Wal-Mart profits drop

The world's biggest retailer, Wal-Mart, yesterday suffered its first drop in profits for a decade and warned that high petrol prices were deterring shoppers from driving to out-of-town supermarkets.The American company, which owns Britain's Asda supermarkets, said its second-quarter earnings had fallen year-on-year by 26% to 1.1bn, largely due to an $863m write-off on its recent decision to exit from Germany. It was a rare setback for the company, ending a record of consecutive increases in profits from 1996. The shares fell by 1.5% during early trading on the New York Stock Exchange.Lee Scott, Wal-Mart's chief executive, said he believed the company's American stores were suffering as the soaring price of fuel hit its lower income customers.

"We are, quite honestly, disappointed with the sales performance of Wal-Mart USA," said Mr Scott in a conference call. "Some of the same issues affecting customers - high utility costs and gas prices - are affecting many businesses including Wal-Mart."Wal-Mart's like-for-like sales in the US edged up by 1.7% in the three months to July, compared with growth of 3.8% in the preceding quarter. The Arkansas-based company said its customers were spending more when they visited its stores but were tending to consolidate their shopping by cutting back on "top-up" visits.

Wal-Mart is closely watched as an indicator of trends in retailing. A second large American shopping chain, Home Depot, also struck a cautious note yesterday warning that its sales were likely to slow in the second half of the year due to "mixed economic signals".Early indications of a slowdown in the American economy prompted the Federal Reserve to hold interest rates last week. Neil Curry, a retail analyst at merchant bank UBS, said Wal-Mart's sales growth was looking "rather modest". He said the company was particularly vulnerable to the high petrol price because of its thrifty customer base: "Given Wal-Mart's lower income demographic, it's going to hit them more than most."

In Britain, Wal-Mart also revealed that profits at Asda were "moderately below plan", blaming declining profit margins on the competitive environment. Asda's position as the country's second-biggest grocer has come under pressure in recent months from a resurgent performance by Sainsbury's.

Wal-Mart does not break out financial details of Asda's performance but it did reveal that overall sales outside America were up 31% to $18.6bn, boosted by purchases in Brazil, Central America and Japan. Asda has opened seven new stores so far this year and Wal-Mart said the chain got a boost during the World Cup from strong sales of food and clothing tie-ins. Asda accounts for more than 40% of Wal-Mart's international sales.