By  on February 21, 2007

Wal-Mart Stores Inc. posted fourth-quarter earnings that beat analysts' expectations as international growth and a $98 million net tax benefit bolstered results.

Wal-Mart's performance buoyed stock trading in Tuesday's afternoon session. At the bell, the Dow Jones Industrial Average closed up 0.2 percent to 12,786.64 while shares of Wal-Mart rose 3.7 percent to $50.26.

For the three months ended Jan. 31, the retailer's net income rose 9.8 percent to $3.94 billion, or 95 cents a diluted share, from $3.59 billion, or 86 cents, in the same year-ago quarter. Total revenues climbed 11 percent to $99.08 billion from $89.25 billion, which included a sales gain of 10.9 percent to $98.09 billion from $88.42 billion last year. Analysts had the company pegged to earn 90 cents, according to Thomson Financial.

"Our customers benefited from low prices around this world. It is a reaffirmation of the proposition that is synonymous with Wal-Mart: saving people money so they can live better," said H. Lee Scott, president and chief executive officer, during a taped earnings conference call.

Scott said the company's international segment had a "phenomenal quarter, driven by a tremendous performance in Mexico, solid sales in Canada and continued improvements in the U.K., and we're seeing solid results in markets like Argentina, Brazil and China."

Earnings were helped by a $98 million, or 2 cents a share, net tax benefit. Excluding the tax benefit, Wal-Mart would have still beat Wall Street's consensus estimate. Total U.S. same-store sales for the quarter rose 1.6 percent, with a 1.3 percent increase for Wal-Mart Stores and a 3.1 percent gain for Sam's Club. While Wal-Mart's domestic stores under the Wal-Mart brand posted an operating income gain of 11.3 percent, and Sam's Club came in with a 15.4 percent rise, it was the international businesses that reported the greatest gain, at 32 percent, in operating income from continuing operations. Operations in South Korea and Germany were shed during the third quarter of fiscal year 2007.

For the year, net income was essentially flat, rising just 0.5 percent to $11.28 billion, or $2.71 a diluted share, from $11.23 billion, or $2.68, a year earlier. Total revenues rose 11.7 percent to $348.65 billion from $312.1 billion, which included an 11.7 percent sales gain to $344.99 billion from $308.95 billion. Total U.S. comps rose 2.1 percent, with Wal-Mart up by 1.9 percent and Sam's Club gaining 2.9 percent.The company provided first-quarter guidance of a same-store sales increase between 1 and 3 percent, and earnings per share from continuing operations of between 68 cents and 71 cents. For fiscal year 2008, EPS is forecast between $3.15 and $3.23.

Charles Holley Jr., senior vice president for finance, said during the taped call that apparel and home sales continue to be softer than the company would like at Wal-Mart stores in the U.S. He noted that comp sales rose slightly at 1.3 percent, driven by an increase in the average ticket even though customer traffic declined slightly. Strong areas were entertainment, food and pharmacy.

Consulting and research firm Customer Growth Part­ners, in an updated report Tues­day, said its analysis of Wal-Mart's merchandise selection indicates that the discounter "has continued to migrate its lines to higher price point/higher margin merchandise, not by abandoning entry-point pricing, but by expanding its offering of upmarket goods." The report also said the discounter increased its margins in the food category by emphasizing premium and specialty items, particularly in the "burgeoning take-out/eat-at-home market."

J.P. Morgan analyst Charles Grom has a "neutral" rating on shares of Wal-Mart. "While the stock's absolute/relative underperformance over the past five years has tempted us to get bullish, we do not see a positive catalyst on the horizon," Grom wrote in a research note on Tuesday after the discounter released earnings results.

In contrast, Oppenheimer analyst Bernard Sosnick and Lazard Capital Markets analyst Todd Slater both have "buy" ratings on shares of Wal-Mart. Sosnick believes that Wal-Mart shares are about to "begin a long period of appreciation, based on improving operating results," while Slater in his report noted that "international growth is driving gross margin expansion." Slater has a target price of $59 a share.

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