Wal-Mart Posts Higher Profits; Says U.S. Economy Challenging

When Wal-Mart was the true low-price leader, the company performed well in hard economic times. But now the largest U.S. retailer by revenues is warning that weakness in the American economy is putting pressure on its customers.

Wal-Mart reported on Tuesday its ninth consecutive quarter of falling sales at U.S. stores. The company said sales at stores open for at least one year dropped 0.9 percent.

The company's stock advanced in pre-market trading Tuesday, up 3.34 percent, or $1.67, to $51.65, after the company said net income in the second-quarter rose 5.7 percent over the same period in the previous year. Net income totalled $3.8 billion, or $1.09 per share.

Total revenues were up 5.4 percent, to $109.3 billion.

But Wal-Mart, seen as a bellwether for the U.S. economy since it is the biggest retailer, said domestic economic growth and currently at roughly one percent and high unemployment is pressuring the company's performance.

"We remain concerned about the economic pressure on our customers and the uncertain impact it can have on their shopping behavior," said Bill Simon, chief executive of Wal-Mart's U.S. business, in a statement. "With this volatility, it is as important as ever to deliver on Wal-Mart's one-stop shopping promise for broad assortment and every day low prices."

But the company's promise of everyday low prices has been challenged recently. As the company grew from a small discount store chain from its founding home in Bentonville, Arkansas into the world's largest retailer, Wal-Mart's pricing advantage has eroded. Other retailers have slashed prices in the tough economy, while online retailers have also slashed prices on consumer goods.

Last month, a Morgan Stanley survey reported that 60 percent of Wal-Mart's customers no longer believe the retailer's prices are lower than those of competitors. Also, consumers have changed the way the shop in the recession, taking away Wal-Mart's long-held advantage.

Customers buy in smaller packages in hard times, challenging Wal-Mart's low-price, bulk packaging advantage. Also, consumers are using less credit and relying more on cash, buying in smaller quantities but often more frequently. Wal-Mart, however, has been built upon the one-stop-get-all shopping premise.

But that's not working as well in the two years after the recession as growth remains slow and unemployment remains high.

Still, as revenues at Wal-Mart International rose 16.2 percent to $30 billion in the second-quarter, Wall Street was applauding the company's performance on Tuesday.