Good news in Wal-Mart's bad news

So Wal-Mart suffers a 'bad' quarter. But a deeper look at the numbers shows some not-so-bad results.

By Jim J. Jubak Feb 22, 2010 3:06PM

Jim JubakSun fails to come up. Water no longer wet.


Wal-Mart (WMT) comparable sales dropped at U.S. stores for the quarter ended Jan. 31. That's the first time ever. Ever. 


Time to add this company to my watch list for a buy some time within the next three months.


If you're looking for thin reeds (see this post), here's another one that says U.S. consumers are feeling better about themselves: Some portion of the consumers who found shopping at Wal-Mart so attractive during the worst of the recession has apparently decided that it's OK to spend a little more.


We're not talking about a huge drop here. U.S. comparable-store sales were down all of 2% from the same quarter a year earlier. Some of that drop came from falling prices for electronics and food, the company said. 


Wall Street analysts say that accounted for about 0.9 percentage points of the drop.


But much of the rest came from a drop in traffic caused by first, remodeling at stores that deterred shoppers, and second, a decline in store traffic.


Some of the consumers who had gone to Wal-Mart, often for the first time, during the recession are returning to their former shopping habits. 


For example, this was the first quarter since the start of the recession in which Target (TGT) showed higher same-store sales growth than Wal-Mart.


This quarter and the next are also tough on Wal-Mart, because the year-earlier quarters were so strong. In the fourth quarter that ended in January 2009, for example, comparable-store sales in the U.S. climbed 3.6%. In the next quarter, the challenge is almost as bad, since the company turned in 2.9% year-to-year same-store sales growth in 2009.


So, why am I adding this stock to my Buy list?


Because sometimes it takes a middling quarter to show exactly how great a company is.


For example, look at what Wal-Mart managed to achieve on margins during this “bad” quarter. Gross margins climbed by 0.35 percentage points on tighter inventory controls. Operating margins rose 0.4 percentage points on higher gross margins and selling, general, and administrative expenses (SG&A) that climbed at a lower rate than sales did.


It didn't hurt, either, that while U.S. comparable store sales were flat, sales in the international business were up 19.5% year to year, including currency effects, or 11.9% excluding currency. 


International sales carry higher margins than Wal-Mart gets from its more mature U.S. business. (Because Wal-Mart has been such an aggressive acquirer internationally, international comparable-store sales growth isn't a very useful number, so I'm using just net sales growth for that part of Wal-Mart's business.)


It's not supposed to happen like that: Margins are supposed to fall and SG&A as a percentage of sales should climb when sales struggle.


And if the economy slows in the second half of 2010 and into 2011, Wal-Mart is the kind of stock I'd like to own. (I also don't mind that in the just-reported quarter, comparable store sales grew by 5.6% in Brazil and 4.8% in China.)


I'd expect investors to take a few dollars more out of Wal-Mart's share price over the next few months as they focus on those tough year-to-year comparable-sales numbers and the shift in consumer behavior. 


The shares already trade at just 13.4x projected fiscal 2010 earnings. The ten-year average price-to-earnings ratio on fiscal year sales is 20x. At the Feb. 19 share price of around $53.50, the stock paid a 2% dividend.


Check the watch list over the next couple of months to see whether these shares get to be an even bigger bargain.


At the time of this writing, Jim Jubak didn't own shares of any stock mentioned in this post. 

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