Wal-Mart Profit Rises But U.S. Sales Weak

08/17/2010 09:30 am ET | Updated May 25, 2011

NEW YORK — Wal-Mart Stores Inc. reported a 3.6 percent increase in second-quarter net income and raised its earnings guidance for the full year as it benefits from cost-cutting and robust global growth in China, Brazil and Mexico.

But a closely watched measure of revenue fell for the fifth consecutive quarter, dragged down by its U.S. Walmart division, as its main customers have felt the biggest impact of the economy's woes.

Business has also been stymied by merchandising problems, and its strategy remains in flux amid management reshuffling and departures.

Bill Simon, who took over as president and CEO of the company's U.S. operations in June, said that it was accelerating its moves to restore items it had cut earlier in the year at its namesake stores and is returning to everyday low pricing after steep rollbacks failed to excite frugal shoppers. He also reiterated a return to basic fashions like underwear and socks.

"We've set out a clear direction for change in our business, and believe this will put us on a track to see improvement by the fourth quarter," said Simon.

Still,many analysts were unconvinced and say Wal-Mart is still struggling to find its way.

"I think they're confused about what they should do," said Brian Sozzi, analyst with Wall Street Strategies, who complained that the back-to-school assortments are too basic.

Nevertheless, an upbeat profit picture lifted Wal-Mart shares by almost 2 percent, or 86 cents, to $51.27.

The discounter said Tuesday it had net income of $3.59 billion, or 97 cents per share, for the period ended July 31. That compares with $3.47 billion, or 89 cents per share, a year ago.

Revenue rose almost 3 percent to $103.7 billion. Revenue at stores open at least a year fell 1.4 percent, worse than the 0.26 percent expected by Thomson Reuters. At Wal-Mart's namesake stores, that measure fell 1.8 percent, while at Sam's Clubs, it rose 1 percent.

The measure is a key indicator of a retailer's health.

Analysts had expected earnings per share of 96 cents on revenue of $105.3 billion.

"We continue to focus on our priorities of growth, leverage and return," said Mike Duke, Wal-Mart Stores Inc.'s president and CEO, said in a statement. "The slow economic recovery will continue to affect our customers, and we expect they will remain cautious about spending."

As a testament to customers' tepid spending, shoppers are buying back-to-school items closer to the school year's start, officials said during a prerecorded conference call.

Customers continue to have a hard time stretching their dollars to the next payday, and food-stamp use continues to rise, particularly in areas with the highest unemployment, the company said.

During a conference call with journalists Tuesday, Tom Schoewe, chief financial officer, said that even the steep discounts on thousands of products – $1 ketchup bottles and sub-$4 cases of Coke – failed to lift sales as much as forecast because people remain frugal.

Wal-Mart benefited during the recession as affluent shoppers traded down to cheaper stores. But it acknowledged in May that it's losing some of those customers, who've started to trade back up. Meanwhile, stubbornly high unemployment and tight credit are still squeezing its main lower-income customers, who are having more trouble stretching their dollars to the next payday.

At Walmart stores, discretionary items like clothing and home goods, dragged down by weak business in grills, lawnmowers and patio furniture, declined, according to Simon.

But Wal-Mart's merchandising troubles are partly to blame for its weak U.S. business.

The company is also now seeking a replacement for chief merchant John Fleming, who left Aug. 1 and played a big role in shaping what was on store shelves.

Wal-Mart has acknowledged in recent months that its campaign to declutter its stores went too far, leading shoppers to flee to rivals such as Target Corp. for favorite brands. It has been scrambling to restock some products over the past year. That now includes returning merchandise displayed on pallets in the aisles as promotions, which it calls "action alley" merchandise, in the past six weeks.

But Wal-Mart's profits remain robust, helped by its international business and its focus to cut costs. Wal-Mart's international business, which accounts for about 25 percent of its revenue, rose almost 16 percent to $25.9 billion, while Walmart store revenue in the U.S. rose a meager 0.6 percent to $64.6 billion. Sam's Club's revenue was up 3.4 percent to $12.46 billion.

Wal-Mart says it now expects it will earn between $3.95 and $4.05 per share for the year. That's up from $3.90 to $4. Analysts surveyed by Thomson Reuters expect $3.99 per share.

For the third quarter, Wal-Mart expects revenue at stores open at least a year to range from a declne of 2 percent to an increase of 1 percent. That compares wth a 0.5 percent decline in the same period last year.