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Wal-Mart reveals its holiday success

By 8 a.m. on the Friday after Thanksgiving _ the biggest shopping day of the year _ Michael Duke, president of Wal-Mart Stores, knew he was in for trouble.

Two hours earlier, Duke had arrived at a Wal-Mart in Atlanta, prepared to undo shrink wrap and help customers load television sets into their cars. But all the while, he was receiving less than ecstatic reports on his BlackBerry from other Wal-Mart stores around the country. And in the early hours of the shopping rush, he drove to Best Buy, Target, Kohl's, Sears and other nearby discount merchants to compare how they were doing.

"At 7 a.m., I looked at the readings coming in from other states, and my gut feeling was confirmed," he said. "By 8 a.m., we knew we had an issue."

The next day, Wal-Mart told investors that November sales, which included the day after Thanksgiving, were below their expectations, a listless 0.7 percent higher than the previous November. Last week, the company predicted December sales for stores open at least a year would be roughly 2 percent higher _ well below the 4.3 percent gain during Christmas 2003.

Yet from these disappointing announcements, Wal-Mart, the country's biggest retailer, managed to come back with style. Today, it is expected to announce that December sales achieved a 3 percent gain over sales for December 2003 _ a result that Duke said "surprised everyone, including people inside the company."

This week, several of Wal-Mart's top executives, in an interview on the inner workings of the company, described _ day-by-day and some cases, hour-by-hour _ how they reacted to initial dismay. They explained what they did to steer the stores back on course, from the markdowns to the open-microphone meetings with workers to the multimillion-dollar ad campaign.

In one respect, Wal-Mart is no different from any other retailer: The Christmas season accounts for a disproportionate share of its yearly income. For Wal-Mart, analysts estimate the holidays represent close to 20 percent of annual sales, or about $50-billion.

And Black Friday _ the industry's name for the day after Thanksgiving (because that is when retailers traditionally hoped to break into profitable "black" territory for the year) _ is seen as a gauge for the all-important holiday selling season.

"They did what they had to do," said Todd Slater, a retail analyst at Lazard. "They got the word out. They succeeded in generating traffic without significantly compromising profits.

"They surprised a lot of people, by being so nimble."

By 2 p.m. on the day after Thanksgiving, as millions of Americans enjoying a break from work continued to mob stores, Duke had spent hours on his hand-held communicator, exchanging e-mail messages with executives and store managers about what items _ from Elmos to electric jar-openers _ should be marked down in the next few days in a bid to spur sales.

On Saturday, a management team met to determine which items to focus on. Over that weekend, Claire Watts, the executive vice president in charge of apparel and home furnishings, and Doug Deyn, the executive vice president in charge of almost everything else, started to call suppliers to ensure that if the public rushed in to buy the promotional items, there would be enough to go around.

Lee Chaden, the chief executive of Sara Lee branded apparel, said he got a call at 5:30 p.m. on the Monday after Thanksgiving from Watts to find out if there would be enough fleece separates, produced by Sara Lee's Hanes division. Chaden said he "put on a full-court press" to find the fleece. He checked supplies, first in the stores, then in Wal-Mart's warehouses and finally, in Sara Lee's warehouses. There was enough. Wal-Mart decided to mark them down to $4.64 a piece from $5.84.

In the end, Kathy Fowler, the vice president of Hanes casual wear, said the increase in fleece sales because of the markdowns was "very significant." On Nov. 30, a Tuesday, Wal-Mart's new prices took effect. On Thursday of that week, a new video that promoted the newly discounted items and discussed revamped display techniques was broadcast to all stores, with an introduction by Duke. By Friday, when the advertising campaign began, the new displays were set up.

On Saturday a week later, managers held an unusual meeting with 500 employees, including some hourly workers, many of whom took the microphone to suggest ways to increase sales and profits in the last 14 shopping days before Christmas.

The company started to carry out 21 of their suggestions _ including having employees wear gift cards just below their badges.

The next Monday, executives decided on a second round of markdowns.

Among them was a 5-foot-tall Nutcracker, which Wal-Mart's buyers had guessed would be a big hit at $96. It wasn't. "We knew when the doors opened it wasn't selling," Deyn said. "Seeing it would be a liability; we marked it down to $75."

The nutcrackers still did not move, and what is a store to do with a 5-foot nutcracker when the season is over? Mark them down again. "In some stores, they got down to $25," Deyn said.

On the other hand, there were many more cases, the executives said, where the company offered what they called great prices _ a 17-inch flat-screen TV for $178.88, for instance _ but no one knew it.

Wal-Mart quickly featured the television set in their new full-page newspaper ads with the heading, "Why Wait for Rebates?" Store managers also put the set on a big warehouse-style rack in the main electronics aisle. In the end, the TVs sold well.

Elmo, the plush animal who became a symbol of Wal-Mart's rebound, was marked down to $16.88 from $26.78. Were items like that "loss leaders," products that Wal-Mart lost money on just to get people into the store?

"We don't call them loss leaders," Duke said. "But yes, there were a few cases where things were sold below cost."

Still those markdowns did not cut significantly into profits, executives said. Tom Schoewe, Wal-Mart's chief financial officer, said earnings should come in within the range projected earlier: between 73 and 75 cents a share for the quarter that ends in January.

To be sure, the holiday selling season was a long way from being the best in memory.

"Would we have liked to have more?" Duke said. "Yes. And we're cautious about appearing to crow about a 3 percent gain. We only celebrated for about five seconds."

But "in the context of Wal-Mart, of a battleship this size," he said, "a couple of degrees is a significant shift in the waves."