Wal-Mart Rolls On

I've been itching to write about Wal-Mart (NYSE: WMT  ) for some time. It started after I read a commentary four months ago that asked whether shorting the stock wasn't the right move. Then there was a recent Duel where the bear argument questioned whether health-care costs would hurt the company's margins and whether its image problems were just too great.

Today, the company reported that U.S. same-store sales were up 2.2% for the five-week period that ended Dec. 30. That's at the low end of previous guidance, which called for 2% to 4% growth. As you might expect, this quarter's earnings will come in at the low end of previous guidance of $0.82 to $0.86 a share (well ahead of the $0.75 earned in the year-ago period).

Pessimists will look at the results and see weak sales growth. Optimists will see continued earnings growth and the fulfillment of management's promises. Here's what I see.

The environment
Many retail companies are turning in negative same-store sales for 2005. Retailers 99 Cents Only Stores (NYSE: NDN  ) and Tuesday Morning (NYSE: TUES  ) both suggest that discounters are having a tough time. Heck, even a specialty retailer such as Sharper Image (Nasdaq: SHPR  ) , whose same-store sales dropped 16% in the first 11 months of its fiscal year, prove that you have to have what consumers want to keep same-store sales numbers climbing.

In this tough market, the world's No. 1 retailer is turning in positive same-store sales and quarterly earnings growth, which suggests that its sales and earnings for the current fiscal year should equal or exceed last-year's figures. Sure, some of its peers are posting even stronger results, but same-store sales growth in the neighborhood of 3% is no small feat for a retailer as large as Wal-Mart.

The competition
A quick check of the competition suggests that Wal-Mart is doing just fine. Yes, Target (NYSE: TGT  ) is growing same-store sales faster than Wal-Mart, and its 8.1% trailing annual operating margin is actually higher than Wal-Mart's 5.9%. But on a return-on-equity basis, which measures how well management creates value for shareholders, Wal-Mart's 22.8% outshines Target's 17.6%. In addition, Wal-Mart's operating margin and ROE are twice those of Motley Fool Stock Advisor recommendation Costco (Nasdaq: COST  ) .

Investors shouldn't forget that Wal-Mart is developing an ever-larger presence in the supermarket arena, which is known for its thin margins. Compared with Albertsons' (NYSE: ABS  ) 0.6% same-store sales gain for the first nine months of this year and its 8.9% ROE, Wal-Mart's overall results look pretty good.

The outlook
Analysts expect Wal-Mart to grow earnings by 14% for the next five years (which is 3.5% a year faster than the S&P 500). The stock trades at 17.7 times trailing earnings -- hardly expensive for the world's largest retailer.

While the company's 1.2% dividend will hardly tempt Motley Fool Income Investor subscribers, remember that the company plans to spend $14 billion ($3.36 a share) for capital expenditures. Wal-Mart is not a cash cow being milked -- it's a growth engine, with an excellent ROE for a retailer, using its cash to fund long-term growth.

Short sellers hoping for a change in Wal-Mart's business fortunes may be waiting a while. Bears, especially those worried about operating margins being hurt by health-care costs, should also be cautious. Those costs may rise, but Wal-Mart has a big enough competitive advantage to roll them into its prices and keep margins within historic ranges.

Wal-Mart's stock could still fall from its current levels; it's down more than $3 per share in recent months. But given its expected long-term earnings growth, the downside here is extremely limited.

We're down to the wire with our annual Foolanthropy drive. From now through Jan. 6, please open your hearts and wallets to help our five Foolish charities.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.


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