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Walmart Remains Neutral

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We maintained our Neutral rating on Wal-Mart Stores, Inc. (WMT - Free Report) following appraisal of fourth quarter and full year 2012 results.

Walmart posted earnings of $1.44 per share in the fourth quarter exceeding the prior-year earnings of $1.34 per share, driven by an improved top-line growth. However, the results lagged the Zacks Consensus Estimate by a penny. Revenues climbed 5.8% to $122.3 billion in the quarter, including the positive impact of acquisitions of Netto in UK and Massmart in South Africa. It, however, missed the Zacks Consensus Revenue Estimate of $123.6 billion. We are encouraged by the positive comparable sales of the company for the quarter, which were driven by increased focus, greater price leadership and improved merchandise offerings.

We are optimistic about the company’s significant exposure to the international markets. With retail operations in 26 countries, the international segment of the company is now among the top 3 largest retailers in the world, due to accretive acquisitions, new store growth and positive comparable store sales.

Walmart has also been focusing on expanding its online business, where it holds the sixth position. It has already developed its online businesses in US, UK, Canada and Brazil. Walmart has also increased its controlling stake to 51% in Chinese Internet retailer Yihaodian in order to further strengthen its online business. Walmart has improved its access to Chinese consumers who increasingly use smartphones and social media to shop. Walmart also acquired the Vudu streaming video service in February 2010 and technology company Kosmix in April 2011, demonstrating its commitment to e-commerce and goal of offering customers a unique shopping experience.

Although Walmart has a significant international presence, the company has not been able to enter the lucrative Indian markets and tap a large customer base of $1.2 billion. The proposal to allow 51% foreign direct investment (FDI) by multi-brand retailers like Walmart would have provided a good option to enter Indian markets. However, it raised debates in India and thus the Indian government has suspended the proposal for the time being.

Additionally, Walmart remains exposed to unfavorable foreign currency translations due to its considerable international presence. With rising investments in markets outside US, Walmart also faces economic and political risks. In addition, the company operates in a highly competitive retail market. Walmart also needs to be more competitive, as US shoppers seek for discounts on items to cope with high unemployment. Moreover, we remain cautious of the weak economy and the rising costs, which keep us on the sidelines.

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