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