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Wal-Mart (WMTFree Wal-Mart Stock Report), the world's largest retailer and Dow-30 component, has reported earnings of $0.97 a share for the fiscal third quarter (ended October 31st). That result was within management's guidance range of $0.95 to $1.00, but a bit below our estimate of $1.00. Compared with the year-earlier period, share net advanced 7.8% (excluding a 3Q 2010 tax benefit). The stock traded down meaningfully following the announcement.

In the U.S., Wal-Mart sales advanced 2.7% in the October period, year over year, to $63.8 billion. Comps rose a healthy 1.3%, which was better than the -1% to 1% guidance range provided by the company, the decline of 1.3% in the prior-year term, and our estimate of a 1% advance. The grocery, health & wellness and hardlines categories (which account for approximately 75% of annual domestic revenues) all had positive comps. Notably, comps gained momentum throughout the quarter, driven by an increase in the average ticket despite a drop in traffic versus last year. On the bright side, comp traffic did improve 160 basis points on a sequential basis. Management credited several factors for the better average ticket: the item add-back program (which is now mostly complete); catering to the merchandise tastes of local communities; better technology and associate training, which resulted in improved shelf stocking and minimal sellouts; and a positive response to everyday low prices.

Meantime, Wal-Mart International's sales rose 15.3%, on a constant-currency basis. While all markets exhibited gains, China, Mexico, and Argentina were especially strong. The company added 130 international locations in the term. The Sam's Club chain had a particularly strong quarter, increasing comps at a 5.7% rate (excluding fuel).

Inflation in the Grocery section was 4%, but the company's pricing action softened the blow to the consumer. That factor, coupled with deflation in other categories and a trend of customers trading down to lower-priced goods, held storewide inflation at a reasonable 70 basis points. All told, the gross margin narrowed slightly from the year-earlier period, but rising sales significantly outpaced operating expenses. As a result, Wal-Mart's operating leverage improved for the eighth straight term. We expect further enhancement in the coming quarters as the company executes sourcing initiatives and generates supply chain and operational efficiencies.

Management pointed out that very little has changed in the spending power of its customers. Indeed, only one in ten Wal-Mart female shoppers surveyed by the company view the state of the U.S. economy as ''good''. Against that backdrop, Wal-Mart will refund the difference if shoppers find the same merchandise at a lower price elsewhere. In addition, a layaway program and free shipping on certain purchases made online round out Wal-Mart's holiday savings plan.

The company's fiscal fourth-quarter guidance calls for comps to be flat to up 2%. Moreover, management is looking for share net of $1.42-$1.48 for the January period, and $4.45-$4.51 for the full year. In response, we have lowered our 2011 earnings estimate by a nickel, to $4.50.

Although long-term appreciation potential is below average, Wal-Mart stock has an excellent Safety rank (1) and a decent dividend yield, and the company has a stellar Financial Strength rating (A++), which ought to appeal to conservative, income-minded investors.

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.