Is Wal-Mart recovery-proof?

(Money Magazine) -- Throughout the recession, wealthier households "traded down" and started to shop at Wal-Mart (WMT, Fortune 500) for the first time. As a result, the world's largest retailer saw its market share in general merchandise rise as the economy went south.

Wal-Mart's stock jumped 20% in 2008, but this year its shares are down about 8%, as investors anticipate a recovery that could get shoppers -- especially the company's new upscale clientele -- thinking about more than everyday low prices.

Safe from scrooge

Holiday sales, which make up a third of the revenue at many retailers, are expected to drop 3.2% from last year's anemic levels, according to the National Retail Federation.

But while a lackluster shopping season could send pricier stores reeling, Wal-Mart enjoys a buffer: grocery sales -- staples that don't fluctuate much with the seasons. Food accounts for about half the discounter's overall sales.

Moreover, the consumer's quest for cheap gifts might actually boost Wal-Mart's wallet share. The company recently launched one of its earliest holiday campaigns ever -- before Halloween, much less Thanksgiving -- slashing prices on more than 100 toys to $10 apiece for Christmas.

Broadening its appeal

Shoppers tend to stay home when the economy is bad, but Wal-Mart officials said their foot traffic rose in this recession. About 17% of that new business came from new customers, a majority of whom earn more and spend 40% more per visit than typical Wal-Mart shoppers.

But as the economy heals, some of those customers might migrate back to their preferred stores. So Wal-Mart is remodeling its locations to appeal to them. The company also announced plans to start an eco-labeling program for store products to appeal to green-minded shoppers.

Plus, with unemployment still high, consumers are likely to be value-oriented for a while, says Morningstar analyst Joel Bloomer.

Lost in translation?

Wal-Mart already accounts for 10% of U.S. retail spending, minus autos and restaurant sales. So "long term, more of its growth will come from overseas," says Brad Hinton, a portfolio manager for Weitz Funds.

Foreign stores now make up a quarter of its square footage and sales, but only a fifth of operating income. Wal-Mart has struggled to adapt to local tastes. It exited South Korea after stocking stores with dry goods and electronics -- not the food and beverages that draw Korean shoppers to local discounters.

In Japan, Wal-Mart is only now expected to turn a profit -- after seven years of losses. Says Hinton: "It's not as simple as transplanting the U.S. playbook to the rest of the world."