Simon goes on to say:

What we were really trying to do was [prove] the top line, and what we’re finding is that inside of 12 months they are actually delivering a positive bottom line as well. … Now, the next phase for us is about how big could this be. And I think that’s important in that we’re moving into a phase where we are going to work on the construction costs and we’re going to work on the distribution costs. Again, already profitable, but we want to get them up to what would be the fleet average, or hopefully beyond that. And we’re also going to work on density, like how many can you build in a market and to what point do you have to get you for this to matter on our large base.

So you will see us in the back half of this year go to a market and build them out very densely so that we can understand their interaction with the rest of the market, including us.

In answer to a question, Simon emphasized that the top line is driving the stores profitability. The company’s massive supercenters maintain 70% of Walmart’s inventory. These small stores don’t have the space for that, so store employees have to pick apart deliveries just as they would if they worked in a mom-and-pop store. That costs money, but the higher revenues Walmart is getting are the result of the “convenience” aspect of the stores, and could make the concept profitable provided the company comes up with a reasonably low-cost distribution scheme.

Walmart’s shares closed at $65.07 yesterday, slightly down from a new 52-week high of $65.18. The low end of the range is $48.31.

Shares are less than $5 from an all-time high and less than $0.25 from analysts’ consensus target price. Walmart may not be a value play in the retail sector, as we noted in our review of retail stocks yesterday, but the share price has jumped 9% since the beginning of the year and nearly 18% in the past 12 months. That’s not bad for a behemoth like Walmart.

An edited transcript of Simon’s presentation is available here and the slides are here.

Paul Ausick

When the stores reported first quarter earnings, the preponderance of guidance pointed to slower sales in the second quarter likely based on sales pulled forward into the first quarter due to warm weather. But it could be the case that falling gasoline prices are giving sales a lift in May that could continue through June. According to the latest report from Retail Metrics, retailers are on track to post a comparable store sales gain of 3.6% in May, excluding the negative effect of lost sales at Walgreen Co. (NYSE: WAG) due to its being dropped by pharmacy benefits management firm Express Scripts Inc. (NASDAQ: ESRX).

We looked at a dozen retailers with an eye toward discerning value opportunities for investors: Costco Wholesale Corp. (NASDAQ: COST), Wal-Mart Stores Inc. (NYSE: WMT), Target Corp. (NYSE: TGT), Macy’s Inc. (NYSE: M), Kohl’s Corp. (NYSE: KSS), J.C. Penney Company Inc. (NYSE: JCP), Gap Inc. (NYSE: GPS), Limited Brands Inc. (NYSE: LTD), American Eagle Outfitters Inc. (NYSE: AEO), Abercrombie & Fitch Inc. (NYSE: ANF), The TJX Companies Inc. (NYSE: TJX), and Dollar General Corp. (NYSE: DG).

Costco Wholesale Corp. (NASDAQ: COST) traded at $84.14 and has a market value of around $37 billion. The consensus target price from Thomson Reuters is $86.83 and the 52-week range is $70.22-$92.10. Costco has a dividend yield of 1.3%. The implied upside to the consensus target is just 3%, and we would note that the target is below the 52-week high.

Wal-Mart Stores Inc. (NYSE: WMT) traded at $64.65 and has a market value of around $220 billion. The consensus target price from Thomson Reuters is $65.28 and the 52-week range is $48.31-$64.88 (new high set today). Walmart has a dividend yield of 2.5%. The implied upside to the consensus target is barely 1%, but we would note that the target is still above the 52-week high.

Target Corp. (NYSE: TGT) traded at $56.84 and has a market value of around $38 billion. The consensus target price from Thomson Reuters is $63.65 and the 52-week range is $45.28-$58.95. Target has a dividend yield of 2.1%. The implied upside to the consensus target is 12%, and we note again that the target is above the 52-week high.

Costco Sales

Costco (NASDAQ: COST) continues its extraordinary run as the most successful big-box retailer. Its club membership system has bettered the more traditional store operations of Walmart (NYSE: WMT) and Target (NYSE: TGT). Net sales for the quarter that ended May 6 increased 8% from last year to $21.85 billion. Net sales for the first 36 weeks increased 10% to $65.54 billion. Same-store sales were up 5% for the most recent quarter. Costco’s shares trade at $83.50, up from a 52-week low of $70.22. Costco’s revenue per employee was $569,488, compared to $206,117 for Walmart.

Best IPOs

A quick review of the 25 largest U.S. IPOs ever shows how badly Facebook has done in early trading. Most of the companies on the list have tremendous revenue, traditional business plans that they have been able to freshen, and large profits. Among these are Visa (NYSE: V), UPS (NYSE: UPS), General Motors (NYSE: GM), MetLife (NYSE: MET) and Prudential Financial (NYSE: PRU). The thing that stands out most about the list is how few tech companies it has. Google (NASDAQ: GOOG) is on the list, of course. But most of the companies are financial ones or firms that are manufacturing based. (Data from CapitalIQ.)

Facebook Investigation

The debate over whether some large investors were warned about a revenue downgrade of Facebook (NASDAQ: FB) continues. Several media have carried stories about Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) passing on numbers that showed lowered forecasts for earnings and revenue in the second quarter and the full year. The attorney general of Massachusetts has begun an investigation into whether information was selectively disclosed. Morgan Stanley insists that it was in compliance with all the regulations that set rules for IPO behavior. Even if Morgan Stanley makes its case successfully, the news likely will keep individual investors out of the market. Many of these investors have turned to mutual funds, exchange traded funds and fixed income paper to protect their interests. That behavior has been reinforced by the Facebook IPO.

Douglas A. McIntyre

Same store sales were up 5% for the most recent quarter. Costco’s shares trade at $83.50 up from a 52-week high of $70.22. Costco’s revenue per employees was $569,488 compared to $206,117 for Wal-Mart.

Target and Wal-Mart reported numbers which, although good, where much less robust.

Douglas A. McIntyre

Earnings growth for the reporting retailers is up too, by 11.8%. Excluding Wal-Mart Stores Inc. (NYSE: WMT) due to its size, Retail Metrics reckons that its 120 retailers will show profit growth of 12.2% in the first quarter. Including Walmart, profits will rise 13.8%.

The best profit growth is expected in the recreational sector, with Dick’s Sporting Goods Inc. (NYSE: DKS) and Hibbett Sports Inc. (NASDAQ: HIBB) leading the way a 40%+ earnings gain. Home furnishing retailers are expected to post 40% gains, led by Bed Bath & Beyond Inc. (NASDAQ: BBBY) and Williams-Sonoma Inc. (NYSE: WSM). Footwear retailers are tabbed to grow profits 31%, following huge gains at Brown Shoe Co. (NYSE: BWS) and Footlocker Inc. (NYSE: FL).

The worst performing sector is projected to be consumer electronics, with teen apparel stores the only other retailing sector expected to post overall losses. Best Buy Co. Inc. (NYSE: BBY) and GameStop Corp. (NYSE: GME) are the big players here. Teen apparel retailers like Wet Seal Inc. (NASDAQ: WTSLA), Gap Inc. (NYSE: GPS), and Abercrombie & Fitch Co. (NYSE: ANF) have struggled with same-store sales and revenues, as well as earnings.

Paul Ausick

CalSTRS will vote its more than five million investor shares against the entire board’s reelection at Wal-Mart Stores, Inc. annual meeting. We encourage our fellow shareholders to do the same.

Walmart has not been very good to CalSTRS, and many other investors, as least as far as returns go. Its share price has been nearly flat over the past decade. But, like other holders of shares in the world’s largest retailer, it has ignored the rule that people, including executives, are innocent until proven guilty. The fund writes in a letter about its plans:

Based on these allegations, which indicate a breakdown of corporate governance and lack of oversight that should have averted this situation, CalSTRS does not have confidence that the current board has the independence and leadership needed to address these difficult issues.

A number of charges have arisen against Walmart over bribery activity at its Mexico operations. There are also allegations that past and current management knew about them and covered them up. Federal investigations, and a probe by Walmart’s board, have only just begun. It may be months before these conclude. In the meantime, no one in management or on the board has been pushed out, which is as it should be.

If the CalSTRS approach set a standard by which to measure boards and management, all of the leaders of Chesapeake Energy (NYSE: CHK) and JP Morgan (NYSE: JPM) would be gone by now. The same holds true for dozens of companies that have been through recent ethical scandals. Some board members and executives has been forced out at companies where there were breaches of reasonable standards. This includes Best Buy (NYSE: BBY) and Green Mountain Coffee Roasters (NASDAQ: GMCR). There have been no widespread suggestions that the entire boards and top managements of these corporations resign or be turned out by shareholders. Not everyone on the boards of these two public corporations was part of the wrongdoings. By forcing the resignations of those who had violated fair codes of conduct, these board members actually have proved their worthiness as fiduciaries.

The CalSTRS pressure to unseat the entire Walmart board is too radical. The directors who should reasonably judge the chairman and two CEOs ought to be left to do their jobs.

Douglas A. McIntyre

The OECD expresses concerns that Europe could slip into a deep recession. (Reuters)

The EU debt crisis pushes global shares lower. (Reuters)

Morgan Stanley (NYSE: MS) cuts its Facebook (NASDAQ: FB) ratings just before the IPO. (Reuters)

Sony (NYSE: SNE) and Samsung try to get retailers to discount their TVs less. (WSJ)

AOL’s (NYSE: AOL) Patch local website project continues to draw the ire of investors. (WSJ)

The Congressional Budget Office says that gridlock in DC could cause a recession in 2013. (WSJ)

SAP (NYSE: SAP) will buy Ariba (NASDAQ: ARBA) for $4.3 billion. (WSJ)

South Korea will continue to import oil from Iran despite U.S. and EU sanctions over the Iran weapon’s program. (WSJ)

The International Monetary Fund says the UK needs to create stimulus programs. (WSJ)

Dell’s (NASDAQ: DELL) earnings are hurt as it attempts to move beyond PCs as its major line of sales. (WSJ)

Ford’s (NYSE: F) credit rating is upgraded from “junk” status. (WSJ)

CalSTRS, the second-largest U.S. public pension fund, will vote against Walmart (NYSE: WMT) directors in the wake of a bribery scandal. (FT)

EU banks would be damaged if Greece leaves the eurozone, as they have almost $1.2 trillion in debt from Spain, Portugal, Italy and Ireland. (FT)

Mazda and Fiat to build a sports car. (Bloomberg)

Douglas A. McIntyre

Besides competing with smaller national rivals like RadioShack Corp. (NYSE: RSH) and GameStop Corp. (NYSE: GME), Best Buy has to slug it out with retailers Amazon.com Inc. (NASDAQ: AMZN), Wal-Mart Stores Inc. (NYSE: WMT), and direct sellers like Apple Inc. (NASDAQ: AAPL).

And while Best Buy touts its increases in sales of mobile phones and other portable devices, it also notes:

Areas of comparable store sales growth in the Domestic segment included tablets and mobile phones within the Computing & Mobile Phones revenue category, eReaders within the Consumer Electronics revenue category and Appliances. These increases were more than offset by comparable store sales declines primarily in notebooks within the Computing and Mobile Phones revenue category, gaming within the Entertainment revenue category, and digital imaging and televisions within the Consumer Electronics revenue category. The Domestic segment online channel revenue grew 20 percent compared to the prior-year period.

Selling more cheaper devices does not make up for lost sales in pricier items, unless a retailer can sell an enormous number. Best Buy can’t do that because there’s simply too much competition from wireless carriers, other retailers, and direct sales.

The company reiterated its full-year adjusted EPS guidance of $3.50-$3.80, in-line with the consensus estimate of $3.59. But weak international sales and declining same-store sales mean that Best Buy will be forced to close more stores, which will hurt revenues and ultimately profits unless the company can really figure out a way to boost its online sales. The outlook is probably not as rosy as the company would like us to think.

Shares are up about 1.6% in the pre-market, but were up as much as 6% at one point. Current price is $18.43 in a 52-week range of $17.53-$32.85. The 52-week low was set yesterday.

Paul Ausick

The fall-off of Facebook shares can be traced to a number of things — whether or not they are legitimate. The first is that a some traders believe Morgan Stanley (NYSE: MS) and Facebook decided, at the last minute, to flood the market with stock to raise more money for the social network. There is a rumor that Morgan Stanley cut Facebook revenue forecasts right before the IPO. Major trading issues in the Nasdaq (NASDAQ: NDAQ) system, which delayed orders and rattled investors, might have been another cause. Two days before the IPO, General Motors (NYSE: GM) pulled its ads from Facebook. That seemed to be a bit of revenge, although no one can figure out why. And, perhaps most damaging, analysts attacked Facebook’s inability to make money on its mobile presence, which raised the question of its long-term viability as a growth company.

Zynga faced none of these problems. Its only trouble was being tethered to Facebook because it gets so much revenue from the social network. Facebook’s mobile strategy eventually could effect Zynga, but the balance of the long list of reasons Facebook shares declined really do not apply to the game firm. Zynga‘s shares may have fallen consistently since mid-April, but Wall St. had begun to warm to the company after its recent, better-than-expected earnings. Citigroup (NYSE: C) started coverage of the game firm with a “buy” and a $12 price target.

The Zynga share drop is no different from the reaction traders have when they sell Ford (NYSE: F) because of poor GM earnings, or drop Yum! Brands (NYSE: YUM) when McDonald’s (NYSE: MCD) announces poor earnings. As often as not, two companies in a related sector have very different financial results, for good reasons most of the time. GM has strong sales in China; Ford does not. Yum!’s operations in the U.S. do poorly; America is a stronghold for McDonald’s. Pairings like Walmart (NYSE: WMT) and Target (NYSE: TGT) or Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) are often not pairs at all. If they really were parallel in almost every way, management skills would make no difference to results.

Zynga and Facebook may trade as a pair, but they are not one.

Douglas A. McIntyre

The unofficial closing bells put the DJIA down 156 points to 12,442.49 (-1.24%), the NASDAQ fell more than 60 points (-2.10%) to 2,813.69, and the S&P 500 fell -1.50% or nearly 20 points to 1,304,87.

There were several analyst upgrades and downgrades today, including Dell Inc. (NASDAQ: DELL) raised to ‘neutral’ at Sterne Agee; IntercontinentalExchange Inc. (NYSE: ICE) raised to ‘strong buy’ at Raymond James; SINA Corp. (NASDAQ: SINA) raised to ‘overweight’ at Barclays; Visa Inc. (NYSE: V) reiterated as ‘buy’ but removed from Conviction Buy List at Goldman Sachs; Deere & Co. (NYSE: DE) reiterated as ‘buy’ with target price of $96 at Argus.

Earnings reports since markets closed last night have led to some price changes as of the last half hour of trading today: Bon-Ton Stores Inc. (NASDAQ: BONT) is down -7.3% at $4.09; Dollar Tree Inc. (NASDAQ: DLTR) is down -5.6% at $95.60; E-Commerce China Dangdang Inc. (NYSE: DANG) is down -16.6% at $6.25 (more coverage here); GameStop Corp. (NYSE: GME) is down -10.1% at $18.72 (more coverage here); Sears Holdings Corp. (NASDAQ: SHLD) is up 3.9% at $52.84; and Wal-Mart Stores Inc. (NYSE: WMT) is up 4.7% at $61.97 (more coverage here).

On Friday we are scheduled to get earnings from ANN Inc. (NYSE: ANN), Brown Shoe Co. Inc. (NYSE: BWS), JA Solar Holdings Co. Ltd. (NASDAQ: JASO), Progressive Corp. (NYSE: PGR), and Footlocker Inc. (NYSE: FL).

Other standouts from today include the following stocks:

Rosetta Genomics Ltd. (NASDAQ: ROSG) is down -17.7% at $4.11. The medical diagnostics firm priced a secondary offering this morning. More coverage here.

Dendreon Inc. (NASDAQ: DNDN) is down -11.3% at $7.65. The company’s prostate cancer drug got another challenge from a competing product from Johnson & Johnson (NYSE: JNJ). More coverage here.

MEMC Electronic Materials Inc. (NYSE: WFR) is down -21.4% at $1.68 after posting a new 52-week low of $1.63. The solar component maker lost its CFO today. More coverage here.

Stay tuned for Friday. We don’t have anything on the schedule for tomorrow, but that doesn’t mean that we’ll have a quiet day.

Paul Ausick