Earnings Preview: Wal-Mart's 2Q and the consumer


NEW YORK (AP) — Wal-Mart Stores Inc. is expected to report second-quarter results on Thursday showing continued momentum in the company's U.S. namesake business. But investors will also want to know what the retailer, a barometer of consumer health, will say about the economy.

WHAT TO WATCH FOR: Everyone will be looking closely at results for Wal-Mart stores, which had been hurt by some mistakes. Those include veering away from its bedrock "everyday low prices" strategy and getting rid of some products its shoppers regularly bought in an overzealous bid to declutter stores.

The company, which has since started emphasizing low prices again and returned thousands of items to shelves, is expected to report its fourth-consecutive quarterly revenue gain at stores open at least a year at its namesake U.S. stores. That sales figure is a measure of a retailer's health because it excludes results from locations that open and close during the year. Wal-Mart had reported nine straight quarters of declines in the figure — the longest streak in Wal-Mart's history — until the business turned the corner last year.

Analysts expect Wal-Mart's namesake U.S. business to post an increase of 2.1 percent in revenue at stores open at least a year for the second quarter, according to Thomson Reuters. They expect a 2.5 percent increase for its entire U.S. business, including a 4.7 percent rise at Sam's Clubs.

Given a yo-yo economic recovery, investors will be looking for any signs of whether Wal-Mart's low-income shoppers who struggle with paying the bills are spending a little more, particularly during the critical back-to-school season. The period kicked off a few weeks ago.

The latest government spending report, released Tuesday, shows that Americans increased their retail spending in July by the most in five months. That follows a frugal spring and offers hope that the slumping economy may rebound in the second half of the year.

Americans may be feeling better amid recent signs from the economy's modest but steady improvements.

Some economists cautioned that part of the July increase in retail spending was inevitable after consumers cut spending in each of the months in the April-June quarter. Consumers will likely sustain their spending increases only if hiring continues to strengthen, they said.

Analysts will specifically look for whether Wal-Mart shoppers are having a harder time or easier time stretching their dollars to the next payday. They'll also be looking for whether sales improvements in more discretionary items like clothing continued through the quarter.

Wal-Mart's international business, which produces more than a quarter of its revenue, has remained strong, but the company is striving to make it more profitable. Wal-Mart is focusing on improving its business in Brazil and China.

The company continues to grapple with allegations of bribery in its Mexico operations, which surfaced in late April and could threaten to thwart momentum in its international business, Wal-Mart's fastest-growing division. The company has launched its own internal investigation into the matter and is working with government officials in the U.S. and Mexico. At the company's annual meeting in June, company officials pledged that they will get to the bottom of the allegations. It's also been overhauling its compliance program.

Still, investors, who pushed the stock down right after the allegations surfaced in late April, have sent shares up 25 percent since mid-May.

WHY IT MATTERS: Wal-Mart's results are considered a bellwether of consumer spending because the company draws nearly 10 percent of all nonautomotive retail spending in the U.S.

WHAT'S EXPECTED: Analysts expect net income of $1.17 per share on revenue of $114.63 billion, according to FactSet. The revenue figure excludes Sam's Club membership fees.

LAST YEAR'S QUARTER: Wal-Mart earned $1.09 per share on net sales of $108.6 billion, excluding membership fees.