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Wal-Mart Stores Inc. (WMT - Free Report) reported better-than-expected second-quarter 2012 results. The retailing giant reported quarterly earnings of $1.09 per share up by 12.4% over the prior-year earnings of 97 cents a share as well as surpassing the Zacks Consensus estimate by a penny.

The quarter’s earnings included certain pre-tax items of approximately $49 million from a mark-to-market loss on certain foreign currency derivative positions related to the Massmart acquisition, approximately $36 million from acquisition related costs for Netto and Massmart, and approximately $30 million in expenses related to storm damage from tornados and floods in U.S. operations.

In addition, the combination of the expense and gross margin items totaled $132 million and accounted for approximately a 3 cents impact to the company’s EPS for the quarter.

Revenue and Margin Details

Walmart’s net sales, including fuel, in the second-quarter climbed 5.5% to $108.6 billion from $103.0 billion in the year-ago quarter. It exceeded the Zacks Consensus Revenue Estimate of $108.1 billion. Net sales in the quarter included a currency exchange rate benefit of $2.3 billion.

Walmart International posted net sales growth of more than 16% over last year to $30 billion, mainly driven by sales increases in Mexico, U.K., Canada, Brazil and China. This included a currency exchange translation benefit of $2.3 billion.

Sam’s Club delivered strong results in the quarter with sales hike of 4.9% to $12.0 billion, excluding fuel. Comparable traffic and ticket, excluding fuel, were both higher in the quarter versus the prior-year quarter. Further, it increased for both Business and Advantage members in the quarter. Sam’s delivered comp increases in nearly all categories across the club.

Sam’s Club comparable sales, without fuel, increased 5.0% for the same period. Sam’s Club expects comp sales, without fuel, for the current 13-week period to increase between 3.0% and 5.0%.

Walmart, widely regarded as a bellwether for the U.S. economy, stated that U.S. same-store sales decreased 1.3% year-over-year to -0.9%.

The decline in Walmart U.S. comparable store sales was fueled by a fall in consumer traffic, while average ticket was up versus the prior year. Grocery and, health and wellness categories had positive comparative sales for the quarter under review.

For the period from July 30 through October 28, 2011, Walmart U.S. expects comparable store sales to range from negative 1% to positive 1%.

Meanwhile, quarterly operating income climbed by 3.1% year over year to $6.4 billion, while the operating margin contracted by 13 basis points to 5.84%. The growth was primarily caused by favorable foreign currency translations.

Other Financial Update

Walmart ended the year with free cash flow of $4.0 billion, compared to $4.5 billion in the year-ago period. Return on Investment (ROI) was 18.4% during the quarter compared to 19.0% in the prior year period. ROI was negatively impacted by the acquisitions and currency exchange translations.

The company returned $2.7 billion to shareholders by way of dividends and share repurchases. During the quarter, Walmart repurchased $1.4 billion of shares, representing approximately 26.1 million shares. In addition, the company paid $1.3 billion in dividends.

Walmart also completed its acquisitions of the Netto stores in the U.K. and the majority ownership position in Massmart Holdings Ltd. in sub-Saharan Africa, during the quarter.

Guidance

Based on the strong results of the second quarter and the economic environment in the United States and around the world, management provided an estimate that third quarter fiscal 2012 earnings per share from continuing operations will be in the range of 95 cents to $1.00, compared to last year’s reported EPS of 95 cents, which included a tax benefit of approximately 5 cents per share.

For the fiscal year 2012, Walmart has raised its EPS guidance to a range of $4.41 to $4.51, as compared to last year’s full year EPS of $4.18, which included approximately 11 cents per share for certain items.

Recommendation

We remain encouraged by the company’s significant presence in the international market. The international segment of the company consists of retail operations in 14 countries and Puerto Rico.

Currently, Walmart -- which faces stiff competition from Target Corp. (TGT - Free Report) and Costco Wholesale Corporation (COST - Free Report) , has a Zacks #3 Rank, implying a short-term Hold recommendation.




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