Adds comments from conference call throughout

By Juveria Tabassum and Nicholas P. Brown

May 21 (Reuters) - Walmart WMT.O stuck to its conservative annual sales and profit targets on Thursday, driving shares down even as rising fuel costs drove bargain-hunting shoppers to its low-priced groceries and essentials.

U.S. retailers have flagged growing pressure on consumer spending this year, with sentiment falling to a record low in May and inflation posting its largest gain in three years.

Walmart's first-quarter operating income rose 5% to $7.49 billion, while net sales climbed 7.1% to $175.7 billion.

CEO John Furner, however, retained the company's annual forecast, which analysts have described as conservative: a net sales growth target of 3.5% to 4.5%, and earnings per share between $2.75 and $2.85.

The company said it expects net sales to be near the top of that guidance. Still, shares fell more than 4% on the conservative forecast.

"Walmart has been one of the few megacap retail names trading near multi-year highs, and an affirmed outlook for the full year simply was not enough to push shares higher," said Bryan Hayes, stock strategist at Zacks Investment Research.

The world's largest retailer by revenue has been largely insulated from weak spending as its scale helped it keep prices low despite tariffs and geopolitical volatility.

But with fuel prices touching $4 a gallon as the Iran war drags on, pressure is expected to increase on U.S. consumers. Costs of food - Walmart's top category - are particularly vulnerable as fertilizer grows more expensive.

Higher fuel costs, which Walmart tried to absorb in its delivery fulfillment operations, reduced the company's operating income in the first quarter by about $175 million.

"If the current elevated cost environment persists, we'd expect somewhat higher retail price inflation in Q2 and the second half of the year," said Walmart CFO John David Rainey.

Smaller rival Target TGT.N doubled its annual sales forecast to 4% on Wednesday, on increased investments in product mix and store payroll. But it also warned about a tough macro environment ahead.

Grocers Kroger and Albertsons provided conservative annual forecasts as they reported earnings this week.

U.S. CONSUMERS FEEL THE PINCH

The average fuel fill-up at Walmart's gasoline stations fell below 10 gallons for the first time since 2022 this quarter, indicating stress, Rainey said on a post-earnings call.

"We're not immune, we're not bulletproof to some of these things that are happening in the economy," Rainey acknowledged. "Fuel prices certainly weren't where they are right now when we gave our guidance at the beginning of the first quarter."

Furner, who took the reins in February, said Walmart was extending price rollbacks it started in the second half of last year.

"The consumer, especially here in the U.S., they're telling us they're feeling some pressure and they're looking to Walmart for value," he said.

Average transactions were up 3% in the first quarter from a 1.6% rise a year ago. But the amount spent per visit slowed to 1.1% from 2.8% a year ago.

"The translation here is that Walmart is taking real traffic share rather than simply riding price inflation," said Hayes.

Walmart said it expects second-quarter net sales to increase 4% to 5%, compared with estimates compiled by LSEG of a 5.09% rise. It forecast adjusted earnings per share of 72 cents to 74 cents, versus expectations of 75 cents.

The retailer has been attracting more higher-income shoppers who are seeking convenience and signing up for its delivery services.

E-commerce sales, a focus for Walmart, jumped 26% n the first quarter, and their contribution to total sales was up sharply from a year ago.