| NEW YORK
NEW YORK Wal-Mart Stores Inc said on Tuesday that quarterly profit rose 7 percent as discounts drew in bargain-hunting U.S. shoppers, but its shares fell after the world's largest retailer issued a cautious outlook for the current period.
While Wal-Mart said the year was off to a "solid start," it indicated results for this quarter could miss Wall Street estimates as it contends with a tough economic environment, higher transportation costs and customers who are running out of money between paychecks.
Wal-Mart shares, which through Monday were up 22 percent year to date and have outperformed the 29 other components of the Dow Jones Industrial average, fell 2.1 percent in morning New York stock Exchange trading.
"Customers are faced with results of a tougher economy, higher gas prices, food inflation and the increase in the overall cost of living," said Eduardo Castro-Wright, head of Wal-Mart's U.S. operations, on a recorded call.
"The 'paycheck cycle' is more pronounced as things get tighter for customers toward the end of the month," he added.
Net income rose to $3.02 billion, or 76 cents per share, in the first quarter ended on April 30, from $2.83 billion, or 68 cents per share, a year earlier. The results matched analysts' average per-share forecast, according to Reuters Estimates.
For the second-quarter, Wal-Mart forecast earnings per share of 78 cents to 81 cents. Analysts on average are expecting 81 cents.
Telsey Advisory Group analyst Joseph Feldman said it made sense for Wal-Mart to issue a conservative forecast given the uncertain environment. But he expects the discount retailer to outperform its peers in this climate.
"If anybody's going to execute and perform well and get share in this market, it's going to be Wal-Mart," he said.
SEEKING LOW PRICES
Consumers are seeking out Wal-Mart's low prices, especially for basic items like groceries, shampoo and cleaning supplies, as the U.S. economy falters and prices of food and fuel soar.
The economic downturn comes as Wal-Mart has gotten back to the basics, trumpeting its low prices and slowing its aggressive expansion plans, to improve results at its existing U.S. stores.
At the end of January, Wal-Mart slashed prices on thousands of items by up to 30 percent.
In the first quarter, net sales rose 10 percent to $94.12 billion. Sales at U.S. stores open at least a year, a key retail gauge known as same-store sales, rose 2.9 percent.
Sales rose almost 7 percent to $59.07 billion from $55.44 billion at the namesake Wal-Mart stores and increased to $11.11 billion from $10.32 billion at the Sam's Club warehouse division.
International sales jumped 22 percent to $23.94 billion. Read more about the international results at.
America's Research Group, which tracks consumer behavior, said there had been an increase in the number of U.S. consumers who did not previously shop at Wal-Mart, but are now going to its stores for basic items like paper towels and medicine.
About one-third of the people who had never shopped at Wal-Mart are now going there once or twice a month, Chairman Britt Beemer said on Monday.
On the recorded call, Castro-Wright said U.S. customer traffic was "positive for the first time in a very long time."
Its struggling apparel business is improving, but its home business is being hurt by the weak housing market, he said.
Castro-Wright also said the retailer would continue to keep its inventory "very lean," helping to avoid costly markdowns and reduce "shrink" -- inventory lost to events like shoplifting or employee theft.
In an interview, Chief Financial Officer Tom Schoewe said that given the "volatile" environment, the company is being "appropriately conservative" with its second-quarter forecast.
It expects second-quarter U.S. same-store sales to be between flat and up 2 percent, with earnings per share of 78 cents to 81 cents.
"With positive traffic and improving momentum in apparel ... and the stores looking better and better all the time, I think they're in good shape to at least be on the higher end of expectations," said UBS analyst Neil Currie, who has a "buy" rating on its shares.
Schoewe said that as Wal-Mart moves through its current quarter, it will get a better sense as to whether consumers are spending their tax rebates in its stores.
The rebates are part of Washington's $152 billion 2008 economic stimulus package, and about 130 million households are receiving some $100 billion in cash to spend.
To entice shoppers to use their rebate dollars in its stores, Wal-Mart is offering to cash the checks and cutting prices on staple goods such as cereal and lunch meat.
"The real question that we would have ... is how much of the checks are being used to fill gas tanks or refrigerators?" the CFO said.
Executives also said that higher transportation costs would remain a "potential headwind" for the rest of the year.
Wal-Mart shares fell to $56.78 in morning New York Stock Exchange trading. This year, the stock has substantially outperformed shares of smaller rival Target Corp, which are up almost 7 percent, and the Standard and Poor's Retail Index, which is down 1 percent.
(Editing by Lisa Von Ahn and Dave Zimmerman)