Wal-Mart St ores may be making some big changes

Wal-Mart Stores Inc. has already made some significant changes since chief executive Doug McMillion took over a year ago, but it appears poised to make even more.

Following a reconfiguration of Wal-Mart’s senior management team, Credit Suisse analyst Michael Exstein believes the giant retailer is focused on setting a higher standard for its international operations. More specifically, he thinks the company will eventually move capital resources away from less promising businesses, as its rivals have already done.

“As the retail industry continues to shake out, Wal-Mart is in a better position to be proactive rather than reactive to these developments,” Mr. Exstein told clients.

He noted that Wal-Mart’s international segment does not appear to be earning its cost of capital, since it remains well below both the domestic division and Sam’s Club operations. International accounts for 32% of Wal-Mart’s capex, yet contributes only 28% of sales and 24% of EBIT.

The analyst believes rationalizing the international business and reallocating some of this capital should boost returns for both the company and shareholders.

He estimates that divesting some international operations (specifically Brazil and Asia) would generate US$4.2 billion in cash savings, which could be could be used to repurchase an additional 37 million shares and raise the dividend by 16%.

Mr. Exstein thinks these transactions could be accretive to margins and EPS. After the buyback, he expects Wal-Mart’s EPS would rise to US$5.26 from a current estimate of US$5.20.

Spinning off Sam’s Club, the analyst added, would create two focused and betterpositioned enterprises. He estimates this could generate US$10.2 billion in cash for WalMart, allowing it to buy back another 117 million shares, or 4% of the current base. This could also allow Sam’s Club the flexibility to better compete with Costco stores.