It seems like hopes for a strong back-to-school season (not to mention a more general spending recovery overall) are fading away for Wal-Mart (NYSE: WMT). Weak consumer spending may not be a huge surprise this quarter, but I found it interesting that the company also lost some operating leverage. In any case, while Wal-Mart really isn't the sort of stock to buy or sell on the basis of one quarter, but I find the valuation and potential here to be pretty underwhelming on the whole.
Sluggish Results On Multiple Fronts
With only one exception, I think this is a quarter where Wal-Mart will have disappointed most analysts and investors at pretty much every point on the income statement. The magnitude of the disappointments aren't very large, but they do make it harder to argue for a bullish case for the shares.
Revenue rose 2.4% as reported this quarter, or 2.8% on a constant currency basis. That was a little weaker than expected, with the weakness showing up in all three major divisions. U.S. Wal-Mart sales were up 2%, Sam's Club sales were up 2.6%, and International sales were up 2.9% (or 4.4% in constant currency). On a comp basis, same store sales were flat (versus an expectation of 1% growth), with U.S. Wal-Mart flat (versus expectations of 0.6% growth) and Sam's up 1.7%. International comps were mixed, with negative comps in the U.K., Mexico, Japan, and Canada, offset by some growth in Brazil, Africa, and China. 

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Margins were a little curious. Gross margin improved 20bp from the year-ago period, which was the one bright spot I saw in the quarter. On the other hand operating income rose only 1.4% (1.8% in constant currency), and the company lost 5bp of operating margin. On a line basis, U.S Wal-Mart income rose 5% and Sam's rose 8%, while International declined 1.3%.
Wal-Mart Is The Market
Given Wal-Mart's results, it's hard for me to think that this is going to be a strong back-to-school season. There were certainly be outperformers and underperformers through the reporting cycle (American Eagle (NYSE:AEO), for instance, had a terrible result recently while Kohl's (NYSE:KSS) looked better), but it's difficult for me to believe that other retailers like Costco (Nasdaq:COST) or Target (NYSE:TGT) will do significantly better than the “blah” results we've now seen at Wal-Mart.
If there is momentum, it may be in the e-commerce space. Wal-Mart's e-commerce sales were up 30% this quarter, but Amazon's (Nasdaq:AMZN) significant price advantages could drive even more traffic and sales out of the stores and onto their website.
Along similar lines, I wonder what Wal-Mart can really do to change things in the meantime. A new Fresh Produce Guarantee is nice and everything, but it's probably not going to get shoppers to switch from Kroger (NYSE:KR), Whole Foods (NYSE:WFM), or farmers' markets if that's where they prefer to buy their produce. Likewise, sell-side analysts have made a big deal about exclusive merchandise offerings like neon-colored colors or Duck Dynasty-related products, but I struggle to believe those are more than just tiny blips on the radar screen for Wal-Mart.
International Conditions Still Tough
Wal-Mart's international results don't give me warm fuzzy feelings about the health of the global economy. Mexico has slowed down (as even the very well-run FEMSA (NYSE:FMX) has seen Oxxo comps slow down), the U.K. and Japan remain sluggish, and stores in China continue to see troubling declines in store traffic – not to mention the fact that Wal-Mart has been lagging companies like Sun Art and China Resources Enterprises in terms of comps.
Wal-Mart doesn't report an international comp number, but my back-of-the-envelope math suggests comps were down slightly overall (about 0.3%).
The Bottom Line
Ongoing price investments will keep Wal-Mart competitive in food retailing, but I think it will be harder for Wal-Mart to absorb the stronger merchandise price competition from Amazon, particularly as Amazon apparently doesn't need to worry much about margins. Moreover, I don't see Wal-Mart really distinguishing itself in its international operations such that I'd want to own the stock for that play either.
If you think consumer spending will turn around, Wal-Mart makes sense as a play on that them. But considering the growth potential and the stock's valuation, it seems like a pretty uninteresting stock today.
Disclosure – At the time of writing, the author owned shares of FEMSA.

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