The Honest Abe Assessment of Wal-Mart

Opinions are all over the map on what to do with Wal-Mart on its earnings induced sell-off. Some believe the quarter was a step back from the increasingly positive investment thesis of the past six months. Others are eyeing the dip as an entry point into the ultimate fiscal cliff stock play, which so happens to be performing very fundamentally well before the arrival of a fiscal cliff of any sorts. I can't say I am surprised by the market's reaction (WATCH the crash course guide to Wal-Mart's earnings: http://decodingwallst.com/watch-two-lively-guys-talk-about-wal-mart-earn...). As I noted on Twitter (@BrianSozzi), the pullback may represent a buying opportunity; note that we alerted clients on July 30 to exit the long position recommended the day of the first quarter earnings release.

The market appears to be yelling fire in a crowded room given the surface negatives, such as same-store sales not being at the upper-end of guidance ranges for the U.S. division and Sam's Club. Oh, and then there were pesky issues in the form of a well telegraphed curtailment in overseas expansion plans this year and the performances out of the UK and Brazil only being so-so. However, in the end, there is a good chance of this quarter being viewed in a favorable light, and therefore the dip opens up an opportunity. Here is what I am thinking:

•On a total sales miss due chiefly to currency headwinds, and another gross margin miss (was down again y/y), Wal-Mart continues to drive stronger productivity in the U.S. namesake, Sam's Club, and to a lesser extent international (you could see this in operating income rising faster than sales growth). That is a key consideration in the bull thesis on Wal-Mart, investments in price that lead to market share gain and strong leverage on an ever productive asset base.

•Unlike Target (TGT), Wal-Mart does not need a 5% reward card to bring people through the doors consistently. In other words, Wal-Mart's now entrenched positive U.S. comp trend is suggesting the company will have solid back to school (back to school already off to a strong start as indicated on the earnings call) and holiday selling seasons. Consumers are seeing Wal-Mart as the true low price leader and giving their entre shopping list to the registers.

•I am a fan of Wal-Mart slowing the pace of international openings to better focus on getting the economic models of the currently opened stores correct. By mid-2013, if Wal-Mart is able to continue to bring down costs in key emerging markets, the operating margin profile of the business should show nice year over year improvement.