Wal-Mart's Q1 profit, sales underwhelm Wall Street

The first few months of the year were tough for Wal-Mart Stores Inc. The world's largest retailer reported Thursday that its first-quarter profit edged up just slightly, and the company struggled with a sales slump in its namesake business during the three-month period.

The discounter also offered a quarterly profit outlook that came below Wall Street's projections. Its stock fell on the news.

Wal-Mart blamed a litany of factors affecting its budget-conscious customers, including a payroll tax increase, delayed tax refunds, job worries and bad weather. It is the latest in a string of big-name, consumer companies from McDonald's to Macy's, to cite such hurdles in the first quarter of the year.

"Frankly, we had a more difficult quarter than expected," said Wal-Mart's president and CEO, Mike Duke, in a pre-recorded call.

Wal-Mart a bellwether

Wal-Mart is considered an economic bellwether because the retailer accounts for nearly 10 per cent of non-automotive retail spending in the U.S. The latest results indicate that many American households with lower incomes continue to struggle even as the job and housing markets improve.

"This is a reality check for Wal-Mart's low-income shoppers," said Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisers. "The low-income shopper is even more financially stressed than people realize."

Internationally, Wal-Mart faces slower growth amid a global recession.

A bribery scandal also threatens to slow its business overseas. Allegations first surfaced a year ago that Wal-Mart failed to notify law enforcement authorities that company officials authorized millions of dollars in bribes in Mexico to speed up getting building permits and gain other favors. Wal-Mart has been working with government officials in the U.S. and Mexico on that investigation.

Wal-Mart has already slowed its expansion plans in Mexico, and last November it said it was looking into potential U.S. bribery law violations in Brazil, China and India.

Weather affected seasonal sales

While the company said lingering cool weather into April was a culprit in a sales shortfall for seasonal goods like spring fashions and sporting goods such as camping gear, Charles Holley, Wal-Mart's chief financial officer, told reporters on a conference call that economic worries loom large.

"Our customers tell us that jobs and employment are high on the list of concerns," he said.

Additionally, like many companies, Wal-Mart said that business during the first quarter was hurt by the government's delay in processing income taxes and paying refunds. Wal-Mart said it cashed less in income tax refunds than a year ago.

Another big hurdle for Wal-Mart's financially strapped shoppers have been tax changes, which executives said started having more of an impact as the first quarter progressed. An increase in the payroll tax of two percentage points, which took effect Jan. 1, means that a take-home pay for a household earning $50,000 a year has been sliced by $1,000.

Such factors all helped to depress results. Wal-Mart earned $3.78 billion, or $1.14 per share, in the quarter that ended April 30. That compares with $3.74 billion, or $1.09 per share, a year earlier. Revenue rose 1 per cent to $113.43 billion. That figure excludes Sam's Club membership fees. Results fell short of Wall Street expectations for earnings of $1.15 per share on revenue of $115.78 billion.

Fails to meet Wall Street projections

Revenue at stores open at least year, a key measurement for retailers because it excludes the effect of stores that open or close during the year, also fell below expectations.

Wal-Mart reported a 1.4 per cent drop in revenue at stores open at least a year at its namesake business, which accounts for about 60 per cent of the company's total revenue. That was the first drop since the second quarter of 2011. At Sam's Club, the figure rose just 0.2 per cent, held down by less traffic from business customers, bad weather and lower-than-expected inflation.

Wall Street analysts had expected its U.S. namesake business to be unchanged and were projecting a 1.2 per cent rise at Sam's Clubs.

Still, Wal-Mart said that business has picked up in May fueled in part because of warmer weather. The company expects revenue at stores opened at least a year to be up as much as two per cent at its namesake U.S. business

Wal-Mart said that it expects expenses related to the Foreign Corrupt Practices Act — which forbids American companies from bribing foreign officials — to be in the range of $65 million to $70 million in the quarter. The company cited that the figure is higher than the $40 million to $45 million costs it has incurred in past quarters. That's partly because the company is investing more in improving its compliance controls.

Wal-Mart said that it expects earnings per share to be in the range of $1.22 to $1.27 in the current quarter. Analysts had expected $1.29 per share.

Shares fell $1.75 per share, or more than two per cent, to $78.11 in late morning trading. That's at the high end of its 52-week range of $61.25 to $79.96.