In many respects, Wal-Mart (NYSE: WMT) continues to defy logic, because it's difficult to fathom how a company stands any chance to grow after reporting $92 billion in quarterly sales. Yet in other respects, Wal-Mart is confirming that growing in the double digits is only becoming more of an uphill battle.
Wal-Mart's second-quarter sales growth of 8.8% was indeed impressive, given the significant base continually used for the comparisons, but the results came in slightly below analyst expectations. Bottom-line earnings also fell short, causing management to concede that "our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us."
Investors appeared to agree, as the stock fell more than 5% to a new 52-week low after earnings were released Tuesday. Management also tempered projections for the full year, dropping its earnings forecasts a dime to $3.05 to $3.13. Overall, it appears that operational improvements at Sam's Club -- which is starting to resemble market leader Costco's (Nasdaq: COST) layout more and more these days -- and strong international growth are not proving to be enough to offset flagging sales at Wal-Mart in the U.S., which accounted for 64% of total sales.
Management cited strength in the company's domestic grocery, pharmacy, and electronics sales, which easily rival the dominance of pure-play peers in Kroger (NYSE: KR), Walgreen (NYSE: WAG) and CVS (NYSE: CVS), and Best Buy (NYSE: BBY). But soft sales in home products and apparel are hitting just as subprime woes hit homes, and a move to brand-name clothing has yet to overcome Wal-Mart's image as fashion-challenged. The end result for the quarter was an anemic 1.2% increase in quarterly comps.
Total international sales jumped 15.7% as Wal-Mart continues to roll right along in Brazil and the U.K. via its Asda subsidiary, and it recently announced big plans to enter India. It will rely on international sales to keep growth chugging along, but until domestic trends improve markedly, Wal-Mart shares are likely to continue to tread water.
Despite the near-term woes, Wal-Mart still qualifies as a blue-chip company with a favorable long-term outlook and a history of double-digit sales and earnings growth. And despite the recent reduced earnings forecast, the company should still grow year-over-year earnings 14%. In fact, there is little threat that Wal-Mart will lose its status as the undisputed "everyday low-cost operator."
If you can't tell, I'm torn on the stock. Usually, I try to take advantage of short-term pain if I like the long-term outlook, but in Wal-Mart's case, its near-term woes have persisted for longer than I would have expected, and its core customer base is being seriously affected by higher gasoline prices, interest rates, and other unfortunate hits to the pocketbook. These trends are also starting to spread to international markets such as Canada and Mexico.
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Fool contributor Ryan Fuhrmann is long shares of Walgreen, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
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