Wal-Mart profit up, cautious on third-quarter forecast

NEW YORK Thu Aug 14, 2008 12:25pm EDT

A customer shops at a Wal-Mart Supercenter in Rogers, Arkansas, June 5, 2008. REUTERS/Jessica Rinaldi

A customer shops at a Wal-Mart Supercenter in Rogers, Arkansas, June 5, 2008.

Credit: Reuters/Jessica Rinaldi

NEW YORK (Reuters) - Wal-Mart Stores Inc (WMT.N) second-quarter profit jumped 17 percent, but the discount retailer forecast current quarter results that could miss Wall Street estimates as consumers worldwide deal with tough economic times.

Executives at the world's largest retailer said on Thursday that a boost from U.S. tax rebate checks, which spurred shopping in the latest quarter, was mostly over, and sales remain volatile as shoppers run out of money in between paychecks.

Wal-Mart also raised its full-year forecast on the strength of second-quarter results as shoppers seek out low prices on everything from food to health-care products and electronics.

Its shares slipped 6 cents to $57.82.

"What we see, as do many around the world, is a global economy that is difficult," Wal-Mart Chief Executive Lee Scott said on a recorded call.

"When energy and oil prices go up on top of inflation and health care and core food items, there's a great deal of pressure on the customer," he said.

Analysts said Wal-Mart's third-quarter outlook was lower than some expected, but its recent earnings results show the retailer is well positioned to gain market share.

"While some may have been hoping for a beat and bigger raise, we think Wal-Mart is appropriately conservative in a tough environment," Morgan Stanley analyst Gregory Melich wrote in a research note.

Wal-Mart's net income rose to $3.45 billion, or 87 cents per share, in the second quarter that ended July 31, from $2.95 billion, or 72 cents per share, a year earlier.

Earnings per share from continuing operations increased to 86 cents from 75 cents. Analysts on average had been expecting 84 cents, according to Reuters Estimates.

Wal-Mart forecast third-quarter earnings per share from continuing operations at between 73 cents and 76 cents, while analysts on average had expected 76 cents.

TAX REBATE SALES LIFT 'BEHIND US'

Investors are watching retail results closely for signs of how consumer spending, which accounts for two-thirds of U.S. economic activity, will hold up heading into the crucial year-end holiday shopping season.

U.S. consumers got a boost in the second quarter from tax rebate checks, which put roughly $100 billion into the hands of shoppers. But Wal-Mart said the benefit was already fading.

"Now that the checks are for the most part behind us, some of the lift that we saw in the July period is now behind us," CFO Tom Schoewe said in an interview.

Meanwhile, consumers continue to be squeezed by a soft housing market, tighter access to credit and inflationary pressures. Data released on Thursday showed that U.S. consumer prices rose at twice the rate expected in July, while jobless claims remained at levels associated with a recession.

Scott said the weakened economic climate, which has spread from North America to Europe to some developing countries, is changing shoppers' habits. Some are buying cheaper cuts of meat, while others are eliminating vacations, he said.

"People are eating more sandwiches in Puerto Rico, and relying more on private-label products in the UK," he said.

SALES UP MORE THAN 10 PERCENT

Wal-Mart's second-quarter net sales rose more than 10.4 percent to some $101.6 billion. Sales rose 8.5 percent to $64.05 billion at its namesake stores and increased to $12.28 billion from $11.38 billion at its Sam's Club warehouse unit. International sales jumped 17 percent to $25.26 billion.

Total sales at U.S. stores open at least a year, a key retail gauge known as same-store sales, rose 4.5 percent. Same-store sales at its namesake discount stores increased 4.6 percent and rose 3.7 percent at Sam's Club.

The retailer said margins rose in the quarter compared with a year ago as it trimmed its inventory and improved its merchandise selection, helping it avoid profit-crunching clearance sales.

"Gross margin expanded significantly more than we expected as improved inventory management led to reduced number of markdowns and fewer clearance sales," Standard & Poor's equity research analyst Joseph Agnese wrote in a research note.

For the third quarter, Wal-Mart expects U.S. store sales to rise between 1 percent and 2 percent.

The company raised its estimate for full-year earnings from continuing operations to a range of $3.43 to $3.50 per share. In February, it said it expected $3.30 to $3.43.

(Editing by Lisa Von Ahn and Maureen Bavdek)