For the past eight years, Wal-Mart Stores Inc's shareholders have had little reason to beam like the retailer's well-known smiley face image, as stock prices have dropped and the company has underperformed rivals like Target Corp.

But the gloom may be finally lifting -- ironically thanks in part to the U.S. economy's increasing troubles.

With many Americans facing rougher times as the housing market stumbles and unemployment climbs, consumers are seeking out Wal-Mart's traditional low-price appeal, especially for necessities like food and toiletries.

That comes at a time when the world's largest retailer is getting back to basics and pulling back from the more aggressive expansion plans of recent years.

The increased attention to costs by both Wal-Mart and shoppers has Wall Street taking notice.

Citigroup analyst Deborah Weinswig listed as one of her 10 predictions for 2008 that Wal-Mart would get its mojo back.

She recommended investors buy Wal-Mart shares, as a slowdown in the economy will increase the appeal of Wal-Mart's one-stop shop format and low price strategy.

STOCK SINKING

Wal-Mart's shares have fallen more than 20 percent since Lee Scott took on the role of chief executive officer on January 15, 2000. In afternoon New York Stock Exchange trading, they were down 71 cents or 1.4 percent to $49.95.

Under Scott, Wal-Mart has pursued international expansion while also increasing its U.S. footprint. When Scott became CEO, Wal-Mart had 2,835 U.S. stores. It now has 4,141.

But the pace of openings has caught up with the retailer. Its sales at U.S. stores open at least a year, or same-store sales, slowed in recent years as it saturated many suburban markets.

Sales have also been roiled by merchandising missteps. In 2006, it downplayed its discount roots to compete with rival Target by stocking cheap but trendy clothes and home goods.

But the effort backfired, turning off its lower-income shoppers who wanted basic and affordable items. Wal-Mart spent the last year trying to right its wrongs, clearing out poor-selling goods and reemphasizing its low prices.

Wal-Mart has also put the brakes on its expansion plans, pulling back on building U.S. supercenters, which combine its discount store format with grocery stores, to try to improve sales at existing stores.

REAPING SOME REWARD

Analysts said Wal-Mart is now starting to see results from those U.S. turnaround efforts.

Wal-Mart has traded below $70 for eight years because U.S. Wal-Mart's competitive power eroded from 1995 to 2004, and time was required for earnings growth to bring the P/E (price to earnings ratio) to a more appealing valuation, wrote Gilford Securities Inc analyst Bernard Sosnick, who has a buy rating on the shares.

U.S. Wal-Mart is now in its third year of an improvement effort and the payoff is beginning to emerge, he said.

Wal-Mart shares trade at roughly 14.8 times current year earnings, roughly in line with Target and cheaper than warehouse club operator Costco Wholesale Corp, which trades at 19.2 times.

Since September, when the Federal Reserve began cutting interest rates as prospects for the U.S. economy darkened, Wall Street has gotten more bullish on Wal-Mart's prospects -- while getting more bearish on Target, which has seen its shoppers pull back on discretionary purchases.

In September, Target was forecast to earn roughly $4.10 per share for this fiscal year, while Wal-Mart was forecast to earn roughly $3.39. Now, Target is forecast to earn, on average, $3.68, while Wal-Mart is forecast to earn $3.42.

Wal-Mart is scheduled to report its fourth-quarter results February 19. Analysts expect its profit to rise, despite a restructuring charge for its Japanese operations -- the result of penny-pinching shoppers scouring its U.S. stores for low prices.

HURDLES REMAIN

Wal-Mart will still face hurdles this year.

Its January U.S same-store sales rose just 0.5 percent after shoppers held onto their holiday gift cards longer than expected or used them to buy food instead of splurging.

It will also have to try to keep prices low while increases in commodity costs are forcing many of its suppliers to raise the prices on everything from cereal to plastic storage bags.

Rachel Wakefield, a portfolio manager at Coldstream Capital Management, said that while she had pared back some of her retail holdings, she kept her Wal-Mart investment. She said Wal-Mart's shoppers are non-discretionary and will have to keep going to the retailer for necessities, like groceries.

In this tough environment, analysts expect Wal-Mart to, well, act like Wal-Mart, cutting prices aggressively and then promoting those discounts to gain market share.

Our own forecasts anticipate aggressive price leadership by the retailer over the next year, stated Sanford C. Bernstein's monthly retail report. We believe that Wal-Mart will continue to post solid sales performance over the coming months.

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