French-based hypermarket-to-the-world Carrefour (OTC BB: CRERF) reported its 2003 earnings yesterday. For those not acquainted with the world's No. 2 retailer and No. 1 unpronounceable store name, Carrefour invented the concept of the "everything under one roof" superstore. (Wal-Mart (NYSE:WMT) namesake Sam Walton liked the concept so much that he duplicated and perfected it some 40 years ago.)

Carrefour's 2003 profits were up nearly 19% at 1.6 billion euro (beating analyst predictions of 11% growth), on sales growth of a miniscule 2.6%. That's an excellent illustration of the economics of certain retail sectors.

When you operate on tiny margins, any improvement in those margins translates into incredible growth in the bottom line. Say you sell $1 billion worth of goods a year, but have only a 2% profit margin. Shave your operating costs by a percent, squeeze your suppliers for another percent, and presto! You have doubled your net profit.

Carrefour only trimmed its operating margin by 0.4%, but that was enough to produce substantial profit gains. Moreover, the company insists there are still more economies to be achieved, not least in scale. For 2004, Carrefour projects that sales growth of 6% will once again generate double-digit earnings growth.

Yet despite good news for current profits and more good news for the future, the company's stock fell slightly yesterday and again today. Why? Probably because of the story behind the story of good earnings growth.

About a week ago, Carrefour was rumored to be the target of a Wal-Mart buyout. Wal-Mart has coveted an entry into the French market for years (there must be big money to be made selling discount snails and frog legs.) And the American uber-retailer has already bought its way into the U.K., Germany, and Japan. But its attempts to buy itself a French subsidiary have been stymied since its abortive courtship of the Auchan and Carrefour chains in 1999.

When the rumor of Wal-Mart's renewed interest in Carrefour began circulating in late February, the French hypermarket's stock price spiked. It could be that two weeks of no further news on the buyout front has made the arbitrageurs nervous. If so, perhaps they used yesterday's good earnings news as a means of selling their shares -- voting with their feet, as it were, on the chances of the Wal-Mart buyout actually materializing.

Wondering what will come of Wal-Mart's desire for Carrefour? Talk it over with other Fools on the Wal-Mart discussion board.

Motley Fool contributor Rich Smith owns no shares in any companies mentioned in this article.