Wal-Mart Stores Inc. (WMT) shares slumped to a nine-month low on Thursday after Merrill Lynch (MER) lowered its rating on the stock, citing concerns over slowing sales and a tough economic outlook.

Analyst Virginia Genereux said that historically, Wal-Mart's sales outperform other retailers in slower economic times, but that may not happen now because its core lower-income customers are grappling with a troubling mix of steep energy prices, rising interest rates, and stricter credit card payment terms.

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The shares fell $1.37, or 3 percent, to $43.78 in morning trade on the New York Stock Exchange, their lowest mark since October.

Genereux lowered her rating on the stock to "neutral" from "buy." The shares have been stuck in a rut for about six years amid concerns about slowing domestic sales growth, a raft of lawsuits, and growing opposition to its U.S. expansion.

Nearly one-half of Wal-Mart's sales come from households earning $30,000 a year or less, Genereux noted. The average household spent $4,600 on energy in 2005, and costs have continued to rise this year, taking up a hefty chunk of the budgets for lower-income families.

To make matters worse, interest rates have risen dramatically, making home refinancing less attractive. Recent legislation that mandated higher minimum monthly credit card payments is also hitting lower-income consumers.

"Historically, Wal-Mart's (sales at stores open at least a year) have tended to outperform other retailers in slower economic times," Genereux wrote in a note to clients. "It is not clear, however, that Wal-Mart's comps will see the 'trade-down' lift this time, given these secular pressures on lower income consumers."

The downgrade came as Wal-Mart is remodeling hundreds of its stores as part of its effort to appeal to higher-income consumers who are less sensitive to energy costs.

The retailer already draws some 130 million customers to its U.S. stores each week, but Wal-Mart wants to encourage them to buy more higher-margin merchandise such as clothing, rather than just food and cleaning supplies.

Genereux said the remodeling efforts will likely pay off in the longer term, "but this is a difficult environment in which to execute those changes, and earnings could face more pressure in the intermediate term."

She also noted that weakness at home may increase the focus on Wal-Mart's international operations, where a series of recent acquisitions in Japan, Brazil and Central America have pressured margins.

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