There was good news for the financial markets after the three-day weekend, with retail giant Wal-Mart
I say unexpectedly strong because as recently as June 25, the company was forecasting a 2% to 4% increase from the same period last year. Wal-Mart must have had very strong sales in the final week before the Fourth of July.
As you can see from the table, this is the highest U.S. same-store sales increase Wal-Mart has posted since May 2004.
|U.S. comps since February 2004|
The markets responded with a surge of optimism, as shares of Wal-Mart traded up almost 3% on Tuesday, approaching the $50 mark for the first time since the stock began a serious slide last April. Other big-box retailers like Target
What does this mean for investors? Wal-Mart sales are considered a barometer for retail sales in general, particularly on the lower end of the demographic scale, so this may mean consumers are beginning to loosen their wallets despite sky-high gas prices. I would caution that one month does not make a trend. And as you can see from the chart, Wal-Mart's sales took a nosedive beginning in June 2004, so the company is going up against softer results. Target and Costco report their June sales Thursday, and then we'll understand whether this is a blip or if all boats are rising on increased consumer spending.
I would also note that there are two pieces of good news here for the behemoth from Bentonville. First is that seasonal merchandise drove the improvement. This is important because that seasonal stuff carries higher margins than consumables. Second is the earnings effect. With its 3% comps last year, the company had a hard time leveraging expenses. Once Wal-Mart gets into the 4% to 5% comparable sales range, investors could begin to see some earnings leverage.
I would keep an eye on Wal-Mart, and not just because I own shares in the company. Once the elephant starts to move, the ground could begin to shake. Sustained mid-single-digit comp sales growth is just the tonic Wal-Mart needs to overcome all the bad press it has received over the last year.
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Fool contributor Timothy M. Otte searches for retail value in Atlanta. He welcomes comments on his articles and owns shares of Wal-Mart, but none of the other companies mentioned in this article.