BENTONVILLE, Ark. — Unlike a year ago, when its domestic business was building momentum, Walmart reported top- and bottom-line results for the second quarter of fiscal 2014 that were below expectations, in part reflecting sharp deceleration in the International Division, which had been a consistent growth driver.

Unlike a year ago, when its domestic business was building momentum, Walmart reported top- and bottom-line results for the second quarter of fiscal 2014 that were below expectations, in part reflecting sharp deceleration in the International Division, which had been a consistent growth driver.

Also unlike the prior-year quarter, when the company raised its earnings guidance for the full fiscal year, this time management lowered its sights for both sales and earnings for the full year.

Excluding $146 million in income attributable to non-controlling interests, consolidated net income attributable to Walmart for the three months ended July 31 moved up 1.3% to $4.07 billion, or $1.24 per diluted share, a penny shy of the average estimate of $1.25 per share among analysts polled by Thompson Reuters. The results included a negative impact of 1 cent per share from non-income tax matters associated with Walmart International.

The earnings-per-share performance benefited from the repurchase of about 24 million shares for $1.9 billion during the quarter. The average number of diluted shares outstanding consequently decreased year over year by 3.1%.

Net income for the six months improved at a similar pace, advancing 1.2% to $7.85 billion.

Second quarter net sales gained 2.4% to $116.22 billion, despite a negative currency exchange hit from a stronger dollar. On a constant exchange basis, consolidated net sales would have risen 2.8% to $116.7 billion. Excluding fuel sales at Sam’s Club, total comparable-store sales in the United States were flat but inched up 0.1% with fuel factored in.

Net sales for the half, meanwhile, grew 1.7% to $229.64 billion, as U.S. comparable-store results edged downward 0.6% both with and without fuel.

Other income, which includes such items as Sam’s Club membership fees and fees for financial services, fell 4.3% to $729 million in the second quarter, while total revenues increased 2.3% to $116.94 billion, short of the $118.09 billion forecast by analysts. For the half, other income dipped 1.4% to $1.49 billion, as total revenues increased 1.7% to $231.13 billion.

Operating income for the second quarter moved up 1.4% to $6.79 billion, trailing the modest sales growth — an important metric for Walmart management. Gross margin expanded 19 basis points to 24.75%, but as a result of the tepid sales performance, the margin erosion was aggravated by a failure to leverage operating, selling, general and administrative (OSG&A) expense, which grew 21 basis points to 19.41% of revenues.
Operating income for the half eked out a 1.3% uptick to $13.25 billion, as gross margin added 12 basis points to 24.46%, while the OSG&A ratio kept pace with a 12-basis-point increase to 19.21% of revenues.

In prerecorded remarks, senior vice president and treasurer Jeff Davis pointed out that Walmart’s core corporate expenses escalated 12.2% during the quarter, in part due to expenses related to the Foreign Corrupt Practices Act [FCPA] and compliance that rose to $82 million, above management’s projected range of $65 million to $70 million. Factoring out those items, he added, core corporate expense would have declined approximately 2.2%.

Second quarter net interest expense surged 9.5% to $553 million, largely as a result of the prior-year release of interest accruals on tax-related matters and higher debt balances, according to Davis. Year-to-date interest expense increased 4.1% to $1.08 billion, with the result that pretax income growth was slower than that of operating profit, edging up 0.8% to $6.24 billion for the quarter and adding 1.0% to $12.17 billion for the six months.

"We delivered a solid increase in earnings per share for the second quarter," president and chief executive officer Mike Duke said in a statement. "Consolidated net sales and our Walmart U.S. comp were below expectations. While the retail environment was challenging across all our markets, the Walmart U.S. and Sam’s Club businesses improved comp sales from the first quarter, and the growth of International sales was consistent."

Turning to Walmart’s different operating segments, operating income at the Walmart U.S. division (which includes Supercenters, discount stores, supermarkets and small-format stores), gained 5.2% to $5.52 billion on sales that advanced 2.1% to $68.73 billion.

Comparable-store sales for the division edged downward 0.3%, marking the second consecutive quarter of declining comparable-store sales (see adjacent story for detail on the top-line performance at Walmart U.S.).

Operating profit for the half expanded 5.5% to $10.85 billion on a slower 1.2% rise in sales to $135.28 billion as comparable-store results receded 0.8%.

At the Sam’s Club division, operating profit gained 3% to $551 million, outpacing a sales increase of 2.6% to $14.53 billion. Comparable-club sales expanded 1.7% both with and without the gas business included. Excluding fuel, net sales for Sam’s rose 2.4% to $12.8 billion. Membership fees and other income for Sam’s, however, fell 4.3% during the quarter.

First-half operating profit at Sam’s escalated 7.3% to $ 1.07 billion excluding fuel, while expanding 5.1% to $1.08 billion with gasoline factored in, as the division’s top line advanced 1.4% to $28.40 billion. Comparable-club sales, meanwhile, added 0.9% backing out gas revenues while increasing 0.8% with fuel’s contribution. On a comparable-store basis, customer traffic rose 2.7% during the quarter, but the average transaction lost 1.0%.

As noted above, results from Walmart’s international division showed a marked deceleration from the consistent double-digit growth of recent years, as the segment reported a 1.3% drop in operating income to $1.47 billion. Second quarter net sales rose 2.9% to $32.96 billion, but would have expanded 4.4% to $33.4 billion at constant exchange rates.

For the half, International’s operating profit declined 2.9% to $2.72 billion as sales moved forward 2.9% to $65.96 billion. "Across our international markets, growth in consumer spending is under pressure," said Doug McMillon, president and CEO of Walmart International. "Consumers in both mature and emerging markets curbed their spending during the second quarter, and this led to softer-than-expected sales."

With a disappointing quarter on the books at midyear, management has lowered its sights on both top- and bottom-line growth for the year.

Walmart projects that third quarter net earnings will range between $1.11 and $1.16 per diluted share, and expects earnings for the full fiscal year to come in between $5.10 and $5.30 a share, down from its previous forecast of $5.20 to $5.40 per share, while analysts are looking for $5.29 per share on average. Net sales, meanwhile, are now predicted to increase between 2% and 3%, compared with a prior prediction of 5% to 6% top-line growth.

"This guidance takes into account the challenging sales and operating environment," said chief financial officer Charles Holley. "As we’ve seen in the past, discrete tax items have had a meaningful impact on our effective tax rate and reported results in the back half of our fiscal years. We anticipate that a wider range of between 31% and 33% is now possible for our full-year effective tax rate, versus our previous range of 32% to 33%. In addition, we believe expenses for FCPA matters and compliance programs will be between $75 million and $80 million for both the third and fourth quarters."

As of July 31, the company operated 539 Walmart discount stores, 3,211 Supercenters, 621 Sam’s Clubs, 316 supermarkets (including the Neighborhood Market, Amigo and Supermercado banners), and 26 small-format stores (including Walmart Express, Walmart on Campus and Super Ahorros) in the United States. Internationally, Walmart operated a total of 6,242 units in Africa (366), Argentina (101), Brazil (566), Canada (380), Chile (334), China (396), Costa Rica (214), El Salvador (80), Guatemala (207), Honduras (74), India (20), Japan (437), Mexico (2,418), Nicaragua (80) and the United Kingdom (569).