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Rising oil prices hurt Wal-Mart profits

Citing high oil prices, Wal-Mart, the US' largest retailer, announced its smallest quarterly profit growth in four years and warned that its third-quarter earnings would fall short of analyst estimates, disappointing Wall Street.

The company said that second-quarter earnings rose 5.8 percent to US$2.8 billion, or US$0.67 a share, compared with US$2.7 billion, or US$0.62 a share, in the quarter a year earlier.

Sales for the period, which ended on July 31, rose 10.2 percent to US$76.8 billion. Analysts surveyed by Thomson Financial were expecting a quarterly profit of 65 cents a share and revenue of US$77.46 billion.

The news out of Bentonville, Arkansas, dragged down other retailers, and contributed to an overall drop in the market on Tuesday. The Standard & Poor's retailing index fell almost 3 percent. Wal-Mart shares reacted by falling US$1.53, or 3.12 percent, to US$47.57, just above their 52-week low of US$46.20. Other retailers followed suit. JC Penney lost 4.16 percent and Sears Holdings fell 5.34 percent.

"Wal-Mart Stores did miss their plan as our customer continues to be impacted by higher gas prices and it is difficult to improve our expense leverage in the current environment," the retailer's chief executive, Lee Scott, said in a statement.

"I worry about the effect of higher oil prices," Scott said in a recorded message for investors, adding that prices could "erase improvements in employment and real income for an important part of our customer base."

The company also cited high gasoline prices when it posted disappointing first-quarter earnings in May.

With 3,762 stores in the US and traffic of more than 100 million customers a week, Wal-Mart's heft and ubiquity make it a macroeconomic barometer among retailers. The company aggressively squeezes suppliers, and leverages its overseas buying power, to pass on its trademark "every day low prices" to consumers.

"This news shouldn't come as a surprise," said Ulysses Yannas, a broker who follows retail stocks for Buckman, Buckman & Reid. "They deal with the lowest-income customers, on average."

Yannas estimated that Wal-Mart would have had to expand its sales by 12 percent to offset higher energy costs, which in addition to affecting customer spending, have added to the company's store overhead and transportation costs.

Wal-Mart's chief financial officer, Thomas Schoewe, said utility expenses rose by US$100 million, and its fuel costs were up US$30 million, in the quarter.

Still, the case can be made that Wal-Mart's dogged low-price model gives it a degree of countercyclicality -- making it a more compelling spending destination for consumers with tighter budgets.

Looking to the third quarter, Wal-Mart predicted earnings in the range of US$0.55 to US$0.59 a share, a penny lower than the Wall Street consensus; for the fiscal year, the company forecast earnings per share of US$2.63 to US$2.70, compared with its previous range of US$2.70 to US$2.74.
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