” and “improved customer service,” citing cleaner stores, fewer out-of-stock products and faster checkout lanes. Scott was upbeat about the results but cautious about the future, stating, “We know that the economy remains a critical factor in this new fiscal year.”

What’s IT Got to Do with It?

In October 2007, CIO published an article that examined how Wal-Mart’s internal IT department had contributed to the retailer’s fiscal problems, which began with stagnant sales in 2005 and ran into 2006 and 2007.

The ISD group, as it’s known internally, had distracted itself with a cutting-edge radio frequency identification (RFID) program that frustrated its suppliers, the article reported. In addition, the ISD group had yet to adjust to the realities of the new Web 2.0 world and consequently its online sales lagged rivals’ efforts, and IT leaders relied too much on homegrown IT systems and shunned retail software it deemed not scaleable enough.

On top of it all, both Wal-Mart corporate and ISD were stuck in a command-and-control mindset that centralized all decision-making and took away the power and flexibility of local managers.

Wal-Mart’s future success depended, in part, upon CIO Rollin Ford and his department’s ability to deliver the applications and systems that the giant needs to compete today—just as it did a decade or two ago.

Paula Rosenblum, an analyst at Retail Systems Research (RSR), said in the article that although the current IT regime didn’t directly contributed to Wal-Mart’s troubles, “it is fair to say they didn’t anticipate the shift [in retailing]. And they didn’t realize that [retail software] and hardware had matured enough to where it could support them.”

By mid-2007, Wal-Mart had announced that it had implemented or was in the process of installing applications it previously seemed unwilling to use, the article noted. Wal-Mart bought Oracle’s retail price-optimization application and HP’s Neoview data warehousing platform to crunch the data Wal-Mart collects in its 4,000 U.S. stores. Rosenblum noted that HP’s Neoview tool could provide business intelligence (BI) data derived from all types of customer purchasing information, which in turn can help Wal-Mart stock its stores based on what sells locally—a competitive differentiator for any retailer today. And Oracle’s application could help Wal-Mart to move merchandise faster by knowing when to discount the prices on slow-selling items.

Combined, these two tools could offer new and powerful decision-making capabilities for Wal-Mart’s merchandising managers.

The Price Is Just Right

In announcing Wal-Mart’s fourth-quarter financials, CEO Scott attributed the “strong results” to its “price leadership strategy.” That strategy was another way of saying Wal-Mart had returned to its everyday-low-prices roots, which it had moved away from in 2006. Its forays into selling cheap but trendy clothes and home goods backfired with its consumers, a CNBC article noted. So in 2007, Wal-Mart “cleared out the poor selling merchandise and then cut prices earlier than ever for the holiday season, hoping to win back sales from its lower-income shoppers,” according to the article.

In a report on Wal-Mart’s fourth-quarter news, Deborah Weinswig, a retailing analyst at Citi Investment Research, noted that the “main driver of the improved inventory levels was management’s focus on moving inventory through markdowns in 2Q07 and 3Q07, followed by tight inventory management by operations and merchandising.” It appeared that the new retail applications were, at the very least, in use.

To RSR’s Rosenblum, Wal-Mart’s uplifting financial results are attributable to a combination of those IT improvements and a bit of luck. It’s likely that Oracle’s application, which can guide retailers on marking down merchandise, helped Wal-Mart get “out of a bad situation faster,” she says. “IT got them out of a place they didn’t belong and did it pretty cleanly, but the company still has work to do on localizing assortments. I think it will take a while for the technology initiatives to take hold.”

John Simley, director of media relations at Wal-Mart, says that “there are an awful lot of moving parts to produce the financial results, and it’s well-established that the company’s IT efforts in many ways make it all possible.” He notes that IT systems help Wal-Mart ensure that “we have the right product, in the right place, at the right time for the customer, and that’s absolutely data-dependent,” he says. The use of accurate and timely data “allows us to take cost of out of the system, and anything that we can do to reduce our costs allows us to lower our prices and that provides a compelling value for customers.”

When asked if the Oracle price-optimization tool had played a specific role in enabling Wal-Mart to markdown merchandise more accurately and at the right time during the last quarter (which included the holiday season), Simley says that he “can’t detail anything specifically, but it’s fair to say that all of these applications work in concert to help us do our jobs as well as we do them.”

As to the fortuitous timing, or “luck,” as Rosenblum terms it, “the company went ‘back to basics’ at the right time—the down economy,” she says. “Wal-Mart is in a very good position right now because of the economy.”

Can IT Really Help with Wal-Mart’s Customer Service?

In the conference call, CEO Scott also noted the improved customer service in the stores that were a result of fewer out-of-stock products and faster checkout lanes.

Scott’s assertion that Wal-Mart improved its customer service stands in stark contrast to the most recent data from The University of Michigan’s quarterly American Customer Satisfaction index. Wal-Mart was the worst-rated retailer in terms of customer satisfaction, according to the ACSI. Its most recent score plummeted 6 percent to 68, which is well below the industry average and is at an all-time low for the retailer.

In the October 2007 CIO article, AberdeenGroup analyst Sahir Anand noted that “technology and customer service go hand in hand,” and IT had a role to play to improve the customer shopping experience: POS systems needed to be continually updated, checkout experiences should be speedy, price checkers and interactive kiosks should be up and running at all times, and that associates were ready, willing and able to guide and motivate customers to use all these tools.

Rosenblum, however, doesn’t think ISD played much of a part in the rejuvenated customer service initiatives that Anand cited in the article and CEO Scott mentioned. Most of those tasks, she says, are roughly equivalent to saying that IT played a role in “ensuring the lights are on. In fact, if the POS systems are not continually updated, something is horribly wrong.”

For most companies it’s difficult to link any IT-driven initiative to an increase in the bottom line, and financial results that specifically call out IT’s positive contributions to quarterly results are few and far between on Wall Street.

Of course, it’s much easier to point out how IT can drag on earnings: Weinswig noted in her report that Wal-Mart’s earnings were “deleveraged” by higher-than-expected SG&A (selling, general and administrative) costs relating to three long-term and “transformational” merchandising, finance and HR projects. (The finance and HR projects are Wal-Mart’s installation of an SAP package.)

Even with the good news, Wal-Mart and other retailers face a tough year ahead. Wal-Mart executives told the analyst community that it estimated same-store sales to be flat or up only 2 percent and forecasted first-quarter 2008 earnings that might not meet analysts’ expectations.

Now more than ever, it appears, Wal-Mart will need to lean on its IT systems and new retail applications during the next fiscal year.