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Wal-Mart Profits Rise, But U.S. Sales Still Slump

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NEW YORK — Wal-Mart Stores Inc. posted a second-quarter profit increase of 5.7 percent on Tuesday and raised its outlook for the year as its results benefit from international sales growth and cost cutting. But the world's largest retailer was unable to stop a two-year sales slump at its Walmart stores in the U.S as customers continue to grapple with a weak job market and other economic woes.

While its international business has consistently been strong, Wal-Mart's U.S. operations have suffered as the nation's economic downturn has pummeled low-income Americans — Wal-Mart's core customers. That's bad news for the U.S. economy since Wal-Mart is considered a bellwether for consumer spending, which accounts for 70 percent of the economy. The retailer rings up nearly 10 percent of all nonautomotive retail dollars spent in the U.S.

"It's clear that many consumers are still struggling," said Mike Duke, CEO of Wal-Mart Stores Inc., in a pre-recorded call. "They're trading down to stretch their budgets, buying a lower-priced brand of detergent, moving from branded canned goods to private label and purchasing half gallons of milk, instead of gallons. That's why we are laser-focused on investing in price to help our customers."

At a time when Americans are being squeezed by a weak job and housing market and rising costs for everything from food to clothes, Wal-Mart customers show that many consumers are still finding it hard to make ends meet. In its monthly survey of customers, the retailer found that almost 40 percent of those polled are holding off or eliminating items they would normally buy. The company also found that job security is the biggest concern among its customers, with more than 15 percent of mothers saying they have experienced the loss of a household wage earner's job in the last year.

Those worries contributed to the ninth consecutive quarter of declining revenue at Walmart stores in the U.S. open at least a year, a key measure of a retailer's health in the U.S. A 5 percent increase at its Sam's Club chain partially offset that decline, causing revenue at stores open at least a year to be flat for the overall U.S. division.

Overall, revenue, excluding Sam's Club membership fees, was up 5.5 percent to $108.6 billion. Results were buoyed by Wal-Mart's international business, which produces 26 percent of its revenue. The company's international division was up 16.2 percent.

The retailer, based in Bentonville, Ark., reported net income of $3.8 billion, or $1.09 per share, in the three months ended July 31. That compares with $3.6 billion, or 97 cents per share, in the same period last year. Analysts had expected $1.08 per share on revenue of $108.08 billion.

Wal-Mart said it will continue to improve results. The company said revenue at stores open at least a year at its Walmart stores in the U.S. is improving and reiterated that it expects to see growth in that measure by the year's end.

The company noted that the 0.9 percent decline in the second quarter was smaller than the 1.1 percent drop it had in the first quarter and a 1.8 percent decrease during last year's fourth quarter. And after a difficult start to May, Wal-Mart said business improved in June and July.

Wal-Mart said results are improving because U.S. customers are beginning to respond to its turnaround strategies. After consumers balked at popular brand names and other merchandise they want being missing from store shelves, the company has been restocking those items that it had scrapped in an overzealous move to clean up stores. And its returning to a philosophy of everyday low pricing instead of slashing prices temporarily on select merchandise is resonating with its financially-strapped customers.

For the third quarter, Wal-Mart expects earnings to be in the range of 95 cents to $1.00 per share, while analysts had expected 97 cents per share. Wal-Mart raised its full-year guidance to a range of $4.41 per share to $4.51 per share, compared with the forecast it gave in February of $4.35 per share to $4.50 per share. Analysts had expected $4.46 per share.

Charles Holley, chief financial officer, said in a statement that the outlook reflects "our confidence for the back half of the year."

Company officials, however, said they still have more work to do.

Recent surveys, including one from WSL Strategic Retail, show that Wal-Mart that shoppers no longer believe that it's the low-price leader. Holley acknowledged that over the past three years the company had allowed the gap between its prices and those of competitors to slip. He said the company now is working with suppliers in lowering costs. "We are very focused on widening the gap," he said.

At a time when its customers are being hurt by the economic downturn, Wal-Mart also is facing more competition from dollar stores, online retailers and rival Target Corp., which is aggressively pushing into the grocery business. To better compete with dollar stores and the like, the company this year is opening 15 to 20 smaller Walmart Express stores, which are less than one-tenth the size of supercenters.

Holley said on Tuesday that the company has been pleased with sales at the four Walmart Express stores it opened this past summer.

Wal-Mart shares rose $1.93, or almost 4 percent, to $51.91.

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