Wal-Mart Stores Inc's turnaround appears to be gaining traction as simple strategies like undercutting competitors by a penny on a gallon of milk are helping to restore its image as the go-to retailer for budget-conscious Americans.

When the world's largest retailer reports fiscal fourth-quarter results on February 21, analysts on average expect to see the company's best U.S. sales performance in more than two years.

They even say the company may have put an end to six quarters of declines in the number of visits to Walmart stores in the United States.

Traffic is a key benchmark in a turnaround that has taken more than 18 months under U.S. chief Bill Simon, who was appointed after a failed experiment to attract more affluent shoppers with a less cluttered store featuring short-term sales.

An increase in traffic would be a sign that a nascent rebound - first seen in the third quarter when Walmart U.S. posted an increase in sales at stores open at least a year - is sustainable. That increase was the first in more than two years.

If you get that right then everything else kind of falls into place, said Natalie Berg, director of global research at Planet Retail, referring to traffic.

If investors are convinced of a U.S. turnaround, Wal-Mart shares could power higher than the current $62, which is already up 24 percent since mid-August, analysts said.

Wal-Mart shares are a compelling investment and could rise to at least $82, said Robert Straus, portfolio manager at ICON Advisers in Greenwood Village, Colorado. As of December 30, Wal-Mart was the fourth-largest holding in the firm's ICON Consumer Staples fund, with 42,800 shares.

While other retailers in the ICON fund such as Costco Wholesale Corp , Target Corp and TJX Companies Inc are attractive now, Wal-Mart's valuation is more so, said Strauss.

Wal-Mart trades at about 13.8 times expected 2012 earnings, versus a price-to-earnings ratio of 21.8 times for Costco, 12.4 times for Target and 17.3 for TJX.

Gilford Securities analyst Bernard Sosnick, who rates Wal-Mart a buy, said the shares could head toward $70, the top of a 12-year trading range, on the heels of the fourth-quarter report. However, he cautioned that the shares may pull back temporarily after their recent run.

BIG BOOST FROM LAYAWAYS

Analysts, on average, expect Walmart U.S. sales rose 1.8 percent in the fourth quarter ended in January, according to Thomson Reuters I/B/E/S. That would be their best performance in the last 10 quarters, which included nine quarters of declines and one quarter which posted a 1.3 percent rise.

A key component to Walmart's success during the recent holiday season was the well-publicized return of layaways, which allow customers to pay a little at a time and collect the goods with the last payment.

The plan was so popular that Walmart parked more than 3,000 trailers outside many U.S. stores in order to hold toys and electronics until shoppers finished paying and picked them up.

I wouldn't rule out positive traffic, said Consumer Edge Research analyst Faye Landes. Layaway is an inherent traffic builder as shoppers need to put the items on hold and then come back to make payments and pick up their purchases.

The rebound comes after the company last year revived its core mantra of offering low prices on a wide variety of goods - after the failed makeover drove shoppers to seek bargains elsewhere.

At Wal-Mart's annual shareholders meeting last June, Chief Executive Mike Duke made it clear that everyone at the company was refocused on operating at low cost every day and offering everyday low prices, the mantra preached by founder Sam Walton.

Every time we save them a dollar, that puts us one more step ahead of the competition - which is where we always plan to be, Duke said, repeating a line from Walton. The CEO said he had recently started rereading Walton's book for the third or fourth time.

Walmart is also aggressively fighting back against other low-priced chains, promising to match competitors' advertised prices, investing $2 billion to keep its prices low and even cutting prices on a store-by-store basis.

When Walmart opened its biggest Chicago store in late January, an Aldi store in the same shopping center was advertising milk at $1.79 a gallon. Walmart then quickly priced its Great Value private-brand milk at $1.78 a gallon.

LISTENING TO SAM

One could argue that Walmart should never have been in a position where a rebound was necessary. As a discount retailer, the December 2007-June 2009 recession should have been its sweet spot.

However, under former U.S. chief Eduardo Castro-Wright and merchandise head John Fleming, the chain took steps such as cutting back on some of the merchandise it offered and using splashy short-term sales.

Such tactics drove customers into the stores of Family Dollar Stores Inc and other chains that expanded their lineups in food, eating away at Walmart's biggest business. In the quarter that ended in July 2009, for example, Walmart posted a 1.5 percent drop in U.S. same-store sales, while Family Dollar reported a 6.2 percent rise.

Fleming eventually left the company and Castro-Wright was moved over to run Walmart's online business, a job he also recently left. Simon was promoted in June 2010 to replace Castro-Wright and reverse the decline in comparable sales.

The bread and butter of Walmart's business is basic household goods. There, Walmart has been hurt as chains such as Dollar General Corp and Family Dollar sold smaller, less-expensive packages of brand-name goods such as Procter & Gamble Co's

Tide and Gain detergent and Kraft Foods Inc's Oreo cookies and Ritz crackers.

For Walmart, which calls itself a house of brands, that shift required a new response.

They were a little bit slow two years ago in waking up to the dollar store competitive threat, said Richard Hastings, consumer strategist at Global Hunter Securities LLC.

In response to Dollar General and Family Dollar, Walmart has started opening more of its small Walmart Express and midsize Neighborhood Market stores, which emphasize food.

Reinstating layaway helped Walmart reach out to lower-income customers that had strayed to the dollar stores. Many Walmart shoppers have little to no access to credit, and 85 percent of transactions at its stores are paid for in cash.

Walmart's core customer has a household income of $30,000 to $60,000. The majority of shoppers at Family Dollar make less than $40,000 a year, while the median household income of shoppers at Target is about $64,000.

The layaway strategy is what helped Walmart win customers away from competitors in the last quarter, analysts said.

At Sears Holdings Corp's Kmart, layaway sales declined during the holiday season and were part of the reason same-store sales fell. Toys R Us, which offered layaway at most of its U.S. stores, saw U.S. same-store sales rise just 1.2 percent in December 2011, after rising 2.2 percent a year earlier. Target, which does not offer layaway, said in mid-November that its toy sales early in the holiday season were crimped by Walmart's layaway plan.

I am in the camp that Walmart was one of the winners this holiday season, said Telsey Advisory Group analyst Joseph Feldman. I think they did capture some share.

(Reporting by Jessica Wohl and Brad Dorfman in Chicago, editing by Matthew Lewis)

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