US groceries-to-general merchandise giant Walmart (NASDAQ:WMT) delivered forecast-beating Q2 results on 20 August. And the world’s biggest retailer raised its FY27 earnings guidance, drawing confidence from market share gains at home and abroad.
So why did the shares plunge almost 10% to $103.84 on Wall Street despite this impressive ‘beat-and-raise’ quarter?
| Share price: $103.84 (-9.2%) | Market cap: $826bn |
| PE FY27: 36x | Yield FY27: 0.95% |
Source: Marketscreener.com
Well, Walmart’s US comparable sales were their weakest in over six years. And Q3 guidance also disappointed the market.
Investors were left wondering if the hitherto resilient US consumer is finally feeling the strain from higher gas prices.
Sales growth decelerates
For the quarter to July, Walmart posted adjusted earnings per share (EPS) of $0.81 on a 5.9% increase in total revenues to $187.9 billion, beating estimates of $0.74 and $186.8 billion respectively. Global ecommerce sales surged 23%, while global advertising revenue increased 38% and membership fee revenue grew 17%.
Constrained by federal price caps on prescription drugs, Walmart’s US comparable sales still rose by a respectable 2.6% year-on-year.
| Q2 FY27 | Q1 FY27 | |
| Net sales ($bn) | 125.2 | 117.2 |
| US comparable sales (%) | 2.6 | 4.1 |
| Transactions (%) | 1.5 | 3 |
Source: Walmart Inc, quarterly earnings reports
However, this was a significant slowdown from Q1’s 4.1% increase. It also represented the slowest rate of growth since late 2019. Transactions were up by a modest 1.5%, versus the 3% increase seen in Q1.
Soft guidance weighs
The Bentonville-based behemoth raised its FY27 sales guidance from the 3.5% to 4.5% range to between 4% and 5%. Walmart also hiked its adjusted EPS outlook from between $2.75 to $2.85 to the $2.80 to $2.87 range.
But Q3 guidance proved soft. Walmart forecast net sales growth of between 3% and 3.75% and adjusted EPS of $0.62 to $0.64, which was below the $0.68 consensus estimate.
Price, speed and convenience
‘Our team delivered another good quarter, and we continue to make steady progress on the long-term value drivers of our business,’ said CEO John Furner.
‘Our multi-year growth in ecommerce is evidence that customers are choosing Walmart because we deliver price, speed, and convenience across a broad assortment. At Walmart, they can have it all.’
CFO John David Rainey said Walmart’s operating income outlook reflects the ‘continued prioritisation of tariff refunds received in Q2 into customer experience and price investments in the second half’.
For this reason, he urged sceptical investors ‘to consider Q2 and Q3 performance together to assess the underlying growth of the business’.
Walmart’s shares have more than doubled over the past five years and the retail colossus joined the $1 trillion market cap club earlier this year. This surge reflected investor excitement surrounding its market share gains, ecommerce progress and the potential of its advertising business.
But this rapid ascent left the stock ‘priced for perfection’. Walmart’s elevated valuation meant there was scant room for disappointment. And this is why the shares tumbled on weaker-than-expected US comparable sales and soft Q3 guidance.
Evidence is mounting that the lower income US consumer is feeling the pinch from inflationary pressures, with US retail sales down 0.6% in July. But this squeeze should play to the value-focused retailer’s strengths.
Walmart is reinvesting almost $2.9 billion in tariff refunds to cut prices for hard-pressed US shoppers. While this will impact profits in the short term, it will drive market share gains over the long term.
US competitor Target (NYSE:TGT) has rediscovered its mojo, but it is too small to put a significant dent in Walmart’s market share any time soon. For these reasons, we regard the Walmart sell-off as an overreaction that has created a compelling entry point for patient investors.
