At Wal-Mart, Not All Bargains On Shelves

6/29/2009


  Recent Price
$48
  Dividend
$1.09
  Yield

2.3%

  P/E Ratio
14
  Shares (millions)
3,930
  Long-Term Debt as % of Capital
36%
  52-Week Price Range
$63.85 - $46.25

By lining its shelves with staples and inexpensive discretionary products that consumers buy even during difficult economic times, Wal-Mart Stores ($48; WMT) has delivered consistent same-store-sales growth while lowering inventory levels.

Wal-Mart has gained market share by attracting wealthier shoppers who traded down to cheaper stores. Once the economy recovers, many consumers could stay frugal as they rebuild savings and pay down debt. Wal-Mart says it has built lasting loyalty and can keep these shoppers.

Wal-Mart shares offer a reliable dividend, solid operating momentum, and a bright long-term outlook for just 14 times trailing earnings — down 22% from the five-year average of 18. Offering discounts to shoppers and investors alike, Wal-Mart is a Long-Term Buy.

Business breakdown
At U.S. Wal-Mart stores (64% of sales and 75% of operating income in the past 12 months), groceries generate about 49% of sales; followed by 13% for entertainment products; 12% for sporting goods, seasonal, and automotive items; 11% for apparel; and 10% for health and wellness.

Sales at Sam’s Club (12% and 6%) rose 3% in the past 12 months but contracted 1% in the April quarter, reflecting the struggles of small-business owners. International operations (24% and 19%) have generated particularly strong sales in the United Kingdom, Brazil, and Mexico.

Big get bigger
No discussion of Wal-Mart is complete without addressing its scale. The company’s stores occupy more than 920 million square feet — 33 square miles. And annual sales top $400 billion, more than the gross domestic product of Belgium, Sweden, or Venezuela. The discount giant accounts for 25% of U.S. supermarket sales and 11.3% of all retail sales, up from 10.5% a year ago.

At this size, growth can pose a challenge. Wal-Mart looks to expand its program for generic drugs as it encroaches on a terrain generally held by pharmacy-benefit managers.

Wal-Mart has also set its sights abroad. The retailer aims to open 10 to 15 wholesale facilities in India, and the payoff could be huge. India’s retail market is estimated at $300 billion to $500 billion. Indian law bans multibrand retailers from selling directly to consumers, but Wal-Mart will be selling to other businesses. Wal-Mart also plans to invest $809 million in Brazil this year and is considering expansion into Russia and Argentina.

The company has slowed U.S. expansion, allowing a tighter focus on improving performance at existing stores. Wal-Mart plans extensive remodeling in an effort to keep its newer, more affluent customers. Renovations will include wider aisles, faster checkout lines, a revamped electronics department, and even skylights.

Conclusion
Year-over-year sales growth is expected to slow in the July quarter, hurt by difficult comparisons. Wal-Mart says government stimulus checks boosted same-store sales 1% to 2% in the year-earlier quarter. The consensus foresees profits rising 4% per-share in the fiscal year ending January and 9% in fiscal 2011, targets that seem conservative. An annual report for Wal-Mart Stores Inc. is available at 702 S.W. 8th St., Bentonville, AR 72716; (479) 273-4000.

WAL-MART
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Apr '09 $0.77 vs. $0.76 - 1% $54.57 -

$46.25

16 - 14
Jan '09 1.03 vs. 1.02 +2% 59.23 - 46.92 17 - 14
Oct '08 0.77 vs. 0.70 + 7% 63.85 - 47.00 19 - 14
Jul '08 0.86 vs.

0.76

+ 10% 59.95 - 55.05 19 - 17
           
Year
(Jan.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $402.30 $3.42 $0.93 $66.85
-
$46.92 19 - 14
2008 $375.38 $3.16 $0.83 51.44
-
42.09 16 - 13
2007 $345.98 $2.92 $0.65 52.15
-
42.31 18 - 14
2006 $313.34 $2.63 $0.58 53.74
-
42.31 20 - 16
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
73 70 60 82 64 55 27

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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