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Wal-Mart Stores (WMT - Free Wal-Mart Stock Report), the world's largest retailer and a Dow-30 component, has reported disappointing fiscal fourth-quarter results (year ended January 31st). Earnings per share came in at $1.60, below last year's tally of $1.67 and our estimate of $1.68. (Note: These figures exclude $0.26 in nonrecurring charges.) Net sales, at $130.6 billion, rose 2.8% year over year (in constant-currency terms), in line with our $130.2 billion estimate. Strategic "price investment'' within all three operating segments caused a 40-basis-point reduction in the gross profit rate. Wal-Mart stock declined modestly on the news.

As expected, Wal-Mart U.S. had weak comparable-store sales. That all-important metric narrowed by 40 basis points year over year, compared with a 50-basis-point gain in 2013's fourth quarter. Traffic fell 1.7%, while the average ticket increased 1.3%. E-commerce business positively affected comp sales by approximately 30 basis points. Management cited severe winter weather conditions, a reduction in government food stamp benefits, and a shortened holiday season for the somewhat weak comparisons.

The company said comp sales for the first two weeks of February were also down, a consequence of heavy winter storms. In fact, at one point, Wal-Mart had 200 stores closed due to the weather. Comps for the fiscal first quarter of 2014 are expected to be flat, on top of a 2.4% decline in the previous year's quarter.

As usual, certain product categories have been performing better than others. The grocery business gained 24 basis points of market share (Nielsen), but the overall comps were in the negative low-single-digit range, due to the aforementioned food stamp issue. Produce and adult beverages were once again standouts. Health & Wellness delivered a low-single-digit positive comp, as strength from the prescription business offset a soft flu season.

The Hardlines business, which includes seasonal items, delivered a low-single-digit positive comp. Entertainment continued to be weak, as comps were in the negative mid-single-digit range. Too, the apparel category posted mediocre results. Encouragingly, e-commerce sales contributed 30 basis points to the Wal-Mart U.S. comp. The company is focused on improving the customer experience on mobile platforms to help drive sales. Other customer-centric initiatives include Site to Store and Ship from Store.

The International unit put in a decent performance, with sales rising 4.3% in constant-currency terms (but falling 40 basis points when currency translation is included). The operating environment remains challenging, due to low inflation, still-elevated unemployment, and weak consumer confidence throughout many of WMT's global operating environments. Management is focusing on improving the operating model in key markets such as Mexico, Brazil, China, and India. Of note, International's gross margin rate contracted 88 basis points due to price cuts.

Comps at Sam's Club fell 10 basis points (excluding fuel), as a 1.2% increase in traffic was more than offset by a 1.3% in the average ticket. Similar to Wal-Mart U.S., frigid winter weather caused many shoppers to stay home. For the April period, the company expects flat comps.

Wal-Mart's small format Neighborhood Market stores delivered a 4% favorable comp for the full year, thanks mostly to traffic increases. The company added 105 new Neighborhood markets in 2013, bringing the current fleet to 346. Management had previously planned on opening 120-150 of these stores in 2014, but now expects to open between 270 and 300 thanks to lower capital costs.

Wal-Mart expects fiscal first-quarter earnings per share to range between $1.10 and $1.20, versus the $1.14 logged in last year's comparable period. In response to management's guidance and the still-challenging demand environment, we are shaving a nickel off of our bottom-line estimate, which now sits at $1.15. We are also cutting $0.30 from our full-year forecast, bringing it to $5.35 per share, in line with management's guidance range of $5.10-$5.45.

Overall we were not enthused by this earnings report. We are placing greater blame on the weak operating environment than on Wal-Mart's execution. Although it may take time for a pronounced turnaround in demand to materialize, patient investors may be tempted by the decent valuation on high-quality Wal-Mart shares.

About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,158 supercenters (includes sizable grocery departments), 561 discount stores, 620 Sam’s Clubs, and 286 Neighborhood Markets in the U.S., plus 6,148 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.072 billion (as of 1/31/13). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% U.S. sales in 2012, while sales per square foot were about $437.

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