Walmart (NYSE:WMT) reported results on Thursday showing that U.S. consumers are still shopping at its stores despite economic headwinds. However, shares fell after margins weakened and inventory costs rose.
The world’s largest retailer has gained market share from rivals, as wealthier shoppers turn to Walmart to offset tariff-driven price pressures. This shift helped fuel an 85% surge in Walmart’s stock over the past 18 months. Analysts now argue the valuation looks stretched.
Shares slipped 4% in midday trading after Walmart posted its first earnings miss in more than three years. Second-quarter profit fell short, with adjusted EPS at 68 cents, missing the forecast of 74 cents. Walmart’s 12-month forward P/E ratio of 36.64 is nearly double the industry median and almost three times higher than Target’s.
Margins disappoint despite strong sales
Gross margins came in weaker than expected. U.S. margins rose 26 basis points, but overall margins were flat at 24.5%, missing consensus forecasts of 24.9%, according to D.A. Davidson.
“Expectations were high for a margin beat and we didn’t get that,” said Steven Shemesh, analyst at RBC Capital Markets.
Still, revenue remained strong. Walmart reported $177.4 billion in Q2 revenue, beating the average estimate of $176.16 billion, according to LSEG data.
Tariffs weigh on costs
CEO Doug McMillon said tariffs continue to push costs higher. As inventory is replenished at post-tariff levels, expenses rise week by week. Walmart warned it would raise some prices this summer to offset the added burden, drawing criticism from President Donald Trump.
An S&P Global survey showed July business input prices hit a three-month high, largely due to tariffs. Rival Target also warned about rising cost pressures.
E-commerce growth boosts performance
Walmart’s online sales rose 25% in Q2, with one-third of deliveries completed in three hours or less. Its marketplace sales surged 40%, with strong demand in electronics, toys, automotive, and gaming.
Shoppers adjust to higher prices
Middle- and lower-income households are adjusting by buying fewer items or switching to private-label brands, while higher-income households, earning above $100,000, have yet to make such changes.
Walmart raised its full-year sales forecast to growth of 3.75%–4.75%, compared to its prior 3%–4% range. Adjusted EPS is now expected at $2.52–$2.62.
CFO John David Rainey said Walmart remains cautious given trade policy uncertainty, though the impact of higher costs on margins may be smaller than feared.
Resilient consumer demand
Despite cost pressures, Walmart’s U.S. comparable sales rose 4.6%, above the 3.8% forecast. Average spending per transaction increased 3.1%, while customer traffic slowed to 1.5% from 3.6% a year earlier.
Discounts remain popular, with shoppers responding to over 7,400 “rollbacks”, 30% more than last year on grocery items. About two-thirds of Walmart’s U.S. products are domestically sourced, giving it some protection from tariffs compared to rivals.
