Wal-Mart's lowered profits may be omen

Published May 16, 2007

BENTONVILLE, Ark. - Wal-Mart Stores Inc. warned Tuesday that its profits in the current quarter could fall short of expectations after reporting an 8 percent gain in first-quarter earnings amid cost-cutting and strength in its warehouse clubs and international businesses. The company continued to struggle with its namesake discount business.

The tepid outlook from Wal-Mart - considered a barometer for the retail industry - could serve as a warning bell that rising gasoline prices and a weakening housing market will continue to eat away at consumer spending in the coming months.

"Quite honestly, we're not satisfied with our overall performance, " Wal-Mart president and chief executive Lee Scott said.

Same-store sales rose 0.6 percent in the first quarter at Wal-Mart's U.S. stores, with its Sam's Club warehouse stores accounting for all of the gain. Wal-Mart's namesake stores slipped 0.1 percent in the quarter, while Sam's Club warehouse stores rose 4.7 percent.

Same-store sales, or sales at stores opened at least a year, is a key gauge of retailer health because it measures growth at established locations open at least a year rather than at newly opened ones.

For the current quarter, Wal-Mart projected same-store sales to be up a modest 1 to 2 percent.

Bright spots include Sam's Club, which now has seven consecutive quarters in which profits grew faster than sales, Scott said.

Wal-Mart's international division, the fastest-growing part of the company, accounted for 23 percent of sales for the quarter.

The company reacted to inflation in Mexico by lowering prices of tortillas and other staples, which Scott said was an investment in customer loyalty.

In Great Britain, Scott said Wal-Mart's Asda chain added 1.5 million customers since mid 2005, half in stores that were already open.

Wal-Mart said it expects second-quarter profits to be within a range of 75 to 79 cents per share. Analysts surveyed by Thomson Financial expect a consensus 79 cents per share for the period.

Fast Facts:

Wal-Mart earnings

For its first quarter, Wal-Mart's net income rose 8 percent on an 8.5 percent increase in revenue.

1st Qtr Year Ago Revenue $86.41-bil $79.67-bil Net Income $2.83-bil $2.62-bil Per Share 68 cents 64 cents