Walmart falls after eating some tariff costs; Target and Costco also lower

[Prince Frederick, Maryland USA]
Alexander Farnsworth

Walmart's (NYSE:WMT [https://seekingalpha.com/symbol/WMT]) Q2 results looked strong on the surface as revenue rose 4.8% to $177.4 billion, driven by robust e-commerce growth of 25% and notable gains in advertising. Comparable sales also topped expectations and were well above the retail sector average. However, adjusted earnings per share of $0.68 missed analyst estimates as the retail giant ate some of the costs of tariffs. Operating income grew just 0.4% on an adjusted, constant-currency basis, held back by higher self-insured liability costs.

Despite some near-term expense challenges, Walmart (NYSE:WMT [https://seekingalpha.com/symbol/WMT]) raised its full-year sales and earnings outlook, reflecting confidence in its diversified model and momentum in digital and high-margin businesses.

On the earnings conference call, Walmart (WMT [https://seekingalpha.com/symbol/WMT]) management highlighted that sales in the U.S. were stronger than expected. Interestingly, upper-income households contributed the largest comparable sales gains during the quarter. In terms of tariffs, Walmart (WMT [https://seekingalpha.com/symbol/WMT]) is keeping prices as low as it can, but tipped that higher prices may be a reality in the future due to the pressure on the bottom line.

On Wall Street, Morgan Stanley Simeon Gutman analyst said the firm's initial take on the earnings update is that the profit/incremental margin flywheel did not live up to expectations. Gutman said that was due to underwhelming incremental margins, even though top line growth was solid across the board. "We can debate if healthy (and impressive Q2) topline growth can outweigh a profit miss; given WMT’s market cap, valuation and retail leadership, we believe the company is expected to consistently deliver on both sales and margins," updated Gutman.

DA Davidson analyst Michael Baker said top-line metrics for Q2 and WMT's guidance were strong, but EPS fell short after the expected accounting related benefit from tariff related cost/price increases did not materialize.

Meanwhile, Evercor ISI analyst Greg Melich sees Walmart (WMT [https://seekingalpha.com/symbol/WMT]) as better positioned than most retailers to navigate the choppy tariff and consumer backdrop. "Risk remains from potential for a slower U.S. consumer with headwinds from wages/utility/healthcare etc., yet Walmart is executing at a high level and its every day low price model/price leadership coupled with enhanced omnichannel convenience are a solid recipe for sustained share gain, in our view," he wrote. The firm thinks Walmart's (WMT [https://seekingalpha.com/symbol/WMT]) initiatives and share gain set it apart, while its ability to lean into scale while delivering innovation, coupled with its strong balance sheet, provides favorable positioning.

Shares of Walmart (WMT [https://seekingalpha.com/symbol/WMT]) were down 5.0% in early trading on Thursday. Target (NYSE:TGT [https://seekingalpha.com/symbol/TGT]) shed 1.7% and Costco Wholesale (NASDAQ:COST [https://seekingalpha.com/symbol/COST]) traded 2.1% lower. Dollar General (DG [https://seekingalpha.com/symbol/DG]) was 1.6% lower in early action.

MORE ON WALMART

* Walmart Earnings Preview: Tariffs, Trade Policy Have Complicated Picture; Focus On The Operating Margin [https://seekingalpha.com/article/4814888-walmart-earnings-preview-tariffs-trade-policy-complicated-picture-focus-operating-margin]
* Walmart: Tariff Fears Fuel Cry Wolf Rally [https://seekingalpha.com/article/4814856-walmart-tariff-fears-fuel-cry-wolf-rally]
* Walmart: Recent Inflation Data Is A Headwind Ahead Of Q2 Earnings [https://seekingalpha.com/article/4814529-walmart-recent-inflation-data-is-a-headwind-ahead-of-q2-earnings]
* Walmart tops sales expectations led by e-commerce, higher average ticket, and strength in the advertising business [https://seekingalpha.com/news/4487827-walmart-tops-sales-expectations-led-by-e-commerce-higher-average-ticket-and-strength-in-the-advertising-business]
* Walmart beats Q2 topline estimates, raises outlook [https://seekingalpha.com/news/4487849-walmart-beats-q2-topline-estimates-raises-outlook]