Wal-Mart second-quarter forecast trails estimates on economy

Wal-Mart Stores Inc., the world’s largest retailer, forecast second-quarter profit that was less than analysts estimated as consumers struggle amid the slow U.S. economy and higher taxes.

Earnings per share will be $1.22 to $1.27, the Bentonville, Arkansas-based company said today in a statement. Analysts projected $1.29, the average of 24 estimates compiled by Bloomberg. Sales in the fiscal first quarter ended April 30 trailed analysts’ estimates while profit matched projections.

Chief Executive Officer Mike Duke has cut prices on groceries and other necessities as the chain’s lower-income shoppers deal with elevated unemployment and higher Social Security taxes. First-quarter sales at U.S. Wal-Mart stores open at least 12 months fell 1.4%, the first drop after six straight gains. Analysts estimated a 0.1% decline.

“They’re pressured by the economy, unemployment, the increase in payroll taxes, the delay in tax returns,” Bernard Sosnick, an analyst at Gilford Securities based in New York, said today in an interview. “All these negatives coalesced in the first quarter.”

Sosnick recommends buying the shares and said improvement in the economy and lower gas prices should help Wal-Mart later in the year.

The shares fell 2.1% to $78.19 at 9:35 a.m. in New York. Wal-Mart had gained 17% this year through yesterday, compared with a 16% increase for the Standard & Poor’s 500 Index.

Profit Gains

First-quarter net income increased 1.1% to $3.78 billion, or $1.14 a share, from $3.74 billion, or $1.09, a year earlier, Wal-Mart said. Analysts projected $1.14, the average of 24 estimates compiled by Bloomberg. First-quarter revenue rose 1% to $114.2 billion, trailing analysts’ $116.1 billion average estimate.

Duke said in the statement that the first quarter was marked by “considerable headwinds to top line sales” and that the company’s performance will improve throughout the year. Comparable-store sales for Wal-Mart U.S. will be little changed to up 2% in the second quarter, the company said.

Wal-Mart’s sales slowed in January and February after shoppers’ incomes were reduced by a 2 percentage-point increase in the payroll tax. They also were hurt by tax returns that were delayed because of forms that were shipped late and additional, federally mandated fraud scrutiny.

Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail obtained by Bloomberg News that month-to-date sales had been a “total disaster.” Murray left Wal-Mart last month. Chief Financial Officer Charles Holley said in March that those sales returned to normal by the end of February.

Weather Effect

Cooler temperatures also curtailed demand for spring merchandise in North America. Target Corp., the second-largest U.S. discount retailer, said last month first-quarter profit would be less than it previously forecast as cold weather hampered sales of spring merchandise.

“It has been much cooler than normal, which has an impact on seasonal merchandise,” Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis, said today in an interview. “A lot of Wal-Mart’s customers buy clothes when they need them. If weather is really a negative impact on the first quarter, we’ll find out in the second quarter because it should even out.”

Kohl’s Earnings

Kohl’s Corp., the third-largest U.S. department-store chain, also cited weather as affecting first-quarter sales while saying that it was able to keep expenses and inventory under control.

The company said today in a statement that first-quarter net income fell 4.5% to $147 million, or 66 cents a share, from $154 million, or 63 cents, a year earlier. Analysts surveyed by Bloomberg estimated 57 cents, on average. Menomonee Falls, Wisconsin-based Kohl’s shares rose 4.5% to $51.92.

Shoppers are getting some relief as gas prices decline. The average U.S. price of a gallon of regular unleaded gas fell to about $3.50 in April from this year’s high of $3.79 in February, according to AAA.

Given the challenges its customers face, Wal-Mart has worked to keep prices low to maintain traffic at its stores. Grocery prices at Wal-Mart fell in the first quarter as part of the retailer’s plan to spend $6 billion to cut prices in the category, according to a study conducted by Bloomberg Industries during the past 22 months.

Neighborhood Markets

The retailer also has been opening more small, neighborhood markets to better compete with dollar-store chains such as Dollar General Corp. and Family Dollar Stores Inc. Wal-Mart prices were below Dollar General’s 100% of the time in household goods and more than 85% of the time in grocery, auto supplies, pharmacy and health and beauty aids, according to the study.

Wal-Mart’s international division increased first-quarter sales 2.9% to $33 billion. Excluding the effect of foreign-currency fluctuations, sales would have risen 5.4% to $33.8 billion.

The company has been working to reintroduce its everyday low price strategy in Brazil and China after struggling to find strong sales growth in both markets. In India, Wal-Mart has faced questions over lobbying.

The company said last week it would invest 100 million yuan ($16.3 million) over three years to improve food safety in China as it works to bolster its image after a series of food-related citations.

Wal-Mart increased first-quarter comparable-store sales in the U.K., Africa, Mexico, Central America, Brazil, Chile, Argentina, China and India, while sales on that basis fell in Canada and Japan. Operating income in the international division fell 4.7% to $1.26 billion as expenses rose.

“Expenses growing faster than revenue is disappointing,” Yarbrough said. “International has been choppy.”

Bloomberg News

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