Leading global retailer Wal-Mart (WMTFree Wal-Mart Stock Report) has reported fiscal second-quarter (ended July 31st) earnings per share of $1.09, reflecting a 12.4% rise over last year's tally. The result matched our estimate and fell toward the high end of the company’s $1.05-$1.10 guidance range. Net sales increased 5.5% to $108.6 billion, driven by Wal-Mart International and Sam's Club. (Total revenue, which includes membership and other income, was $109.4 billion.) Operating expenses rose at the same rate as sales, but would have been lower if not for certain acquisition-related costs and damages from tornadoes and floods in the United States. We expect the company to be able to leverage operating expenses for the full year.

Wal-Mart U.S. demonstrated progress in its goal of achieving positive comps by yearend. Although same-store sales for the quarter declined 0.9% (excluding fuel sales), it was the best result in almost two years, and compared favorably with the 1.1% contraction recorded in the first quarter. Importantly, monthly sequential sales trends improved in June and July. The average transaction amount was positive every month in the quarter and traffic rose throughout. Grocery and Health & Wellness (two-thirds of sales) delivered low-single digit positive comps as the assortment addback was completed, driving increased traffic. A focus on everyday low prices and keeping shelves stocked also contributed. Similar to the food and consumables addback initiative, Wal-Mart plans to continue to expand its general merchandise offerings in the months ahead. Apparel has been one of the biggest underperformers, as comps fell in the mid-single digits during the quarter. However, the category did realize a 300 basis point sequential-quarter improvement and should continue to grow as key brand reintroductions help regain customers. We expect electronics to continue lagging due to poor media and gaming sales as well as double-digit TV price deflation.

Management confirmed that its core customer group (consumers with annual incomes under $30,000) continues to struggle financially due largely to elevated gas prices and high unemployment levels. Indeed, stores are seeing higher traffic following conventional payment periods, causing WMT to adjust staff and stock levels. Grocery inflation of 3.5% did not have a material impact on sales as customers traded down to private label brands, smaller package sizes, and avoided discretionary purchases.

The Sam's Club unit recorded a strong 5% comp increase. That was the sixth straight quarter of improvement there. These results were comparable to that of its primary competitor, Costco (COST).

The International segment continued to be Wal-Mart's primary growth driver. Sales of $30 billion reflected a 16.2% year-over-year advance, and all regions had positive constant currency sales growth (except for Japan, due to the natural disaster recovery there). Brazil, China, and Latin America performed particularly well. The company completed the acquisition of 147 Netto stores in the U.K., and a 51% stake in Massmart, the leading general merchandise retailer in sub-Saharan Africa. Management is focused on rolling out the everyday low price platform in international markets, which takes multiple quarters to complete in each region.

Management expects the October-period comp sales comparison to be between -1% and 1% (compared to last year's    -1.3%) and earnings per share to be between $0.95 to $1.00, in line with our $1.00 estimate. A focus on low prices will probably keep gross profits flat for the quarter. Still, based on strong international results, progress in the merchandise addback initiative, and effective cost controls, the company changed its full-year guidance range from $4.35-$4.50 to $4.41-$4.51. The shares rose as much as 4.2% following the news release.

About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 2,907 supercenters (includes sizable grocery departments), 708 discount stores, 596 Sam’s Clubs, and 189 Neighborhood Markets in the U.S., plus 4,557 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and the U.K. The company operated 985 million square feet of total store space at the end of its 2010 fiscal year. Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 54% U.S. sales in 2010, while sales per square foot were about $430.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.