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Wal-Mart (WMT) sales for the second quarter, announced in August, were below expectations; however, it was an improvement from the first quarter. Wal-Mart reported Q2 EPS of $1.24, up 5.1%, and added $2.7 billion in net sales. The results stressed one underlying factor to many analysts: lower to middle-income Americans are holding onto the money they have, which will have implications across the entire retail industry. Other participants like Macy's (M), J.C. Penney (JCP), and Kohl's (KSS) have reported similar concerns for their future earnings.

Wal-Mart has revised their consolidated net sales growth to range between 2-3% for the full year, versus their previous range of 5-6%. The company is forecasting earnings-per-share for the third quarter to range between $1.11 and $1.16, compared to $1.08 per share last year.

Company expansion:

The company's growth during the second quarter included 98 net new stores and clubs, comprising 5.9 million new square feet of selling space. In the third quarter, the company is planning to open approximately 90 units, representing 7 million additional square feet. In the near term, it would appear that growth in the number of stores will drive the growth of the stock, instead of any hoped for increases in same store sales.

Industry outlook:

The U.S. retail environment remains challenging, with increased COGS for food products due to last year's drought and the higher payroll tax instituted earlier in the year, it is expected to remain challenging. High fuel prices have begun to impact consumer spending, with many analysts expecting cautious consumer spending throughout the rest of the year. In addition to expanding their footprint, Wal-Mart continues to focus on cutting expenses to increase shareholder value.

For the long-term, Wal-Mart is focusing on six key areas:

  • Delivering a strong US business: mobile and online technology investments will attract better sales in US.
  • Lower Cost Structure: Effective cost management is vital to improving returns in international during this low-growth cycle.
  • Increase capital discipline: the company is pleased with the stronger performance of their new stores, and a number of recent grand openings that delivered sales ahead of expectations.
  • Leverage initiatives: leverage teams are partnering with the operating segments to drive greater expense savings. Increased direct import volumes are lowering cost of goods sold.
  • Winning in e-commerce: Sales globally grew more than 30% in the first two quarters, led by the strong performance from their acquisition of Yihaodian.
  • Continue to strengthen Wa-Mart's compliance: enhanced processes and procedures, associate training and organizational leadership. They are continuing to implement compliance systems, conduct regular risk assessments and increase training for their associates.

Analyst forecasts:

The current consensus among 31 polled investment analysts is to hold shares in Wal-Mart Stores Inc.; with 7 analysts predicting strong upside potential and 5 analysts predicting good upside potential. None of the analysts polled recommended selling shares, particularly as the holiday season is rapidly approaching.

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The 22 analysts offering 12-month price forecasts for Wal-Mart have a median target of $81, with a high estimate of $90 and a low estimate of $75. The current share price is $73.

Conclusion:

In the sluggish retail industry, Wal-Mart, along with its major competitors, will face short-term headwinds. However, many investors are optimistic about the upcoming months as the U.S. economy continues to improve and the Euro-zone has officially moved out of recession.

Expansion plans, as discussed above, are the right investments to position the business for long-term success; despite the short-term impact that they create on financial results. Wal-Mart has ambitious goals and, though it may take a year or two before they begin to really bare fruit for investors, the company is well positioned to maintain its position as the low-cost giant.

Source: Wal-Mart: Near- And Long-Term Outlook