2/19/2008

Wal-Mart Takes Center Stage
By Brian Sozzi

Quarterly Snapshot

Today, Wal-Mart Stores Inc. (ticker symbol: WMT) announced its 4Q08 financial results.  Net sales, which excludes membership income from the Sam’s Club division, rose 8.3% to $106.3 billion (consensus $106.9 billion).  According to management, it was the first time in history that any retailer has reached $100.0 billion in sales for a quarter.  Diluted earnings per share, excluding a cumulative $0.02 negative impact from one-time charges (broken down below) totaled $1.04 (consensus $1.02).

There was no hiding Wal-Mart’s leadership position this past holiday season in terms of merchandise pricing.  The company’s “Save More, Live Better” marketing message was in full view on television, and as evidenced by the underlying 4Q08 financials, it resonated with the targeted audience.  Wal-Mart outperformed cheap chic rival Target Corp. (ticker symbol: TGT) on a comparable store sales (comp) basis during the holidays, a dramatic reversal in fortunes from what we have observed over the past three years.  Average ticket grew solidly at U.S. stores, and there were indications that Wal-Mart’s poor customer traffic trends are starting to course correct as consumers remain extremely price conscious.

Drilling deeper, the company’s control of inventory while maintaining healthy in-stock positions is a feat to marvel at, not to mention the realization of 4Q08 gross margin expansion against significant price reductions.  While the Wal-Mart U.S. division demonstrated strong operating metrics, it appears the company is taking the fight back to overseas competitors by extending its price leadership message.  Management did convey a FY`09 earnings per share guidance range that was below consensus, but as a result of momentum in most aspects of the business, we suspect this outlook could prove conservative.

Wall Street Strategies Inc. Updated Opinion

Having reviewed the fourth quarter data and our modeling, we believe it’s prudent to adopt a more aggressive viewpoint on the stock.  Without question, considerable ambiguity exists as to the pace of consumer spending in 2008 as many households battle mortgage resets, restrictive credit, and rising fuel/food prices.  Against such a backdrop, Wal-Mart’s return to the price leadership forefront in 2007 has positioned it for continued market share gains in 2008.

Looking beyond this dynamic, it’s hard not to get excited about Wal-Mart’s ability to expand the gross margin rate, control inventory, and aggressively reduce capital expenditures.  We are particularly encouraged by the expected modest reduction in capital expenditures in 2008 versus 2007, which should serve to improve returns, boost cash flow, and allow for greater focus on store remodeling.  All told, with valuation at compelling levels, strengthening operating fundamentals of Wal-Mart, and the company’s general positioning globally to save consumers money amid tough economic circumstances, we view the stock as a buy.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.