• by Sarah Mahoney  @mahoney_sarah, May 16, 2007

Wal-Mart managed to turn in record sales and earnings for the first quarter, despite its declining same-store sales trends. But it failed to meet Wall Street's expectations, and warned that its next quarterly results would also disappoint.

For the first quarter of its fiscal 2008, net sales hit $85.4 billion--up 8.3% from the same period last year. Income from continuing operations gained 6.2%, to $2.8 billion. While operating income was up just 1.8% at Wal-Mart's domestic unit, it gained 19.8% at Sam Club's, and 19.3% at Wal-Mart International. In a conference call, Wal-Mart Stores President/CEO Lee Scott conceded that the Bentonville, Ark.-based company's overall results were disappointing.

And if there was ever any thought that Wal-Mart might continue its recent--and some might say, poorly considered--plans to target more affluent consumers, it's gone now: "We know well the challenges in the U.S.," Scott said, adding that consumers are worrying about income, the cost of living, and the cost of fuel. "Saving money is important to our customers, and you will see us more committed than ever to price leadership."

Also in the conference call, Eduardo Castro-Wright, CEO of Wal-Mart Stores USA, defended the company's controversial decision to match associates' schedules with customer traffic. Based on internal research that included 700 stores, the staffing changes doubled same-store sales increases.

The company was "very disappointed" in the way weak apparel and home sales bogged down quarterly results, Castro-Wright said. And he warned that as all that unsold clothing gets marked down, there will be continued pressure on profit margins. Bright spots include the food division and health care, buoyed by strong grocery results and the success of the company's $4 generic prescription program.

Castro-Wright added that he expected to see a turnaround in apparel with back-to-school sales, which begins in July.

But, for the next quarter, the company made a few grim predictions, including a gain of just 1% to 2% in same-store sales and earnings below its initial forecast.