Walmart Lifts Outlook as Tariff Refunds Fuel Profit Surge
The retailer now expects adjusted earnings of $2.80 to $2.87 a share for the full year after second-quarter operating income jumped 28.8%.
Walmart (WMT) reported second-quarter results that showed a widening gap between its top-line trajectory and its profitability, as tariff refunds and a shift in business mix powered a sharp acceleration in operating income even as comparable-store sales in its home market slowed.
Consolidated revenue grew 5.9% in the quarter ended July 31, decelerating from 7.3% in the first quarter, with constant-currency growth of 5.1% also easing from the prior period's 5.9%. The top-line slowdown was most visible in Walmart U.S., where comparable sales excluding fuel fell to 2.6% from 4.1% in the first quarter. Health and wellness represented an 80-basis-point headwind, while pharmacy deflation tied to new maximum fair price regulations represented a 125-basis-point drag. Average ticket growth in the U.S. business slowed to 1.1% from 3.1% a year earlier, while transaction counts held steady at 1.5%.
Profitability told a different story. Consolidated operating income surged 28.8% on a reported basis and 17.4% on an adjusted, constant-currency basis, a sharp acceleration from 5.1% adjusted growth in the first quarter. The gross profit rate expanded 96 basis points, compared with just 6 basis points in the prior quarter, primarily due to tariff refund impacts. In Walmart U.S. alone, operating income grew 20.6%, with the segment's gross margin widening to 29.4% from 27.9% a year ago on tariff refunds and improved business mix.
The tariff benefit was not without offsets. Walmart U.S. operating expenses deleveraged 72 basis points, reflecting higher claims expense, depreciation, and associate healthcare costs. Internationally, gross margin compressed slightly to 21.4% from 21.6%, and constant-currency operating income growth decelerated to 5.7% in the second quarter from an 8.0% pace in the first half.
Sam's Club emerged as a standout on the profit side. The warehouse chain's operating income surged 44.3% on a reported basis and 23.3% adjusted, accelerating from 11.2% adjusted growth in the first half, aided by tariff refunds and membership gains. Comparable sales excluding fuel slowed to 4.4% from 5.9% a year earlier, but transaction counts accelerated to 7.0% from 3.9%, even as the average ticket declined 2.5% versus a 2.0% gain a year ago. Gross margin expanded to 11.4% from 10.9%.
Global eCommerce growth decelerated to 23% from 26% in the first quarter, though store-fulfilled pickup and delivery and marketplace continued to lead the gains. The digital channel's contribution to Walmart U.S. comparable sales rose to roughly 510 basis points from about 420 basis points a year ago, and Sam's Club saw a similar expansion to roughly 450 basis points from 350.
Advertising and membership fees, two pillars of Walmart's higher-margin ancillary revenue, held their pace. Global advertising grew 38%, roughly in line with the prior two quarters, while Walmart U.S. advertising accelerated slightly to 38% from 36%. Membership fee revenue grew 17%, consistent with recent quarters.
On the bottom line, GAAP earnings per share declined 9.1% to $0.80, dragged down by a $1.2 billion net loss on equity and other investments compared with a $2.7 billion gain a year earlier. Adjusted EPS was $0.81. Interest expense net of investment income fell 74.7% to $171 million, reflecting benefits from debt restructuring.
Free cash flow decreased $1.4 billion to $5.5 billion for the first half, while operating cash flow rose $1.4 billion to $19.7 billion. Capital expenditures climbed to roughly 4.0% of net sales, up from the company's original full-year target of about 3.5% set in February. Global inventory growth slowed to 6.7% from 8.9% in the first quarter, reflecting tighter inventory management.
Walmart raised its full-year guidance across the board. Full-year expectations are for constant-currency net sales growth of 4.0% to 5.0%, up from 3.5% to 4.5%; adjusted operating income growth of 7.0% to 8.5% on a constant-currency basis, up from 6.0% to 8.0%; and adjusted EPS of $2.80 to $2.87, up from $2.75 to $2.85. For the third quarter, guidance is for constant-currency sales growth of 3.0% to 3.75%, which includes a headwind of more than 100 basis points from a timing shift in Flipkart's Big Billion Days event, and adjusted EPS of $0.62 to $0.64.
The company repurchased $5.1 billion of shares year to date through the second quarter, retiring 42.3 million shares, with $25.1 billion remaining on a $30 billion authorization approved in February.