The market isn’t looking at the retail giant in the right way.
The market wasn’t impressed with the fiscal second-quarter results that Walmart (WMT -0.23%) reported last week. Despite management’s previously upbeat view that tariffs would not much impact the retailer, it turns out that tariffs are indeed taking a toll on its bottom line.
But even though that was the piece of the report that the market zeroed in on, there was a lot of pleasant news for shareholders as well, and the story as a whole demonstrates Walmart’s strengths as a retailer. Walmart has my confidence, and there’s one specific metric that tells the story best.
Keeping the customers coming
Walmart is the largest company in the world by sales, with $693 billion in trailing 12-month revenue. It operates 10,500 stores globally, including 4,600 in the U.S. Its massiveness gives it a lot of leverage. That itself is an edge over smaller retailers, which can’t match its prices and assortment.
Despite its size, Walmart still reliably grows its sales. In its fiscal second quarter, which ended Aug. 1, revenue increased 5.6% year over year on a currency-neutral basis. It enjoys a number of growth drivers, including new store openings, new and curated merchandising efforts, store expansions and redesigns, and, what’s most relevant for this discussion, comparable sales (comps).
Image source: Walmart.
Comparable sales growth is a crucial metric for companies like Walmart. Many companies can achieve revenue growth by opening new locations, but a strict focus on the top line can obscure the performance of Walmart’s established stores.
That’s why shareholders look at comps growth — to get a more nuanced take on how stores are doing. High comps growth implies that customers are loyal, that they’re buying more products more often, and that stores are attracting new customers. Companies often break down the comps figure into traffic growth, transaction growth, and ticket growth. Each of those metrics can add detail to the picture of what’s happening. Walmart’s comps increased 4.6% in the fiscal quarter, although management didn’t provide a more detailed breakdown.
For Walmart to keep its top spot in retail, it will have to keep customers coming through its doors and spending money, and that’s where it’s focusing its efforts.
Tariffs, profits, and what matters most
When President Donald Trump announced his broad tariffs on imports, Walmart said that it didn’t expect to be highly impacted by the new taxes. Much of the merchandise it sells in the U.S. is made domestically, and its size gives it unusual leverage with its suppliers, allowing it to push back against their moves to raise wholesale prices or to ask them to cut costs through methods like cheaper packaging. However, in the August update, management said that tariffs are taking a toll on Walmart’s profits.
Wall Street analysts had been predicting the company would report $0.74 in adjusted earnings per share (EPS), and Walmart reported only $0.68 per share. That more than 9% miss is a big deal. Management blamed it on several factors, including general liability and workers’ compensation claims, but also pointed to higher costs due to tariffs. It also said that it expects those tariff-driven costs to keep climbing through the rest of the year.
Walmart is highly focused on giving customers the greatest value to keep them shopping in its stores, and it watches the competition carefully to ensure there’s a price gap between them. It absorbs some costs when necessary to make that happen. That affects the bottom line, but its top line is thriving.
CFO John David Rainey also pointed out that despite the miss on earnings and its expected increases in costs ahead, management isn’t changing its full-year outlook for operating income. It did raise its full-year guidance for revenue growth to a range of 3.75% to 4.75%.
The market is getting it wrong
If Walmart is feeling pressure from tariffs, it can be understood that all retailers are. Other retailers don’t necessarily have Walmart’s domestic producers or its leverage with suppliers. Smaller companies also won’t have the capacity to absorb as much of those higher costs as Walmart, so higher prices elsewhere are likely to drive customers to do more of their shopping at Walmart.
Walmart is in a very different operation than it was a few years ago. It has developed a robust e-commerce and omnichannel ordering system, and since it uses its stores as distribution centers, it can get orders out to customers more quickly than most competitors. Its e-commerce sales growth accelerated to 25% year-over-year in fiscal Q2, and orders delivered from stores increased by 50%. Orders delivered from stores within three hours made up a third of that total. That’s hard to beat.
It has also expanded its product assortment to cater to a more upscale clientele, and higher-income shoppers had the highest comps growth in the quarter. So even though it’s still the discount king, it has a wider consumer base. As it gets more customers into its stores, it has the real chance to make them lifetime loyalists.
Walmart’s main category is groceries, which everyone has to buy. Higher costs won’t prevent people from buying food, but it may cause them to shift where they shop. By keeping its prices low, it’s generating higher comparable sales and widening its advantage. That’s a great green flag for its future.
