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Wal-Mart (WMT - Free Wal-Mart Stock Report), the world's largest retailer, put forth a solid bottom-line performance in the July quarter. Earnings per share of $1.18 came in at the high end of management's $1.13 to $1.18 guidance range and were above our $1.16 estimate.

U.S. same-store sales advanced 2.2% (2.5% sans fuel). This was toward the high end of the 1% to 3% guidance range and marked the fourth consecutive positive comp. Traffic was positive for the third straight quarter and made up 18% of the advance. The average transaction amount drove the remainder. Momentum grew throughout the quarter, with July being one of the strongest months so far this year, partly due to a strong showing around the 4th of July holiday. An effective TV ad campaign highlighting WMT's low prices on baskets of goods appears to be helping win back customers and attract new ones. 

Looking at specific categories, grocery (food and consumables) had a low-single-digit positive comp. Its new USDA choice steak offering stood out, beating the average food comp by 300 basis points. Most hardlines continued to do well, but electronics suffered, as weak media and gaming sales were not enough to offset strong tablet growth. A drift away from fashionable clothes toward basic items such as jeans, underwear, and socks, helped drive the second consecutive low-single-digit comp in the apparel category. New shoe brands also helped. 

International sales were up 6.4% (7.2% on constant currency basis). The U.K., Mexico, and Canada delivered stable growth, solid margins, and expense leverage. However, profits from Brazil and China were disappointing due to poor new store site selection and the implementation of the everyday low price strategy. We doubt this will abate in the current quarter, but progress should be made within a year.

Sam's Club continued to put forth strong results with comps sales rising 4.2% and operating income growing at twice the rate of sales.

Although the logistics team managed to reduce the cost per case shipped by 5.4%, the companywide gross margin still fell 18 basis points as Wal-Mart continues to execute its pioneering strategy of passing cost savings onto consumers through lower prices. 

Consolidated operating income was up 4.9% year over year, which was higher than the sales advance of 4.5%. Operating expense as a percentage of sales fell 20 basis points. Over the next five years, Wal-Mart plans on reducing SG&A costs by 100 basis points, and has already made good progress. Some initiatives include standardizing replenishment systems to improve inventory flow and increasing sourcing efficiency.

On the store expansion front, the company has opened 24 of the 80-100 small format stores pegged for this year. The first Wal-Mart Express stores are producing positive comps on the whole, and will continue to be tested and rolled out in Chicago.

The company expects comps for Wal-Mart U.S. to be in the 1% to 3% range for the October quarter and Sam's club to have a 3% to 5% result. Consolidated sales growth for the full year is forecast to advance 5% as currency translation continues to hurt the top line as well as operating income. Full-year earnings per share guidance of $4.83-$4.93 is in line with our $4.90 estimate.

About The Company:Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,029 supercenters (includes sizable grocery departments), 629 discount stores, 611 Sam’s Clubs, and 210 Neighborhood Markets in the U.S., plus 5,651 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and the U.K. The company operated 1.037 billion square feet of total store space at the end of its 2011 fiscal year. Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% U.S. sales in 2011, 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.