Walmart Beats, Raises, and Falls 7%: Here's Why

Image Source: StockCharts

None of it mattered. The market looked past the quarter and focused on two things: how Walmart earned those numbers, and what it told investors about the next three months.

The Comp Line Decelerated Sharply

Walmart U.S. comparable sales rose 2.6% excluding fuel. That is a solid number in absolute terms, but it represents a meaningful slowdown from the 4.6% posted in the year-ago quarter and from the 4.1% Walmart delivered just last quarter. More uncomfortably, it trailed the 3.8% comp Target posted one day earlier.

The composition is where it gets uncomfortable. Transactions grew 1.5%, down from 3.0% in the first quarter — traffic growth effectively halved in a single quarter. Average ticket rose just 1.1%, unchanged sequentially but well below the 3.1% of a year ago. For a retailer whose entire bull case has rested on winning customers rather than raising prices, that transaction deceleration is the number that will draw scrutiny.

In fairness, there is a legitimate explanation for part of it. Management disclosed a 125-basis-point headwind to comp sales from pharmacy deflation tied to the new maximum fair price regulation effective January 1^st. Add that back and the underlying comp lands closer to 3.9%, which reframes the quarter considerably. That is a regulatory pricing effect, not a demand problem — and investors who ignore it will misread the business.

The Profit Beat Was Borrowed From the Second Half

Here is the crux of the selloff. Operating income surged 28.8%, or 17.4% on an adjusted constant-currency basis, and the consolidated gross profit rate expanded 96 basis points. Impressive figures — but Walmart itself told you not to take them at face value.

The company stated plainly that the operating income growth “includes the impact of tariff refunds received, partially offset by price investments in the quarter,” and that “setting aside this net impact, underlying operating income growth was at the top end of our guidance.” Top end of guidance is roughly 8%. Reported was more than double that.

CFO John David Rainey was even more direct: “Our operating income outlook reflects the continued prioritization of tariff refunds received in Q2 into customer experience and price investments in the second half. For this reason, I encourage you to consider Q2 and Q3 performance together to assess the underlying growth of the business.”

That is a CFO telling investors, in plain language, that the second quarter was flattered and the third quarter will be depressed — and to average them. Once you internalize it, an 11% EPS beat stops looking like an inflection.

The Third-Quarter Guide Is the Real Problem

Management guided third-quarter net sales growth of 3.0% to 3.75% in constant currency, operating income growth of just 2.0% to 4.0%, and adjusted EPS of $0.62 to $0.64. That last figure compares to $0.62 in the year-ago quarter — implying flat to roughly 3% growth. The implied revenue guide of about $185.6 billion sits about 1.4% below where the Street was modeling.

Going from 17.4% adjusted operating income growth to a guided 2.0% to 4.0% is a violent deceleration, even with the tariff-refund explanation and a stated 100-basis-point-plus headwind from the timing shift of Flipkart’s Big Billion Days between the third and fourth quarters. For a stock trading at a substantial premium to the market, a quarter of essentially zero earnings growth is not what shareholders were underwriting.

The raise itself also deserves a closer look. Full-year adjusted EPS guidance moved to $2.80–$2.87 from $2.75–$2.85 — a five-cent bump at the midpoint against an eight-cent quarterly beat. Management effectively banked less than it earned. Capital expenditures were simultaneously raised to approximately 4.0% of net sales from 3.5%, which on a $700-billion-plus revenue base is a substantial increase in spending.

Target Just Outgrew Walmart

The comparison that matters most this week is Target, which reported Wednesday morning and delivered numbers that would have been difficult to imagine a year ago. Comparable sales rose 3.8%, well ahead of the 2.4% Street consensus, driven by traffic growth of 3.6%. Net sales climbed 5.3% to $26.5 billion, with digital comps up 8.7% and same-day delivery up more than 25%.

Set the two side by side. Target TGT grew comps 120 basis points faster than Walmart WMT and grew traffic more than twice as fast — 3.6% against 1.5%. For the better part of three years, the prevailing story in mass retail has been Walmart steadily taking share from a struggling Target. This quarter, that reversed.

One important caveat cuts in Walmart’s favor. Target’s headline EPS of $4.11 included $1.65 per share from tariff refunds — roughly 40% of reported earnings. Strip that out and Target earned closer to $2.46, with ex-refund full-year guidance of $8.25 to $9.25 sitting far below the $9.90 to $10.90 headline range. Walmart’s tariff benefit ran through operating income but was largely offset by price investments, leaving its adjusted EPS uninflated.

On an underlying basis, then, the gap narrows considerably. Adjusted for pharmacy deflation, Walmart’s roughly 3.9% comp and Target’s 3.8% are essentially level. Even so, Walmart is no longer the unambiguous winner in mass retail it was twelve months ago.

Read-Through for Retail

Three conclusions follow for the broader sector. First, the consumer is intact but increasingly value-driven. Ticket growth has stalled almost everywhere. That favors scale grocers and warehouse clubs and continues to pressure mid-tier discretionary retailers with no price advantage.

Second, tariff refunds are distorting reported profitability across retail. Home Depot HD, Lowe’s LOW and Walmart have all now cited IEEPA refunds in the same week. Investors should assume any retailer’s second-quarter margin beat contains some portion of this benefit and adjust accordingly.

Third, the bar has been reset. When the sector’s strongest operator beats by 11%, raises guidance, and still falls 7%, it signals that valuations across quality retail have gotten ahead of the earnings trajectory.

Bottom Line

Walmart entered this report with a Zacks Rank #3 (Hold) and a positive Earnings ESP of +0.96% — our model called the beat correctly. The harder question is what happens to estimates now.

The full-year raise argues for modest upward revisions. The third-quarter guide argues for downward revisions to near-term numbers. Those largely offset, which likely keeps the rank anchored.

The long-term story remains genuinely strong: accelerating eCommerce, a 38%-growth advertising business, and expanding membership. But the market has finally drawn a line on paying a premium multiple for growth that depends on one-time tariff recoveries and decelerating traffic. Today’s reaction is not a verdict on the franchise — it is a verdict on the price.

7 Best Stocks for the Next 30 Days

Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."

Since 1988, the full list has beaten the market more than 2X over with an average gain of +23.9% per year. So be sure to give these hand picked 7 your immediate attention. 

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research