Walmart Stores Inc posted better-than-expected earnings on cost cuts, and forecast full year earnings that could beat Wall Street estimates, sending its shares up 1.6 percent.

But its key metric of sales at stores open at least a year fell unexpectedly and its chief executive said the economy will remain challenging in the short term.

Our customers are more disciplined in their spending, said CEO Mike Duke on a recorded call. He said customers are saving more and consuming less.

The retailer also said on Thursday that sales at its U.S. stores open at least a year fell 1.2 percent. Wall Street on average expected a gain of 0.85 percent.

Telsey Advisory Group analyst Joseph Feldman was disappointed in the decline in same-store sales, but he noted the company outperformed its rivals despite a stronger dollar and the recession. He also noted the company raised the low end of its annual guidance.

Without question, the company continues to operate well in a challenging environment, he added.

Walmart's Duke said the company would focus even more on reducing expenses.

Net income fell slightly at $3.44 billion from $3.45 billion. Earnings per share rose to 88 cents from 87 cents, as the company has a lower outstanding share count in this year's second quarter. Analysts on average were expecting 85 cents a share, according to Reuters Estimates.

Total sales fell 1.4 percent to $100.08 billion in the quarter, pressured by the stronger dollar, which cuts the dollar value of sales made outside the United States. Sales rose 2.7 percent to $104.28 billion on a constant currency basis.

For the current third quarter, the company, which has dropped the hyphen from the name of its stores and now refers to them as Walmart, expects earnings per share from continuing operations of 78 cents to 82 cents. The average Reuters estimate was 80 cents a share.

For the 13 weeks ended October 30, the company forecast U.S. same-store sales to be flat to up 2 percent, with same-store sales at its Sam's Club to be flat, plus or minus 1 percent.

The stores have been gaining market share during the recession, as shoppers head to its stores for discount prices on groceries, shampoo, household cleaners and flat-screen TVs.

But it said in May that it would stop posting sales on a monthly basis, leaving analysts to guess how it fared in the second quarter compared with last year, when it was helped by rising food and fuel prices, and consumers spending tax rebate checks in its stores.

For the year, the company forecast earnings from continuing operations of $3.50 to $3.60 a share. Analysts on average forecast $3.53, according to Reuters Estimates.

Sales at Walmart stores in the United States rose 0.3 percent in the second quarter to $64.21 billion, while they fell 3.2 percent to $11.91 billion in Sam's Club warehouse locations.

In the company's international division, sales fell 5.1 percent to $23.97 billion, but on a constant currency basis international sales increased 11.5 percent to $28.16 billion.

Walmart shares were up 79 cents to $51.30 in premarket on Thursday.

(Reporting by Nicole Maestri and Brad Dorfman; Editing by Lisa Von Ahn and Derek Caney)

Walmart