* Q1 EPS 88 cents, beats Street view 85 cents
* Q1 U.S. same-store sales fall 1.4 pct
* Sees Q2 EPS 93 cts-98 cts vs Street view 98 cts
* Shares up 3 percent (Adds company comment, Target reference)
By Brad Dorfman
CHICAGO, May 18 Wal-Mart Stores Inc's (WMT.N) quarterly results beat Wall Street expectations, as a curb on costs helped the world's largest retailer overcome weaker U.S. same-store sales, sending shares up 3 percent.
The costs cuts on everything from labor to transportation helped the company fund "rollbacks" on prices for thousands of items in recent weeks, as it tries to hold onto customers pressured by high unemployment and rising gasoline prices.
Wal-Mart's expenses rose 3.9 percent during the quarter, but that was well below a 5.9 percent increase in sales, helped by international markets like Brazil, China and Mexico. Sales at its U.S. discount stores open at least a year fell a worse-than-expected 1.4 percent.
"If they can leverage expenses in this environment where their (U.S.) same-store sales are so soft, imagine what can happen if they put up a 2 to 3 percent pace of same-store sales increases," Edward Jones analyst Matt Arnold said.
For the time being, Wal-Mart paints a bleak view of its U.S. customers, saying that the use of foods stamps and other government benefits to pay for its goods is up significantly from a year earlier.
"More than ever, our customers are living paycheck-to-paycheck," Chief Financial Officer Tom Schoewe said during a conference call with reporters.
The company reported earnings of $3.32 billion, or 88 cents a share, for the fiscal first quarter that ended April 30. That compares with $3.03 billion, or 77 cents a share, a year earlier and came in ahead of the 85 cents per share expected by analysts, according to Thomson Reuters I/B/E/S.
Highlighting the precarious state of U.S. consumers, Wal-Mart also forecast that second-quarter earnings could fall short of Wall Street estimates and said its U.S. same-store sales for the period could drop.
Within minutes of reporting results, Wal-Mart also announced a new onslaught of price cuts on groceries, offering an average discount of 30 percent for a basket of 22 top food and household products. [ID:nPnDA06591]
Graphic on Wal-Mart earnings:
A SPIKE IN GASOLINE PRICES
The company said its traffic was down in the quarter, though Schoewe said the prime reason for that was because rising gasoline prices -- which it estimated at up 41 percent from a year ago -- were forcing shoppers to cut down on the number of trips they took to the store.
Wal-Mart has also likely lost some customers that it picked up during the recession as even slightly more affluent consumers move back to department stores and rivals like Target Corp (TGT.N), analysts said.
Target, which is scheduled to report first-quarter earnings on Wednesday, has already posted a 2.8 percent increase in same-store sales for the quarter.
"For them to note another soft quarter of traffic is not something I wanted to hear," said Brian Sozzi, an analyst at Wall Street Strategies.
While stores in some emerging markets did well, Wal-Mart's Asda unit in Britain posted a drop in quarterly underlying sales for the first time in four years. [ID:nLDE64H0S5]
Wal-Mart said it expects second-quarter earnings per share of 93 to 98 cents from continuing operations. Analysts have predicted earnings of 98 cents per share.
The company sees U.S. same-store sales, excluding fuel, up 1 percent to down 2 percent in the second quarter.
Vice Chairman Eduardo Castro-Wright, head of Wal-Mart's U.S. division, cited heavier competition on price. He also said there was a strong correlation between same-store sales and unemployment levels.
"Stores in areas with the highest increase in unemployment are running approximately 200 basis points lower comps than those with the lowest," Castro-Wright said.
Wal-Mart is remodeling its U.S. stores to attract more customers and is restocking about 300 grocery items that it had previously cut, in response to customer demand.
The company said it remains on track to have $13 billion to $15 billion in capital expenditures this year.
The company also said it had negative free cash flow of $1.6 billion at the end of the quarter, as inventory levels returned to more normal levels from "relatively low" amounts at the end of the last fiscal year.
Wal-Mart shares were up $1.58 at $54.31 on the New York Stock Exchange. (Reporting by Brad Dorfman, editing by Michele Gershberg and Gerald E. McCormick, Dave Zimmerman, Phil Berlowitz)
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