Aug. 14 (Bloomberg) -- Wal-Mart Stores Inc., the world's largest retailer, said second-quarter profit rose less than analysts anticipated and lowered its earnings forecast, causing the stock to fall the most in more than five years.

Full-year profit will be as much as $3.13 a share, 10 cents lower than its earlier forecast, after sales of apparel and home goods faltered, the company said today.

Sales at older stores rose 1.9 percent in the second quarter and are headed for their smallest annual gain since at least 1980. Chief Executive Officer H. Lee Scott has failed to lure customers with price cuts on back-to-school and holiday items as higher gasoline and housing costs have curtailed consumer spending.

``We're not victims,'' Chief Financial Officer Tom Schoewe said in an interview. ``While it's not the best macroeconomic environment, there's a significant retail opportunity out there, and we need to do a better job of capturing that.''

Net income increased 49 percent to $3.1 billion, or 76 cents a share. Excluding one-time items, profit was 4 cents less than analysts' estimates. A year earlier, Wal-Mart earned $2.08 billion, or 50 cents, after costs to exit Germany.

Revenue rose 8.9 percent to $93 billion for the quarter ended Aug. 3, the Bentonville, Arkansas-based company said.

``When the low-end consumer isn't shopping, it's tough even for Wal-Mart to make their numbers,'' said Eric Beder, an analyst at Brean Murray Carret & Co. in New York.

Wal-Mart fell $2.35, or 5.1 percent, to $43.82 at 4:11 p.m. in composite trading on the New York Stock Exchange. The stock has declined 5.1 percent this year, compared with a 5.3 percent gain by Target Corp., the second-largest discount chain.

Analysts' Estimates

Charles Grom, an analyst at J.P. Morgan Securities Inc. in New York, downgraded Wal-Mart to ``neutral'' from ``overweight'' today, citing economic pressures into next year.

Grom had upgraded Wal-Mart in June after the company said it would open fewer new U.S. supercenters. Efforts to improve results haven't been successful, he said.

``The company and this management has suffered a credibility blow that will take time to overcome,'' wrote Grom. ``The timeframe around such a turnaround will likely be measured in years, not months.''

Virginia Genereux, a New York-based analyst with Merrill Lynch & Co., also downgraded Wal-Mart to ``neutral'' from ``buy.''

Profit included a net benefit of $171 million after tax, or 4 cents a share, after reduced liability and compensation costs and real-estate sales, Wal-Mart said. Excluding that, Wal-Mart earned 72 cents. Eighteen analysts surveyed by Bloomberg estimated average profit of 76 cents.

Last year's second quarter included a charge of 22 cents after Wal-Mart sold its 85 stores in Germany to Metro AG.

Profit Forecast

The company forecast third-quarter profit of as much as 65 cents a share, less than the 68 cents estimated by analysts.

Full-year profit will be from $3.05 to $3.13, less than the $3.15 to $3.23 range the company previously forecast. Analysts had estimated average earnings of $3.16.

At least eight analysts reduced their estimates in the past week after Wal-Mart's U.S. stores chief Eduardo Castro- Wright said Aug. 9 that price cuts hurt the company's profit margin.

Sales in Wal-Mart's international division grew 16 percent to $21.6 billion, or 23 percent of the company total. Argentina, Brazil and China led the gains. U.S. sales climbed 6.5 percent.

Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 23.3 percent from 23.6 percent.

Price Cuts, Markdowns

Price cuts, markdowns to clear out unsold goods, and the mix of merchandise contributed to the contraction, Schoewe said.

``U.S. consumers continue to be under difficult pressure economically,'' Scott said on a recorded conference call. ``It is no secret that many customers are running out of money toward the end of the month.''

Higher gasoline prices, slowing home sales and rising mortgage rates have curtailed discretionary purchases. Consumer spending, which makes up about 70 percent of the economy, slowed to a 1.3 percent annual growth rate in the second quarter, the weakest since 2005.

Third-quarter sales at stores open at least a year will be from 1 percent to 3 percent, Wal-Mart said. Last year, same- store sales climbed 2.1 percent, the smallest annual gain since Wal-Mart began tracking them in 1980.

Wal-Mart ``has really stubbed their toe over the last two years'' trying to sell more profitable home goods and clothing, Beder said. The company ``needs to figure out where they want to be in apparel. Right now, they don't really have a cohesive strategy.''

Target Success

Target, which reports financial results Aug. 21, has attracted shoppers with designer goods such as a $20 cosmetic brush set by make-up artist Sonia Kashuk.

Wal-Mart last year backed off efforts to promote higher- priced goods and shuffled top executives to reinvigorate sales growth. Claire Watts, the company's apparel chief, resigned last month.

The company is ``behind where we had hoped to be,'' in clothing and home sales, Schoewe said. Improvements have been faster than the company expected in grocery, electronics, and pharmacy, he said.

Wal-Mart is pleased with its back-to-school sales, Schoewe said, although ``they're coming later than we had initially expected.''

Wal-Mart operates more than 7,000 stores worldwide, including 4,100 in the U.S. and 930 in Mexico.

(Wal-Mart executives discuss second-quarter earnings on a recorded call at +1-203-369-1090.)

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: August 14, 2007 16:20 EDT