Walmart earnings smash expectations after weaker second quarter from Target

Brooke DiPalma

Brooke DiPalma· ReporterThu, August 17, 2023, 7:30 AM EDT In this article: 

Walmart (WMT) is winning over US shoppers as inflation continues to take a toll.

In the retail giant’s second quarter earnings release, out before the market open on Thursday, Walmart posted same-store sales that rose 6.30%, more than the 4.04% expected, according to data from Bloomberg.

Foot traffic increased for Walmart, up 2.8%, along with a higher ticket, up 3.4%. Online sales rose 2.3% in the quarter.

“Our customers and members are resilient,” Walmart CEO Doug McMillon told investors on the earnings call. “They’re looking for value, and they trust us to be there for them. We see people across income cohorts come to us more frequently looking to save money on everyday needs. That gives us an opportunity to drive conversion in more discretionary categories.”

Meanwhile, its competitor Target (TGT), which reported Q2 results Wednesday, saw a 5.4% drop in sales and shared a dreary outlook for the rest of the year. This comes as consumers’ wallets remain pinched from ongoing headwinds like higher gas prices, a slowdown in the US job market, the looming return of student loan payments this fall, higher mortgage rates, higher interest rates, and higher costs for groceries.

Sales at Walmart’s wholesale business, Sam’s Club US, also got a boost last quarter, rising 5.5%, but that was slightly lower than estimates of up 5.58%. The back-to-school and automotive categories performed well as consumers packed their bookshelves and backpacks ahead of the back-to-school season.

“Typically, when back-to-school is strong, it bodes well for what happens with Halloween and Christmas and GM in the back half,” McMillon said. “I do think our food and consumables percent to total in Walmart US will still go up.”

In Q3, Walmart expects sales to increase by 3% and adjusted earnings per share to be between $1.45 and $1.50. Walmart also raised its full-year guidance. The retail giant expects sales to increase approximately 4% to 4.5% and lifted its earnings outlook to a range of $6.36-$6.46 from $6.10-$6.20 previously for the fiscal year.

Walmart stock fell by 1% in early trading Thursday.Walmart Inc. (WMT)View quote detailsNYSE – Nasdaq Real Time Price (USD)155.69-3.57(-2.24%) As of 3:06PM EDT.Market open.Add to watchlist

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The earnings rundown:

Here’s what Walmart reported compared with Wall Street estimates, according to Bloomberg data.

  • Net revenue: $161.6 billion versus $159.7 billion expected
  • Adjusted diluted EPS: $1.84 versus $1.70 expected
  • US same-store sales growth: 6.3% versus 4.04% expected
    • Sam’s Club US stores growth: 5.5% versus $5.58 expected
    • Walmart US same-store sales growth: 6.40% versus 4.29% expected
  • Traffic growth: 2.90% versus 1.63% expected
  • Ticket growth: 3.40% versus 2.00% expected
  • E-commerce growth: 2.30% versus 1.54% expected
  • Gross margin: 23.38% versus 23.55% expected
  • Inventory growth: -5.34% versus -5.54% expected
Walmart by the numbers (Credit: Yahoo Finance, Source: Walmart)
Walmart by the numbers (Credit: Yahoo Finance, Source: Walmart)

What stood out to us: Walmart US gaining market share across categories

E-commerce is a booming business for the retail giant.

In Q2, overall e-commerce net sales increased by 24%, led by pickup and delivery. Online sales now make up 15% of total sales, reaching $24 billion globally.

In the US, Walmart continues to gain market share, gaining high single-digit sales growth as grocery shoppers bought more food as well as pet and personal care products.

The company also noted that it saw growth in private label brands, which were up 40 basis points, a business it’s been bulking up in recent years.

“We’ve seen customers that are trading down from chicken and pork straight into chicken and ground beef, from things like shrimp and steaks,” Walmart CFO John David Rainey told Yahoo Finance. He added customers “are also trading into private label, and that’s about 20% of our business for Walmart US. And frankly, the quality of those items is much better than it was several years ago.”

A customer shops for a turkey at a Walmart store in Chicago, Illinois, U.S., November 20, 2018. REUTERS/Kamil Krzaczynski
A customer shops for a turkey at a Walmart store in Chicago, Illinois, U.S., November 20, 2018. (Kamil Krzaczynski/REUTERS)

Inflation in the grocery category remained sticky but moderated by 4% compared to last quarter.

Its health and wellness business also saw a high-teens increase in sales last quarter. The company cited strong pharmacy sales reflected in script counts, a higher mix of branded versus generic prescriptions, strength in immunizations, and branded drug inflation.

Since 2019, the retail giant has built up Walmart Health, aimed at making healthcare more accessible using the retailer’s existing US footprint of 4,684 locations.

Walmart was not immune to consumers moving away from discretionary items, however. Last quarter the company saw general merchandise sales drop by low-single digits in items like apparel, home goods, and sporting goods.

Meanwhile, in the background, Walmart is building up one of its side hustles. In the US, Walmart saw a 36% spike in advertising compared to last year. The company rebranded its media business in 2021 to Walmart Connect.

Guggenheim analyst Robert Drbul said the business could represent a multibillion-dollar opportunity for the company, given “Walmart’s vision, reach, and ambition.”

What else we’re watching: C-suite changeup

On Wednesday, Walmart announced Sam’s Club CEO and president Kathryn McLay is moving into a new role as head of the international division, replacing Judith McKenna who is retiring, effective Sept. 11, 2023.

As part of this change, Walmart US CEO John Furner outlined further executive changes in a letter to all Walmart employees obtained by Yahoo Finance.

Chris Nicholas, who previously served as COO and as CFO before that, was promoted to Sam’s Club US CEO and president. Kieran Shanahan, an exec in the International Operations division, was named executive vice president and COO for Walmart US.

What analysts were saying after earnings: 

  • “We remain encouraged for growth within WMT’s margin accretive initiatives which include +35% growth in advertising, marketplace, and WMT+ memberships which we estimate between 22-24 [million] members. Inventory management remains a strength as levels fell (5.6%) relative to total sales growth +5.9%.” -Oliver Chen, TD Cowen
  • “It was another solid quarter, causing WMT to raise its full-year guidance once again. With investors starting to look toward next fiscal year, we see plenty of levers for WMT to continue its strong momentum and grow margins. 1P e-commerce profitability seems to be at an inflection point. In addition, higher-margin businesses like advertising and 3P marketplace are growing faster than the core.” -Arun Sundaram, CFRA
  • “We expect the stock to trade higher today given the 2Q beat and raised FY23 guidance. … Expect some questions to emerge on TGT’s discretionary trends given WMT’s general merchandise improvement in 2Q.” -Kate McShane, Goldman Sachs

Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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