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Low Investment Risk From Low-Cost Wal-Mart

Posted: Feb 20, 2009 12:44 PM by Ryan C. Fuhrmann

Tickers in this Article: BJ, COST, TGT, WMT

Retail giant Wal-Mart (NYSE:WMT) revealed a significant milestone in its February 17 quarterly and full-year earnings results. Fourth quarter sales, which are typically the highest for retailers due to holiday shopping, again exceeded 12 digits. In addition, its $405.6 billion in sales for the year ended January 31, 2009 pushed past the $400 billion barrier for the first time. Wal-Mart's ability to maintain control of its sizable warehouse stores throughout the world is mystifying. Showing little sign of losing focus any time soon, Wal-Mart remains one of the safer bets in the stock market these days.

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Recent Results
Quarterly sales at the namesake U.S. division improved 6% to $71.5 billion (66% of total sales), as same store sales grew 2.8%. Comps also came in positive at discount warehouse chain Sam's Club, which grew 2.5% and came in ahead of comps
reported by rival Costco (Nasdaq:COST) for the all-important holiday season. Total Sam's sales were flat at $11.8 billion (11%), however. International sales declined 8.4% to $24.7 billion as a strong U.S. dollar masked 9% overseas growth on a constant currency basis. Total quarterly store sales grew 1.7% to $108 billion, while membership and other income totaling $1.1 billion pushed total sales to $109.1 billion. (Learn more about this sector in Using Consumer Spending As A Market Indicator and Analyzing Retail Stocks.)

Full-year sales grew 7% on positive comps and high single-digit growth in each of the three operating units. Management held costs in check to only 4% growth and helped net income increase to $13.4 billion. Earnings improved 9% to $3.40 per share and should continue to grow for the coming year, as management put earnings expectations between $3.45 and $3.60. Full-year cash generation improved markedly, as operating cash flow grew 12% to $23.1 billion and lower levels of CAPEX helped push free cash flow (FCF) to approximately $11.6 billion, or just under $3 per share.

Bottom Line
At about 16 times trailing FCF, and 14 times forward earnings, shares of Wal-Mart are no steal. However, Wal-Mart is outperforming peers like Target (NYSE:TGT), which recently announced corporate headcount reductions to offset "weaker than expected sales" at its own big-box stores. (BJ's Wholesale Club (NYSE:BJ) will not release its fourth quarter and fiscal year end results until March 4, 2009.) Additionally, Wal-Mart offers downside protection from a protracted slump in global economic activity given that shoppers increasingly head to its stores to take advantage of low costs. Throw in a dividend yield of 2% and investors might expect a high single-digit annual return on investments for the foreseeable future. (Read more about dividend yield in our Investment Valuation Ratios Tutorial.)

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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