Wal-Mart's 2Q pinched

BENTONVILLE, AR — Holding up a mirror to a sputtering U.S. economy, Wal-Mart continued to spin its wheels, unable to buy much traction during a broadly weak second quarter, its profits edging ahead just 3.5 percent, to $1.62 billion from $1.60 billion last year, way off its form of only a year ago, when the world's largest retailer posted an earnings gain of almost 28 percent.

And the pain isn't stopping there. Wal-Mart also cautioned that third-quarter profits are likely to come in at the low end of expectations in a persistently soft economy and a tricky, promotional retail environment.

Despite the big drop in earnings growth, sales held relatively steady as consumers continued to shun more pricey department stores and flocked to mass merchants and warehouse clubs. Sales jumped up by 14.5 percent, to $52.8 billion from $46.1 billion the prior year. The crucial gauge of same-store sales advanced by 5.7 percent.

Putting earnings under heavy pressure, margins thinned out and costs climbed higher. With much of its sales growth coming from low-margin, front-of-the-store commodities like potato chips and laundry soap, average gross margin eroded by 20 basis points, to 21.6 percent from 21.8 percent a year ago. At the same time costs climbed somewhat higher, rising by 30 basis points, to 16.8 percent of sales from 16.5 percent the prior year.

Caught between the rising costs and falling margins, operating profits inched up a skimpy 1.5 percent, to $2.96 billion from $2.92 billion a year ago. Causing considerable pain to home fashions suppliers — along with all of Wal-Mart's other vendors — the retailer sharply curtailed its inventory growth during the quarter. While overall sales jumped up by almost 15 percent in the second quarter, inventories moved up at a sharply slower pace of 9.2 percent, as Wal-Mart turned the faucet off, taking no risks and slowing the pace of replenishment.