May 16, 2007 By Marcus Kabel Ap Business Writer 4 min read

Wal-Mart Chief Executive Lee Scott warned earnings in the current quarter could fall short of Wall Street expectations and said Tuesday that the company will focus on prices this summer in a bid to rekindle sales in U.S. stores. 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 erode consumer spending in the coming months.

Home Depot Inc. reported a 29.5 percent drop in first-quarter profits on a slight increase in sales the same day.

Wal-Mart Stores Inc. reported an 8 percent gain in its fiscal first-quarter earnings, meeting profit expectations with the help of cost controls and strength in its Sam’s Club warehouse stores and international businesses.

The world’s largest retailer said it expects second-quarter profits of 75 cents to 79 cents per share. Analysts surveyed by Thomson Financial are looking for a profit of 79 cents per share for the period, which ends July 31.

“Quite honestly, we’re not satisfied with our overall performance,” Scott said during a pre-recorded conference call. Sales and profits for the quarter were “not where we would have expected to be nor where we believe we should be.”

“You will see us be more committed than ever to price leadership,” Scott said.

Wal-Mart is losing market share after a shaky attempt last year to offer trendier, pricier fashions like skinny jeans, which failed to garner broad customer appeal.

Wal-Mart began to shift its focus back to lower priced merchandise last holiday season.

Robert F. Buchanan, retail analyst with A.G. Edwards & Sons, said apparel continues to be a problem for Wal-Mart.

Company officials told investors Tuesday that they won’t see an improvement until the back-to-school season. Meanwhile, department stores like J.C. Penney Co. and discounters like Target Corp. have improved their fashion mix, striking up exclusive deals with designers.

“Wal-Mart is continuing to fail to properly interpret the fashion trends of their core low-income customers,” said Buchanan, who rates the share a “hold”.

Buchanan also said he finds Wal-Mart workers, called associates in company parlance, less motivated to help customers now than in the past 24 years that he has covered Wal-Mart.

Goldman Sachs, in a research note, said the focus on low prices could erode gross profit margins at Wal-Mart and at other retailers that may feel pressure to follow suit.

Goldman’s note added that “lowered guidance from Home Depot this morning and an increased aggressiveness on price at Wal-Mart could weigh on retail stocks at large as investors become increasingly skeptical about the macro and competitive environment.”

Don Gher, chief investment officer for Coldstream Capital Management, said it is time for Wal-Mart to show that its plans for reviving U.S. sales can work. Wal-Mart has said it will finish remodeling some 1,800 stores this year and has promised to tailor products in individual stores more closely to local communities.

“The U.S business continues to be hurt by apparel mistakes, but sales are buttressed by strong supermarket, pharmacy and international sales,” Gher said. Coldstream manages assets of about $1.1 billion, including Wal-Mart shares.

On the conference call, Scott that for Wal-Mart shoppers, rising gas prices, personal finances and inflation remain a concern.

In the first quarter, Wal-Mart U.S. stores did well in sales of food, $4 generic drug prescriptions and home electronics. But those results were weighed down by weakness in the higher margin areas of apparel and home furnishings, said Eduardo Castro-Wright, President and Chief Executive Officer of Wal-Mart U.S. stores.

Same-store sales, an industry benchmark for stores opened at least a year, rose 0.6 percent in the first quarter at Wal-Mart’s U.S. stores, the weakest level since Wal-Mart started reporting the quarterly figure in 2003.

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

Scott said Wal-Mart’s fastest growing business remains its international segment, with sales up 18.5 percent in the first quarter, to account for 23 percent of total sales. Wal-Mart has stores in 13 countries from Mexico and Central America to Asia to Britain.

In the first quarter, Wal-Mart said it earned $2.83 billion, or 68 cents per share, compared with $2.62 billion, or 64 cents per share, in the previous-year quarter.

Wal-Mart had revenue of $86.41 billion in the three months ending April 30, up from $79.67 billion in the year prior.

Analysts surveyed by Thomson Financial expected first-quarter earnings per share of 68 cents and revenues of $86.9 billion.

AP-ES-05-15-07 1359EDT