Wal-Mart Stores said that US customers are responding positively to its focus on fresh food, particularly produce, as it looks to reverse weak domestic traffic trends and declining comparable store sales.

The company said yesterday (15 August) that second-quarter sales have come in “below expectations”. In particular, the company saw a drop-off in its domestic business, where a 2% payroll tax hike, low inflation – particularly in grocery – and lower discretionary spending hit US Wal-Mart Stores and Sam’s Club sales.

Comparative sales were down 0.6% in the market, compared to a 2.8% increase in the second quarter of last year. Traffic dipped 0.5%, the retail giant added.

Domestic comps were negatively impacted by damp consumer sentiment, which has been hit by concerns over employment, food and energy costs and the payroll tax, CFO Charles Holley said during a media call to discuss the result.

“We monitor what the concerns are for our customers quite frequently – jobs/employment still remains number one, food costs – even though there is some deflation. I think it just reflects food cost in general. Gas and energy prices would be number three. Then as it relates to the pay roll check reversal,” he suggested.

Although, according to the Thomson Reuters/University of Michigan index, consumer sentiment hit a six-year high in July, Holley maintained that the US retail giant was witnessing a drop-off in consumer optimism. “All I can tell you is what we read with our customers and our sales,” he commented.

While sales missed expectations, CEO Mike Duke emphasised that the retailer saw a sequential improvement from the first quarter – a trend that Wal-Mart believes will continue in the back half of the year.

“We are executing plans to strengthen our top line performance for the rest of the year and expect sequential improvement in the back half,” he insisted.

Duke also emphasised that traffic trends improved as the weather brightened and consumers responded positively to Wal-Mart’s increased focus on fresh food. “Traffic trends improved throughout the second quarter as weather normalised and customers responded favorably to the improved quality in our fresh offerings, especially produce.”

Commenting on the US result, country chief Bill Simon added that, while overall grocery comparable sales were “slightly negative”, net grocery sales were up US$1bn in the quarter.

Wal-Mart witnessed lower-than-expected inflation, and in some cases deflation, in dry grocery, frozen and snacks and beverages. However, Simon flagged the gains Wal-Mart has achieved in produce.

“Our produce business also continued to gain momentum, delivering a strong mid single-digit comp. We’re getting more efficient at transporting the product from farm to shelf. We’re executing weekly store audits and equipping associates with additional skills and tools to ensure quality and freshness. We’re also letting our customers know about it through our ‘fresh over’ marketing campaign and our new 100% money back guarantee,” he suggested.

“What’s even more encouraging was that we saw consistently improving comps in produce throughout the quarter, with a high single-digit comp in July.”

William Blair & C0. analyst Mark Miller took a more downbeat view of the result. In a note to investors, Miller described the declining traffic as a “concern” and suggested that the firm is losing market share in the US.

“Macro issues are contributing to the weakness (higher payroll taxes and lower inflation), but the company continues to lose ground to key competitors, including Costco, Amazon and the dollar stores,” he warned in a note to investors.