Wal-Mart's (NYSE:WMT) U.S. struggles have been widely documented, and were confirmed when the company reported fourth-quarter results on Tuesday. Management is working on a number of fixes, but the international store base continues to do extremely well and overall the stock looks appealing, based on a reasonable earnings valuation.
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Fourth-Quarter Recap
Total sales rose a modest 2.4% to $116.4 billion. Net retail sales rose 2.5% to account for the lion's share of the top line at 99.4%. The rest consisted of Sam's Club membership revenue, which fell 4.5% to underperform the strong results that rivals Costco (Nasdaq:COST) and BJ's Wholesale Club (NYSE:BJ) have been posting as of late. However, Sam's Club did post respectable same store sales growth of 2.7% and total sales growth of 4.4%. Sam's Club accounted for 11.3% of total quarterly retail sales.

Comps at the namesake stores in the U.S. continued to struggle, falling 1.8% as total sales fell a more modest 0.5% and accounted for 61.5% of total sales. The company doesn't break out comps at its international stores, but total sales rose a robust 8.9% to account for just over 27% of total retail sales.

All of the three segments reported solid profit growth. Operating income at the namesake stores in the U.S. rose 4.8% to $6 billion. International saw operating profits rise 7.1% to $2 billion. Sam's Club reported profit growth of 57.1% but only reported total profits of $487 million and the gain was due to a restructuring charge that reduced profitability in last year's quarter. Total company operating income grew 7.3% to $8 billion.

A one-time gain pushed net income ahead 27.3% to $6.1 billion. Income from continuing operations grew a more modest 4.3% to $5 billion. Reported earnings grew 36% to $1.70 per diluted share but again would have grown a more modest 11.9% to $1.41 per diluted share on a continuing basis.

Annual Review
Full year sales increased 3.4% to $421.8 billion, while operating income improved 6.4% to $25.5 billion. Reported net income was $16.4 billion, or $4.48 per diluted share.

For the coming year Wal-Mart said to expect operating earnings between $4.35 and $4.50 per share. Analysts currently project full-year sales growth of just under 5% for total sales just over $443 billion.

The Bottom Line
Wal-Mart's stock has been weak since the earnings report, having dropped a couple of points. At current levels, the forward P/E is less than 12, if the company hits the high end of its guidance range. This is a very reasonable multiple and management is fast at work to improve U.S. comps and refocus its energies on low pricing. It has been criticized for trying to strategically raise prices on certain items while lower them on other products to drive sales, and is seen for alienating its core customer base considered to be more blue collar workers.

The company could also consider spinning off Sam's Club to shareholders. Sam's accounts for a small percentage of overall profits and is likely a distraction to fixing the U.S. namesake store base that could better be left as an independent firm to better compete with arch rivals. This would leave Wal-Mart better focused on regaining share from smaller rivals including Family Dollar (NYSE:FDO) and Dollar Tree (Nasdaq:DLTR) that have succeeded in offering low costs in stores that are more convenient to visit. Wal-Mart plans to roll out smaller stores to better compete in this category. (To learn more, see Economic Moats: A Successful Company's Best Defense.)

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