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Low Bar Set for Wal-Mart

The retail behemoth's margins and international sales will be in focus amid sluggish growth at home.

Times are tough at

Wal-Mart

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, and the retailing behemoth's first-quarter earnings report likely will do little to inspire Wall Street.

The Bentonville, Ark., giant, which reports results before the bell Tuesday, is expected to post earnings of 68 cents a share on revenue of $87.1 billion, according to Thomson Financial. Wal-Mart has already warned, however, that its forecast of 68 cents to 71 cents would be difficult to achieve because of a tough sales environment in April.

The month indeed turned out to be tough for the world's largest retailer. Same-store sales slid 3.5%, significantly worse than the 1.1% drop Wall Street projected.

Goldman Sachs analyst Adrianne Shapira believes Wal-Mart likely will blame big-picture issues such as rising gas prices, the housing slowdown and lower consumer confidence for its sales woes. But she noted in a recent research report that "a variety of macro indicators continue to remain supportive for consumption (nominal wage growth, unemployment rate)."

Wal-Mart's problems, she maintains, are company-specific.

Wal-Mart isn't sitting back helplessly with subpar results. The company is remodeling stores in an attempt to appeal to a higher-end consumer. Additionally, it is focusing efforts on higher-margin items and departments.

On Monday the company announced an expansion of its electronics offerings, including a plan to sell

eBay's

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Skype phones. Wal-Mart also will sell larger big-ticket items such as

Sony

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home-theater systems.

Investors will want to hear how these programs are going, and they likely will pay close attention to margins to see if there is any shift due to a better product mix.

I suspect Wal-Mart's margins will be pinched because of a host of factors, including markdowns, the store remodels and perhaps, to a lesser degree, currency issues.

With sales as weak as they've been, Wal-Mart likely engaged in discounting to move products off the shelves. Meanwhile, the store remodels not only increase expenses, they are also disruptive to sales. Lastly, with so much of Wal-Mart's merchandise manufactured overseas, the weak dollar may increase the company's costs, and the company is unlikely to be able to pass along those expenses to its customers.

I'll be keeping an especially close eye on international sales. In fiscal 2007, which ended in January, Wal-Mart's international sales comprised 34% of total sales, up from 28% in fiscal 2006.

Sales grew 30.2% internationally during the year, compared with just 7.8% growth in the U.S. Clearly, overseas sales are a vital component of the company's growth.

Wal-Mart has made some solid acquisitions in Brazil and Japan, which should aid growth. Without a strong performance internationally, the company's projected 12% long-term growth rate could be in jeopardy. According to the blog

Contrahour, Wal-Mart's price-to-earnings ratio is at a 20-year low. If the international business isn't as strong as anticipated, look for the P/E to head even lower.

Wal-Mart will be a buy again, perhaps even in the near future. Once the market digests the company's negative macro comments and investors start to see some progress on store remodels and movement of higher-margin merchandise, the growth projections may be more attainable, and as a result the stock's multiple should reflect that confidence.

But this isn't a story where I would try to anticipate the turn. You're better off waiting for proof that things are working.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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