Walmart Q2 Profit Rises, U.S. Division “Improving”

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Walmart plans more of its Walmart Express stores, like this one in Chatham, Illinois, in urban areas.

Bentonville, AR—Walmart Inc. posted today a 5.7% increase in its second quarter profits even as its U.S. division reported flat comparable store sales.

For the quarter ended July 31, Walmart’s profit rose to $3.8 billion, or $1.09 a share, up from $3.6 billion, or 97 cents a share, a year earlier. Excluding items, earnings were $1.12 a share. Previously the company had projected earnings of $1.05 to $1.10.

Net revenue for the quarter jumped 5.4% to $109.37 billion, lead by a 16% sales increase in its international division as operating income increased 8.9%. Sales at its U.S. division rose 1.8% but were off 0.9% in comparable store sales. Sam’s Club, its warehouse division, reported a 5% comparable store increase.

Walmart’s second quarter report edged past analysts’ average estimates that expected earnings of $1.08 a share on sales of $108.36 billion.

‘Jobs are No. 1 Concern’ for U.S. Walmart Shoppers

For its third quarter, Walmart forecast a profit of 95 cents to $1 a share and expected its U.S. division, which have declined for nine consecutive quarters, to be down 1% to up 1%.

Analysts’ average estimate forecast third quarter earnings of 97 cents with the U.S. division’s comparable store sales down 0.6%.

Since Walmart’s U.S. division, which accounts for about $260.3 billion, or 62.1% of sales in fiscal 2011, so critical to the company, much of today’s reports centered around efforts to turnaround the struggling division.

But when its core consumers are facing rising gas prices, a still high unemployment rate and basically still are living in a recession, the issues are even more sensitive.

“We remain concerned about the economic pressure on our customers and the uncertain impact it can have on their shopping behavior,” Bill Simon, Walmart U.S. ceo, said.

Echoing those sentiments, Charles Holley Jr., chief financial officer, told analysts in a conference call that “we still see what we call the paycheck cycle as pronounced as ever, and of course the volatility in the headlines, the volatility caused last week, doesn’t help the customer. “We haven’t seen any relief,” he said, and “we’re starting to see jobs as the number one concern among our customers at Wal-Mart.”

Not helping matters are recently consumer surveys that found many of Walmart’s shoppers no longer see the retail giant as having the lowest prices. A WSL Strategic Retail found that 86% of 1,500 Walmart shoppers in an April survey believe that they can get a better deal elsewhere, such as dollar stores. “The competitive landscape has changed,” Wendy Leibmann ceo of WSL Strategic Retail. “And the economic trends that are battering Walmart’s core shoppers are not diminishing.”

For its back to school season and beyond, Walmart will be again promoting “everyday low prices” more than in the past. Holley said the company has corrected changes in its inventory that were unpopular and will be adding smaller “express” stores that fit better into urban neighborhoods.

Those strategies may be helping. Although traffic was down at its stores, those who shopped spent more on average, the company said.

Return to ‘Everyday Low Pricing’ Emphasis

Simon also said that the store is “well-positioned to gain sales and share for the important back-to-school season” and that it is expanding its offerings in important categories to regain customers.” Walmart also said it will now match any local competitor’s advertised price for the same product.

In mid-July, the retailer announced a new back-to-school strategy, saying that it will offer back-to-school items in one place and categorized by school age group so that families can “quickly and easily shop supplies appropriate for their child’s grade.”

One of the biggest areas where Simon said he’s confident of a turnaround is its apparel and accessories business. Simon attributed the improvements to “ongoing business initiatives, especially in our basic apparel offering, and improvement in sales of summer merchandise tied to the warm weather.”

Over the period, men’s, ladies and baby apparel delivered the best comparable results for the period, while children’s apparel, footwear and intimates remained “soft.”

Since Walmart, which averages 140 million shoppers weekly to its U.S. stores, is considered a barometer of the health of the consumer and the economy, analysts are closely examining the turnaround efforts.

“You can tell by their commentary, their commitment to everyday low price, it seems like they’re going to get more aggressive with pricing actions coming up,” said ITG Investment Research analyst John Tomlinson.

“They are having to get more competitive on pricing just as inflation is hitting,” Brian Sozzi, retail analyst at Wall Street Strategies. “Theoretically this is a period when Walmart should be thriving. They have signaled that in the back half of the year they are poised to do well again.”

Walmart also raised its full-year earnings forecast to $4.41 to $4.51 a share from its previous forecast of $4.35 to $4.50.