3 Reasons Wal-Mart Went "International" With Its New CEO
Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Despite what looks like a historic - albeit interim - agreement with Iran on its nuclear program, stocks weren't able to sustain their early gains, and the S&P 500 closed down 0.13% on Monday. The narrower, price-weighted Dow Jones Industrial Average did manage to squeak out a 0.05% gain to achieve another record high above 16,000.
When it comes to naming CEOs, Wal-Mart Stores likes to keep it in the (corporate) family. Today, the company announced that Doug McMillon, who currently oversees Wal-Mart International, will succeed Mike Duke as president and CEO, effective Feb. 1. McMillon joins the company's board, effective immediately. Here are three reasons the company went with McMillon over the other internal candidate, Bill Simon, who runs Wal-Mart U.S.
1. Wal-Mart's international activity is critical to its future growth
McMillon took over Wal-Mart International from Mike Duke when he was named CEO in 2009, so the "foreign route" to the top spot is not a new one at Wal-Mart. With cause: If it is to burnish its growth credentials, international markets are critical to Wal-Mart's future.
Wal-Mart International contributed 29% of the company's revenues in the fiscal year ended in January, but it ponied up 42% of the increase in total revenues. Under McMillon's tenure, Wal-Mart International grew profits before taxes at annualized rate of 8.5%, compared with just 1.3% for Wal-Mart U.S. It can be no coincidence that, in commenting, on his appointment, McMillon said [emphasis mine]: "Our company has a rich history of delivering value to customers across the globe and, as their needs grow and change, we will be there to serve them."
Wal-Mart's international expansion has hardly been without its hiccups. In fact, McMillon has been steering Wal-Mart out of a bribery scandal at Wal-Mart de Mexico, the company's largest subsidiary, that relates to practices dating back to the middle of the last decade. However, faced with a saturating, slow-growth domestic market, foreign markets remain a priority for Wal-Mart.
(Incidentally, foreign markets are challenging for other retailers, too. Last week, Targetmissed its earnings estimate because of a wider-than-expected loss at its Canadian operations.)
2. McMillon is a Wal-Mart veteran and insider
Wal-Mart is a company with a strong corporate culture that promotes from within. The following table shows the tenure of the three CEOs that have led Wal-Mart Stores since it became a public company (all except for founder Sam Walton) and the year in which each joined the company.
All three men had put in more than a decade with the company before being named chief executive, and in the case of Lee Scott, it was more than two decades.
McMillon is, it's worth mentioning, an Arkansas native and a University of Arkansas graduate with a long Wal-Mart pedigree behind him. Indeed, he started his career as a summer associate in a Wal-Mart distribution center, before rejoining the company in 1990 in Wal-Mart store in Tulsa, Okla. -- that's a 22-year year career before being named CEO. Meanwhile, McMillon's former rival for the top job, Bill Simon, is a relative newcomer to the company, having joined only in 2006.
Finally, McMillon is reportedly close to the Walton family, which owns almost half of the company. Wal-Mart Chairman Rob Walton, son of Sam Walton, has been a mentor to McMillon.
3. The U.S. still matters, and McMillon is on top of it
For all the importance of international growth, Wal-Mart U.S. still accounted for nearly 60% of the Wal-Mart Stores' revenue in the fiscal year ended in January; the company can't afford to drop the ball at home (which it has, to a degree, with problems keeping store shelves stocked). One of the benefits of a long career at Wal-Mart: McMillon has been around the shop. Just because his current role has him overseeing the international division, that doesn't mean he's unfamiliar with the U.S. business; in fact, the bulk of his career has been spent in merchandising at Wal-Mart U.S.
Wal-Mart Stores has substantially lagged the S&P 500 over the past five- and 10-year periods. The company faces a number of challenges in terms of operations and public relations, and growth remains elusive. As far as internal candidates go, Doug McMillon looks like the right person to head Wal-Mart Stores, but he's clearly got his work cut out for him.
While Wal-Mart struggles, two "cash kings" are transforming retail
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.
The article 3 Reasons Wal-Mart Went "International" With Its New CEO originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA, and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.