Wal-Mart cuts profit outlook as 2nd quarter results disappoint

Wal-Mart Stores Inc. cut its annual profit and revenue outlook Thursday after releasing second-quarter results that missed Wall Street estimates.

The world's largest retailer expects a tough economy in the U.S. and abroad to continue to squeeze its low-income shoppers through the rest of the year.

The spring and early summer showed some improvement from the first quarter, but overall, it's been a tough first half of the year for the discounter.

The Bentonville, Ark.-based retailer said its second-quarter profit rose 1.3 per cent to $4.07 billion US, or $1.24 per share, for the three months ended July 31. That compares with $4.02 billion US, or $1.18 per share, a year earlier.

Net sales rose 2.4 per cent to $116.2 billion. That figure excludes membership fees from its Sam's Club division.

Analysts had expected earnings of $1.25 per share on revenue of $118.09 billion.

Economic bellwether

Wal-Mart is considered an economic bellwether because the retailer accounts for nearly 10 per cent of nonautomotive retail spending in the U.S. The latest performance indicates that many American households continue to struggle in a yo-yo economic recovery.

While jobs are easier to get and the turnaround in the housing market is gaining momentum, the improvements have not been enough to sustain spending for most Americans, who are juggling tepid wage gains and higher costs of living.

On top of that, Wal-Mart said recent tax changes have further put pressure on its shoppers. Americans are dealing with atwo percentage-point increase in payroll taxes that took effect Jan. 1. That means that take-home pay for a household earning $50,000 a year has been sliced by $1,000.

"The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending," Wal-Mart Chief Financial Officer Charles Holley said in a statement. He noted a "reluctance" among its customers to spend on discretionary items like flat-screen TVs.

During a call with the media, Holley said the top three concerns among its customers are jobs, food costs and gas and energy prices.

Revenue at stores open at least a year at Wal-Mart's U.S. namesake business fell 0.3 per cent. That's considered an important measure of a retailer's performance. Analysts were expecting a 0.7 per cent gain. The decline marks the second straight quarter of declines for the stores after six straight quarters of increases. U.S. Wal-Mart stores account for 59 per cent of the company's total sales.

Adding in Sam's Club and international stores, revenue at stores open at least a year was flat compared with a year ago. It rose 1.7 per cent at Sam's Club.

Total sales increase modestly

The U.S. decline was less steep than in the first quarter, when Wal-Mart's U.S. stores had a 1.4 per cent decline in revenue at stores opened at least a year.

Overall, total sales increased only modestly for Wal-Mart's U.S. business, Sam's Club and its international division for the latest quarter. Wal-Mart's U.S. division posted a total sales increase of 2.1 per cent to $68.73 billion, while Sam's Club saw a 2.6 per cent increase to $14.53 billion.

At Wal-Mart's U.S. stores, clothing did well as the discounter has refocused its offering on basics like socks and no-frills jeans that its shoppers need. During a call with reporters, Holley said it was too early to discuss how the back-to-school business is faring. But he said he's encouraged by early sales of children's clothes.

Still, sporting goods and entertainment products like toys saw declines in the quarter. Cooler weather earlier in the spring hurt merchandise like water toys and pools. And the lack of innovation in the electronics area limited business. But Holley told reporters that shoppers are hesitant to spend on items they really don't need.

In the grocery aisles, Wal-Mart saw a slight decline in sales. A big factor was lower-than- expected inflation, or even deflation in certain cases such as snacks and frozen food. But as Wal-Mart saw in the first quarter, shoppers traded down to cheaper products to save money.

The company's international business had an increase of 2.9 per cent to $32.96 billion.

International consumer spending curbed

In a prerecorded conference call, Doug McMillon, president and CEO of Wal-Mart's international division said that during the first half of the year, consumers in both developed and emerging markets curbed spending. "We believe these trends will persist through the remainder of the year," he said.

A bribery scandal also threatens to slow its business overseas. Allegations first surfaced in April 2012 that Wal-Mart failed to notify law enforcement that company officials authorized millions of dollars in bribes in Mexico to speed up getting building permits and gain other favours. Wal-Mart has been working with government officials in the U.S. and Mexico on that investigation.

Wal-Mart has been investing in fortifying controls overseas and has hired new executives to comply with laws against foreign bribes but also strengthen controls in other areas like food safety.

Wal-Mart said it now expects total sales to rise 2 to 3 per cent for the full year. The company's previous forecast was for growth of 5 per cent to 6 per cent.

The company also took a dime per share off its full-year profit outlook, cutting it to between $5.10 and $5.30 per share, from between $5.20 and $5.40 per share. Analysts were expecting $5.29 per share.

Wal-Mart's stock fell $1.99 to$74.41 in trading Thursday.