Wal-Mart results could move investors past bribe probe

Tue May 15, 2012 3:23pm EDT

A general view of a Wal-Mart store in Mexico City, April 24, 2012. REUTERS/Edgard Garrido

A general view of a Wal-Mart store in Mexico City, April 24, 2012.

Credit: Reuters/Edgard Garrido

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(Reuters) - Wal-Mart Stores Inc (WMT.N) will try to get investors' minds back on business and away from a Mexican bribery scandal, and continued progress in its U.S. turnaround could do just that.

Wal-Mart is expected on Thursday to post its third straight quarter of sales growth at existing U.S. stores, a milestone that could help its lagging shares regain some of the ground that has been lost in recent weeks.

But investors will be looking for any details on the bribery investigation, including costs, when the world's largest retailer reports first-quarter earnings.

Wal-Mart continues to face negative comments from shareholders, employees and activists after a New York Times report on April 21 that Wal-Mart de Mexico (WALMEXV.MX), or Walmex, allegedly orchestrated bribes of $24 million to help it grow quickly and that Wal-Mart's top brass tried to cover it up.

Some are suggesting that, due to the issue, shareholders should vote against board members including Chairman Robson "Rob" Walton, one of the founder's sons, who may have known about the alleged bribes dating back to the mid 2000s, and took no action. Wal-Mart's shareholders meeting is set for June 1.

Wal-Mart has not denied the story, which rocked its share price and prompted lawsuits. The company faces an investigation into whether it violated the U.S. Foreign Corrupt Practices Act, which forbids bribes to foreign government officials. Wal-Mart has said it is cooperating with the U.S. Department of Justice and the Securities and Exchange Commission and that a thorough investigation will take time.

There may not be much more to add about the probe in Thursday's statement and recorded call of executive comments.

"I think earnings will be the opportunity the company needs to get people back focused on fundamentals. The FCPA investigation is going to take years to resolve and there won't be any new info until we are further through the investigation," said UBS analyst Robert Carroll.

Wal-Mart is expected to report a first-quarter profit of $1.04 per share, according to Thomson Reuters I/B/E/S, up from earnings of 98 cents per share last year.

Analysts, on average, expect that sales at Walmart U.S. stores open at least a year, or same-store sales, rose 1.4 percent during the quarter, according to Thomson Reuters.

Such a gain would show a solidified sales turnaround at the retailer's largest unit, which suffered through nine straight quarterly declines before the middle of last year.

Wal-Mart itself forecast earnings per share of $1.01 to $1.06, with Walmart U.S. same-store sales flat to up 2 percent.

It could become tough for Wal-Mart's growth to continue at its recent strong clip. Items that boosted results in fiscal 2011 could become headwinds this year, such as waning food inflation and cycling last year's plans that brought thousands of items and holiday layaway back to U.S. stores, according to Deutsche Bank analyst Charles Grom.

"All told, the fundamental story has holes, which will widen as the year progresses," putting pressure on earnings and the stock's multiple, said Grom, who has a "sell" rating and $53 price target on Wal-Mart shares.

A further decline in the shares, down 1.1 percent this year through Monday after an 8.2 percent plunge in the days following the release of the New York Times article, could provide a chance to stock up, an investor said.

"If it takes a big hit on earnings for this quarter and the share price goes down a lot that would be an opportunity for us to buy more because the underlying company is a juggernaut, a powerhouse," said Frederic Mars, founder and CEO of Cheviot Value Management Inc in Santa Monica, California.

Mars, for one, said he does not expect the bribery scandal to "make a dent in Wal-Mart's future."

His firm holds about 210,674 Wal-Mart shares, which make up about 4 percent of its $320 million in assets under management.

Despite the bribery overhang, some people see Wal-Mart as a defensive name "when the broader market gets ugly," Carroll said.

Raymond James analyst Budd Bugatch said U.S. sales were likely helped in the quarter by the favorable weather that has helped other chains.

Home Depot Inc (HD.N) said on Tuesday the warmer-than-usual weather boosted first-quarter sales, which were still weaker than expected after demand slowed in April. [ID:nL1E8GF1H7] Target Corp (TGT.N), which reports on May 16, already posted a 5.3 percent rise in same-store sales.

Analysts wonder whether Wal-Mart will raise its fiscal year forecast of $4.72 to $4.92 per share, especially given the costs of the bribery investigation. Back in December, when Wal-Mart said it was looking into possible international bribery, it said the issue was not material.

"We would be surprised if management offered materially new information on the issue given its complexity and ongoing nature," Bugatch said.

(Reporting by Jessica Wohl in Chicago; editing by Gunna Dickson)

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