Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Wal-Mart Stores (WMT) fell over 3% in Thursday's session. The retail empire, which operates over 10,000 retail outlets and employs over 2 million employees, announced its second quarter earnings before the market open.

Second Quarter Results

Wal Mart reported second quarter net sales of $113.5 billion, up 4.5% on the year. The strong dollar had an adverse effect of $2.2 billion on net sales.

The company reported operating earnings of $4.0 billion, up 5.7% compared to last year. Net earnings rose by 8.3%, resulting in net earnings per diluted share of $1.18. This was at the high end of the company's own guidance of $1.13-$1.18 per share. On average, analysts expected the company to earn $1.17 for the quarter.

CEO Mike Duke commented on the results, "Walmart had a strong second quarter, and I'm pleased with the earnings and overall results. We had positive comp sales in Walmart U.S. and Sam's Club, as well as each of our International market, reinforcing that customers rely on Walmart to help them save money and live better."

With the "middle class" being squeezed in developed economies, Wal Mart observes the "paycheck cycle" in its international markets as well as in the US. Shoppers tend to spend more money in Wal Mart's stores in the first days of the month, after customers have received their paychecks.

Segmental Information

Walmart U.S.

The company's largest division reported a 4.5% increase in revenues to $67.4 billion. Growth was driven by new openings and comparable store sales growth of 2.2%. Operating income rose by 5.3% to $5.3 billion, as the division continued to reap the benefits of operating leverage.

Walmart International

The international division continues to drive revenue growth. Revenues were up 6.4% to $32.0 billion. In constant currencies, revenue growth would have been 7.2%. Operating income grew a mere 5.4% to $1.5 billion. A strong dollar depressed operating earnings by $110 million. The company is slowing down its expansion in Brazil, Mexico and China. It's main focus is to improve profitability at its current operations.

Sam's Club

The smaller Sam's Club division reported revenue growth of 3.8% to $14.2 billion, driven by same store sales growth of 3.4%. Operating profits of the division rose by 10.1% to $536 million.

Outlook

Based on the decent second quarter results, Wal Mart is raising its full year targets.

Third quarter earnings per diluted share are expected to come in between $1.04 and $1.09. This compares to analysts estimates of $1.05 per share. Walmart U.S. is expected to show comparable sales growth between 1.0 and 3.0%. Sam's Club comparable sales are estimated at 3.0-5.0%.

Wal Mart is raising its full year earnings guidance from $4.72-$4.92 per share towards $4.83-$4.93 per share. This compares to last year's earnings of $4.54 and analysts forecasts of $4.93.

Valuation

Wal Mart ended its second quarter with $7.9 billion in cash and equivalents. It operates with $51.3 billion in short and long term debt, for a net debt position of $43.4 billion.

For the first six months of 2012, the company reported revenues of $225.8 billion. Net earnings came in at $7.8 billion, or $2.28 per share. The market currently values the firm at $244 billion.

This values Wal Mart at roughly 0.5 times annual revenues, and 15 times annual earnings. Target (TGT) trades at 0.6 times annual revenues, while Costco (COST) trades at 0.5 times annual revenues. These competitors trade at 15 and 27 times trailing earnings, respectively.

Currently, Wal Mart pays a quarterly dividend of $0.40 per share, for an annual dividend yield of 2.2%

Investment Thesis

Year to date, shares of Wal Mart trade with gains over 21%. Shares traded around the $60 mark for the first five months of the year. In May, shares rose sharply after the company issued a strong outlook. Furthermore, investors were betting on increased traffic at the discount retail store operator, amidst falling consumer confidence.

Shares hardly advanced over the past decade, but operating performance kept improving. Late 2011, I already wrote an article about how Wal Mart is making up for "its lost decade". Over the past quarter, investors appreciated the improved "value" in Wal Mart's shares. In just three months, shares advanced 22%, trading around all time-highs.

While the results are anything but spectacular, the underlying trend remains positive for the company. With the middle-class being squeezed in developed markets, by austerity measures and weak economic growth, Wal Mart continues to remain popular with shoppers looking for every-day bargains.

Wal-Mart represents an excellent long term investment opportunity. As a note of caution, investors jumping on the train should not expect short term outperformance given the nice run-up over the last months.

Source: Wal-Mart - Investors Pick Up This Growth Brilliant After 'A Lost Decade'