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Earnings Preview: Wal-Mart 2nd-qtr to show gains

Anne d'Innocenzio, AP Retail Writer

NEW YORK (AP) -- Wal-Mart Stores Inc. is expected to show that its business rebounded from earlier this year when it reports its second-quarter results before the markets opens Thursday. But the world's largest retailer's figures still should underscore how its base of low-income consumers remain under financial duress in an uncertain economy.

WHAT TO WATCH FOR: Wal-Mart's figures will be examined for signs about the mindset of shoppers, both in the U.S. and abroad. In particular, analysts will be dissecting any comments on how the retailer's back-to-school season is faring. The period, which typically runs from mid-July through mid-September, is the second largest selling season behind the winter holidays.

There's already evidence that many stores had a slow start to back-to-school. Teen clothing sellers American Eagle Outfitters Inc. and Aeropostale Inc. warned last week of a weak kickoff to the period. Both cited lots of discounting. The teen retailers are expected to report final results next week.

"I have never seen so many promotions to encourage back-to-school shopping," said Tom Julian, a strategic business director at the Doneger Group, referring to what he is seeing at the mall.

Wall Street also will be closely watching how the heavy promotional environment affected Wal-Mart's profit margins.

Like other merchants, Wal-Mart is grappling with a yo-yo economic recovery that has been tough on low-income shoppers, and is causing middle- to upper-income shoppers remain frugal about their purchases.

While jobs are easier to get and the turnaround in the housing market is gaining momentum, the improvements have not been enough to fuel higher levels of consumer spending for most Americans. Most are juggling tepid wage gains with higher costs of living.

On top of that, Americans are still trying to digest the 2 percentage-point increase in payroll taxes that took effect Jan. 1. That means that take-home pay for a household earning $50,000 a year has been sliced by $1,000. Meanwhile, shoppers are being increasingly forced to pay for more of their children's school supplies, sometimes including books.

That has forced parents to stick to necessities. Wal-Mart has noticed that shoppers are staggering their purchases, rather than having one big back-to-school shopping spree. Analysts will be looking for any color on such behavior.

Wal-Mart had a tough time during the first part of the year. For its first quarter, it reported the first drop in revenue at stores opened at least a year in its namesake business since the second quarter of 2011.

Revenue at stores open at least year, a key measurement for retailers because it excludes the effect of stores that open or close during the year, also fell below expectations.

For the company's second quarter of 2013, analysts expect Wal-Mart's namesake U.S. business to post an increase of 0.7 percent in revenue at stores open at least a year, according to Thomson Reuters. Analysts expect a 1.0 percent increase for its entire U.S. business, including a 2.0 percent rise at Sam's Clubs.

Deborah Weinswig, an analyst at Citi Investment Research, said that she believes that Wal-Mart has rebounded from a tough first quarter and should have racked up market share gains and continued improvements in productivity.

But she added, "The consumer hourglass is being stretched, with middle America under significant pressure, primarily driven by the payroll tax hike." She expects Wal-Mart to provide cautious outlook amid a challenging economic backdrop.

Investors also will want an update on the company's investigation into allegations of bribery in its Mexico operations, which surfaced in late April 2012. Wal-Mart has launched its own internal investigation and is working with government officials in the U.S. and Mexico.

Wal-Mart has said it's been investing in fortifying controls overseas and has hired new executives to oversee its efforts to comply with laws against foreign bribes. Starting this year, the company is also tying some of its executives' compensation to how successful the company is overhauling its compliance division.

Still, investors, who pushed the stock down to around $57 after the allegations surfaced in April 2012, have sent shares up 35 percent since then. Shares slipped 22 cents, to close at $76.86 on Tuesday..

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 earnings of $1.25 per share on net sales of $118.24 billion, according to FactSet. The sales exclude figures from membership fees from Sam's Club.

LAST YEAR'S QUARTER: Wal-Mart earned $1.19 per share on net sales of $113.53 billion.