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Like its customers, Wal-Mart is struggling

In this June 7, 2013 file photo, Doug McMillon, President and CEO, Wal-Mart International, speaks at the shareholders meeting in Fayetteville, Ark. Wal-Mart Stores on Monday, Nov. 25, 2013 announced that CEO and President Mike Duke is stepping down from those posts, and named McMillon as his successor, effective Feb. 1, 2014.
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The world’s biggest retailer is struggling—and it doesn’t expect things to get better any time soon.

In its quarterly financial report released today, Wal-Mart Stores chopped its annual profit forecast as it eked out a 0.6% profit increase in the second quarter. While skimpy, the profit rise was a modest improvement over first and fourth quarters when profits tumbled by more than 5% and 20%.

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As the largest US retailer—and private sector employer—Wal-Mart holds a particularly important position in the US economy. For years, its focus on delivering rock-bottom prices to America’s most cost-conscious consumers bore fruit. (Year-on-year profit growth averaged 13% between 1999 and the end of 2007.)

But while the broader economy has picked up, the lower-income Americans who are Wal-Mart’s core customers continue to struggle. During the worst of the recession, Wal-Mart Stores and other discounters noticed a shopping cycle timed to the deliver of US food stamp benefits.

The company’s profits remain linked to the government payments that many of its consumers rely on. The expiration of a temporary boost in food stamps in November 2013 slammed the company’s fourth-quarter profits, helping to drive them down by more than 20%. And the decline in nutritional assistance to poor Americans continues to weigh on Wal-Marts results.

Wal-Mart and the other discounters that focus on delivering low prices are basically facing a fundamental problem. Their customers don’t have money for anything but absolute necessities, which means food, a low-margin product category. And that’s not exactly a recipe for robust margin growth or profits.

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