Walmart boosts outlook as cost-sensitive environment works to its advantage

The news: Walmart reported better-than-expected Q2 results and raised its full-year outlook thanks to healthy spending from its customer base—which includes a growing number of high-income households.

• US comparable sales excluding fuel grew 4.2% year over year (YoY)—an acceleration from the previous quarter—due to a 3.6% YoY increase in the number of transactions and 0.6% growth in average ticket size.
• Revenues rose 4.8% YoY to $169.34 billion, ahead of LSEG’s $168.63 billion consensus estimate.
• Walmart now expects net sales to grow between 3.75% and 4.75% in FY25, up from its previous guidance of 3% to 4% growth; and adjusted earnings of between $2.35 and $2.43 per share, an upgrade from its prior forecast of $2.23 and $2.37.
• However, like Amazon, the retailer cautioned that there is a degree of uncertainty around spending in the second half of the year given the potential for the 2024 election and other geopolitical events to destabilize consumer sentiment.

Zoom out: On the whole, Walmart is confident in the health of the consumer. The retailer hasn’t seen any signs of weakening, although shoppers continue to be “choiceful, discerning, value-seeking,” and focused on essentials over discretionary items, CFO John David Rainey told CNBC.

• That confidence is reflected in July’s upbeat retail sales report. Sales rose 1% month over month (MoM)—the biggest gain since early 2023—and 2.7% YoY, helped by increases in auto and parts, electronics and appliances, and food and beverage sales, per the US Commerce Department.
• Consumers are also showing more interest in discretionary items again, Walmart said: General merchandise sales were positive in Q2 for the first time in 11 quarters, thanks in part to the retailer’s growing selection (itself the result of marketplace growth) as well as lower prices.
• However, it should be noted that—as in previous quarters—most of Walmart’s gains in Q2 came from higher income households, who are not only feeling more confident about the state of the economy but also have more discretionary income to spend, while lower-income consumers keep a tighter grip on spending.

The flywheel is turning: Ecommerce was another bright spot for Walmart in the quarter, which in turn is fueling its advertising business as well as Walmart+ adoption.

• US online sales grew 22% YoY in Q2, while weekly active customers grew 20%—a sign that, as with Amazon, the retailer’s investments in faster delivery, as well as its efforts to expand the selection on its marketplace, are encouraging more shoppers to order online, and order more often.
• That in turn is boosting its advertising business. Walmart Connect revenues rose 30% YoY, helped by a nearly 50% increase in ad sales from marketplace sellers.
• Over half of Walmart’s operating income growth in the quarter came from advertising and membership; the two categories are expected to account for more than 20% of the retailer’s income this year, Rainey told Barrons in May, as part of its strategy to grow profits faster than sales.

The big takeaway: Walmart is ideally positioned to capitalize on consumers’ search for value—not only with its ability to offer lower prices than competitors, but also with its continued investments in convenience, which makes its offerings stickier for households of all income levels.