Carrefour’s Troubles Mount

French retail giant Carrefour SA, reeling from the collapse of a proposed merger in Brazil, predicted a 23% drop in first-half profit amid weak sales at home.

The world’s second-largest retailer, after Wal-Mart Stores Inc. of the U.S., said Wednesday that first-half operating profit will total about €760 million ($1.06 billion) when the French company unveils its bottom line next month. The expected results, down from a year-earlier operating profit of €989 million, largely stem from rising supplier prices in France and falling market share. Second-quarter sales rose 1.6% to €22.4 billion from €22.1 billion last year, Carrefour said.

“We were affected by an increasingly competitive environment which stiffened in May and June,” Chief Financial Officer Pierre Bouchut said during a conference call. The effects are likely to drag out through the year. Mr. Bouchut said Carrefour has a “handicap” to meet its full-year objective of increasing sales and operating profit.

France, which accounts for 44% of the company’s sales, was a punishing market for Carrefour. Sales in the country rose 1.6% to €9.86 billion thanks to a rise in gasoline prices. Many of Carrefour’s stores operate gas stations.

Efforts to revive Carrefour’s slumping hypermarket chain—huge stores that sell items as diverse as baguettes and bicycles—didn’t seem to register with consumers. Stripping out gas sales and the impact of a late Easter, hypermarket sales fell 3.3% and Carrefour said it lost market share. The retailer is in the midst of a €1.5 billion program to revamp its hypermarkets, a program that Mr. Bouchut says will now be accelerated to try to turn around sales.

Carrefour sought to contrast deteriorating sales in pockets of France, Spain and Italy with Brazil, a market that has been in the spotlight for weeks. Sales in Brazil, Carrefour’s second-largest market after France, increased 11% to €3.07 billion in the second quarter. Mr. Bouchut said the group’s cash-and-carry Atacadao chain was particularly robust, and that Carrefour is “stopping the bleeding” at 28 hypermarkets in Brazil that aren’t performing well.

The focus on growth in Brazil sought to bolster the idea that Carrefour can go it alone in the booming consumer market. Late Tuesday, a controversial merger plan between Carrefour and Cia. Brasileira de Distribuição, owner of the high-end Pão de Açúcar supermarket chain in Brazil, collapsed after the government-owned bank that was financing the project withdrew its support. Pão de Açúcar’s partner, Groupe Casino of France, a Carrefour rival, vehemently opposed the project.

Carrefour acknowledged the collapse of the potential deal. “The conditions necessary to the completion of this proposal have not been met,” Mr. Bouchut said. However, he left the door slightly ajar to a revival of the project if other investors come forward to bankroll the Gama investment vehicle created to take over Cia. Brasileira de Distribuição and merge with Carrefour. “If for whatever reason, Gama comes up with a new proposal, then our board could maybe decide to meet again,” he said.

Yet Carrefour is suffering even in some of its emerging markets. Sales in China, the other major emerging consumer market where retailers from around the globe are staking out their territory, were nearly flat. Carrefour said it has been affected by a new law prohibiting discounts on nonfood goods —electronics, furniture and clothing, for example—that it sells in its hypermarkets.

The dismal performance at Carrefour’s French hypermarkets is ushering in a new age of austerity. Mr. Bouchut said all of Carrefour’s units around the world will be expected to contribute to new cost-cutting measures. “We want to rapidly reverse our negative performance,” he added.

Mr. Bouchut also said Carrefour’s price strategy is off. The company has been plagued by an image of high prices for years. To correct that, Carrefour has invested heavily on promotions and loyalty programs.

But now, Mr. Bouchut said Carrefour is spending too much on such efforts and not enough on permanent low prices. Its French competitor Leclerc “has always been about 2% cheaper than Carrefour hypermarkets,” Mr. Bouchut said. Yet he expects the price increases from suppliers, who are passing on rising commodity costs, to hit his competitors in the coming months. Still, “our permanent prices are too high,” Mr. Bouchut said.