NEW YORK (Dow Jones)–Wal-Mart Stores Inc.’s (WMT) fiscal second-quarter earnings rose 3.6% on continued international strength, but U.S. operations remain a drag on results.

Bill Simon, head of Wal-Mart’s U.S. business, said the company faces challenges that have perhaps accelerated, as U.S. customers continue spending cautiously, especially on discretionary products. Food stamps continue to increase as a form of payment while credit cards now only represent about 15% of spending, he said. U.S. same-store sales have now fallen five straight quarters.

Wal-Mart came into the report after a management shake-up and Simon, recently named to his post, said: “We’ve set out a clear direction for change in our business and believe this will put us on a track to see improvement by the fourth quarter.”

Wal-Mart’s international operations continued its momentum, seeing double-digit sales and operating income growth during the quarter. China continues to be a focus for the retailer, opening seven stores during the second quarter and comparable-store sales rose 6.1%. While customers are buying more during each trip, they are making fewer trips to Wal-Mart’s stores in China. Comparable-store sales in Wal-Mart’s Seiyu stores in Japan rose 1.6%. Wal-Mart attributed increased visits to its Japan stores to its everyday low-price model, which differs from the country’s traditionally more sales oriented approach to retailing.

But Wal-Mart’s Asda Group, the U.K.’s second-largest supermarket operator, said second-quarter sales fell.

“Our leadership team across the company has never been stronger, or more focused on our priorities of growth, leverage and returns,” said Chief Executive Mike Duke. “As we build the next generation Wal-Mart, we’re confident about the future of our business.”

Duke’s comments followed an organizationally tumultuous time for Wal-Mart, which saw a shake-up that started with the late June reassignment of U.S. operations chief Eduardo Castro-Wright.

Castro-Wright was replaced by Simon, who was serving as chief operating officer for the U.S. stores, and a few days later Wal-Mart said its chief merchandising officer, John Fleming, was leaving. Castro-Wright, who is now heading Wal-Mart’s online unit, and Fleming, came under pressure as a Wal-Mart strategy that included sharply reducing the number of items that stores carried didn’t pan out and sales suffered.

Wal-Mart’s sales had jumped at the beginning of the recession, as consumers looked for lower-costing products. But some efforts the company has recently taken, including sharply rolling back prices, haven’t paid off and are being scuttled in favor of a more back-to-basics approach. Wal-Mart is adding products it had removed and also returning to certain locations merchandise in main traffic aisles.

The retailer continues sprucing up its stores and may begin seeing some benefit from food price inflation and easier comparisons against U.S. same-store sales that began weakening a year ago. Right now though, the frequency of customer visits is down.

For the period ended July 31, Wal-Mart reported a profit of $3.6 billion, or 97 cents a share, up from $3.47 billion, or 89 cents a share, a year earlier. Earnings were aided by expense controls and share repurchases. In May, the company had projected earnings of 93 cents to 98 cents. Revenue climbed 2.8% to $103 billion. Analysts expected earnings of 96 cents per share on sales of $105.4 billion, according to Thomson Reuters. In the year-ago period, Wal-Mart earned 88 cents per share on sales of $100.91 billion.

Gross margin fell to 24.7% from 25.1% in the latest quarter from last year, partially as the company cut back prices sharply.

International sales rose 11% and earnings jumped 17%. But namesake domestic stores had a 0.2% profit drop as same-store sales declined 1.8%. Wal-Mart had projected comparable-store sales in the U.S. would be up 1% to down 2% in the period. The company’s warehouse club chain Sam’s Club had 2.2% earnings growth and a 1% rise in same-store sales excluding fuel. Overall, U.S. same-store sales minus fuel were down 1.4%.

Wal-Mart raised its full-year earnings forecast by a nickel to $3.95 to $4.05 a share, putting it more in line with analysts’ latest expectations, and forecast a profit of 87 cents to 91 cents for the third quarter. Analysts surveyed by Thomson Reuters expected 91 cents. In boosting the year’s target, Chief Financial Officer Tom Schoewe noted “strength of our underlying operating performance of our first two quarters, despite the challenges facing Wal-Mart U.S. in the short term, and the current economy.”

Shares are up 1.7% to $51.25.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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