I've been itching to write about Wal-Mart
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.
Many retail companies are turning in negative same-store sales for 2005. Retailers 99 Cents Only Stores
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.
A quick check of the competition suggests that Wal-Mart is doing just fine. Yes, Target
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'
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.