Of all the big numbers in Monday morning's third-quarter earnings report from Wal-Mart Stores' (NYSE:WMT) -- and at Wal-Mart they're all big numbers -- none stands out more to me than the $10.4 billion it has spent on capital expenditures over the past nine months. Most companies dream of that kind of number being their revenue.
Wal-Mart has faced a great deal of negativity this year -- not only in terms of the typical labor and greed negativity that constantly swirls around the company, but also in the negativity surrounding the company's share price, which is largely a spill-over of the former issues mixed in with some softer-than-expected sales. But looking at the company's third-quarter financials, you can clearly see that, despite the negativity, Wal-Mart keeps performing and is going to be just fine in the long term.
In Wal-Mart's third quarter, total sales rose 10.1% -- an amazing number, given the company's already huge size. That figure takes into account a 9.5% improvement at Wal-Mart's flagship stores, a 10.3% improvement at Sam's Club, and a 12% boost in international operations. A large chunk of the sales gains came from strong same-store-sales improvements, which were 3.8% overall, 2.9% at the flagship stores, and 8.1% at Sam's Club (or 5.3% without gasoline sales). With regard to international operations, Wal-Mart reported a double-digit sales increase in China.
The operating results for the quarter weren't as strong as the sales gains because of increased freight costs (thanks to rising energy prices), charges related to hurricanes Rita and Katrina, and product warranty expenses. However, the news is not all negative here: The energy costs and the hurricane-based charges are related and are already beginning to subside. The net effect is that despite the strong sales growth, earnings per share rose only 5.5% to $0.57 versus $0.54 last year. However, given the nature of the charges in the quarter, it's not difficult to see how the performance should flow through much better in future quarters.
Wal-Mart's balance sheet is also solid. The company carries a $23 billion slug of long-term debt, but through the first nine months of the year, it also generated $8.1 billion in operating cash flow -- more than enough to finance the debt. However, that cash is better used to continue opening new stores, which is what the company does. And that brings us back to the large capital expenditures at Wal-Mart.
If you're scoring at home, you've realized that Wal-Mart is free cash flow-negative to the tune of $2.3 billion through the first nine months of the year. History shows that the company turns FCF-positive in the fourth quarter. It's also evident that Wal-Mart could be free cash flow-positive in other quarters if it slowed down its store openings, but taking advantage of opportunities makes sense.
As much as I like Costco Wholesale (NASDAQ:COST) and BJ's Wholesale (NYSE:BJ) in the warehouse-club space, as well as Target (NYSE:TGT) and Sears Holdings (NASDAQ:SHLD) in the discount-department-store space, it's tough to argue with the fact that Wal-Mart is a very well-run company that's attractively priced compared with its historical multiples. In fact, it's tough to see how investors could go horribly wrong with any of those five companies.
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Costco is a Motley Fool Stock Advisor recommendation.
Nathan Parmelee owns shares in Costco Wholesale but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
