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Shares of Wal-Mart Stores (NYSE:WMT) are sliding after the world's largest retailer reported its second-quarter results. The soft quarter prompted the company to reduce its full year revenue and earnings targets.

Despite the recent struggles, Wal-Mart has the continued potential to create value for its shareholders and could be included in every well-diversified investment portfolio.

Second-Quarter Results

Wal-Mart generated second quarter sales of $116.2 billion, up 2.4% on the year. Adverse currency movements shaved off $0.5 billion in revenues and 0.4% in revenue growth.

Membership and other income totaled $0.7 billion and was down 4.3% on the year before, resulting in total revenues of $116.9 billion. Total revenues fell short of consensus estimates of $118.5 billion.

Net income rose by 1.3% to $4.1 billion. Earnings per share came in at $1.24 per share, up 5.1% on the year before on the back of sizable share repurchases.

Adjusted earnings per share, which exclude a $0.01 tax charge, came in at $1.25 per share, in line with consensus estimates. CEO Mike Duke commented on the performance:

We delivered a solid increase in earnings per share for the second quarter. Consolidated net sales and our Walmart U.S. comp were below expectations. While the retail environment was challenging across all of our markets, the Walmart U.S. and Sam's Club businesses improved comp sales from the first quarter, and the growth of International sales was consistent.

Looking Into The Results

The 2.4% revenue growth rate can hardly be called impressive. Yet the negative surprise in the report is the lack of operating leverage as earnings rose by a paltry 1.3%.

Comparable sales at the U.S. operations of Wal-Mart fell by 0.3% over the past quarter on poor traffic trends, badly missing consensus estimates for growth of 0.9%. Store traffic fell by 0.5% while prices were up by 0.2%.

Comparable sales, excluding fuel sales, at Sam's Club rose by 1.7%. International revenues were up by 2.9% to $33.0 billion. In constant currencies sales would have been up by 4.4% to $33.4 billion.

Wal-Mart blames the poor profit developments on the softer sales and higher investments into the business. The company has taken measures to contain costs, especially abroad, to improve operating leverage of the business.

And Looking Ahead

On the back of the soft second quarter, Wal-Mart has reduced its full-year earnings outlook. Full-year earnings are now seen between $5.10 and $5.30 per share, as the range has been downwards revised by 10 cents. Consensus estimates for full year earnings stood at $5.29 per share.

Third-quarter earning per share are seen between $1.11 and $1.16 per share. This assumes that comparable-store sales are seen flat in the US. Sam's Club same-store sales are expected to come in between flat and two percent.

Valuation

Wal-Mart ended its second quarter with $9.0 billion in cash and equivalents. The company operates with over $57 billion in short- and long-term debt as well as capital leases.

For the first six months of the year, Wal-Mart generated total revenues of $231.1 billion, up 1.7% on the year. Net income rose by 1.2% to $7.85 billion.

At this rate full year revenues could come in around $475 billion. Net earnings should come in between $17 and $18 billion.

Trading around $74 per share, the market values Wal-Mart at $246 billion. This values the company's assets at 0.5 times annual revenues and around 14 times annual earnings.

Wal-Mart currently pays a quarterly dividend of $0.47 per share, for an annual dividend yield of 2.5%.

Some Historical Perspective

For most of the past decade, shares of Wal-Mart have traded in a $40-$60 trading range. Shares broke out towards the upside in 2012 and have risen to fresh highs of $80 at the start of 2013. After a modest sell-off, shares are currently exchanging hands at $74 per share.

Between 2009 and 2012, Wal-Mart has increased its annual revenues by a cumulative 15% to $469.2 billion. Net earnings rose by 18% in the meantime to $17 billion. In the meantime, Wal-Mart has retired some 15% of its shares outstanding over the past four years.

Investment Thesis

Wal-Mart is cautious as it sees the retail environment getting more challenging both domestically and in its international markets.

Consequently, as global consumers are spending their money cautiously. Total sales for the year are expected to increase between 2 and 3%, down from a previously guided 5 to 6%. US operations continue to suffer from the 2 percent point increase in payroll taxes.

Besides softer spending, adverse currency movements are impacting revenues as well. Yet the company expects to see better results in the second half of the year as Wal-Mart's focus is to improve operating leverage going forward.

Wal-Mart operates with a sizable debt position, but still generates more than sufficient cash flows to please investors. During the quarter, Wal-Mart repurchased $1.9 billion worth of its shares, at a rater of 3% per annum. Shareholders receive another 2.5% annual dividend yield.

Yet the short term prospects are a bit bleak. The lower full year revenue and earnings outlook are a testament of that. Global consumers are strapped on higher taxes as governments are consolidating their finances, while the cost of living keep increasing.

Back in June of this year, I took a look at Wal-Mart's prospects. At the time shares were exchanging hands at $76 per share, when a $15 billion share repurchase program sparked enthusiasm among investors.

Despite some issues, including Mexican bribery charges and public debate of low wages for its associates, Wal-Mart continues to create value for its shareholders. The combined 5.5% yield in terms of share repurchases and dividend yield creates a high current yield for shareholders, while Wal-Mart continues to gradually expand its empire.

The company remains on track to boost long term earnings, making it an excellent choice for any well-diversified investment portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Wal-Mart: Long-Term Appeal Remains Despite A Soft Period Ahead

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