Walmart Stock Rises Slightly Despite Strong Earnings. Here’s Why.

CEO Doug McMillon said on a call with investors, “Our position is one where if things do get tougher, [consumers] are going to increasingly look for value, and we’re going to be able to grow the top line.”

Conditions for the consumer could get certainly get tougher, the company said. While inflation has moderated and employment levels remain steady, credit markets have tightened, energy prices are higher, and some shoppers will soon have to contend with the resumption of student-loan repayments. McMillon pointed to the company’s Canadian operations, which are seeing consumers feel pinched by higher interest rates at a faster pace than the U.S., given their shorter-term mortgages.

“When you put all this together, we see families that are discerning about what they’re spending on,” McMillon added. “They’re setting priorities and spending on the things they care most about.”

But Walmart’s second-quarter results, delivered Thursday, seem to support McMillon’s assertion that the company can thrive even if consumers pull back.

Revenue rose 5.7% to $161.6 billion, topping the $160.2 billion estimate analysts had expected, according to FactSet. Adjusted earnings per share of $1.84 beat projections for $1.71. Sales increased across Walmart’s U.S. and international sectors, but dipped 0.3% at Sam’s Club. Comparable-store sales, which measure growth in stores open for at least a year, grew for all three business segments, with Walmart U.S. notching 6.4% comparable-store growth.

Walmart raised guidance for adjusted fiscal 2024 earnings per share to $6.36 to $6.46, including a 5-cent impact from LIFO, an accounting measure. Analysts had expected earnings per share of $6.30 for the fiscal year. The company had previously guided earnings per share of $6.10 to $6.20 for the fiscal year.

While Walmart isn’t immune to macroeconomic volatility, Evercore ISI analyst Greg Melich believes the company’s initiatives set it apart from competitors, and Walmart’s sheer scale and healthy balance sheet provide “favorable positioning for common industrywide risks.” Melich has an Outperform rating on Walmart stock.

The strength of Walmart’s quarter was especially stark when compared with
Target’s
(TGT) results, which saw the retailer missing revenue estimates and cutting guidance. Walmart’s focus on “everyday low prices” has helped.

“The days of fostering brand loyalty might be over, but continuing to give consumers the best bang for their buck is eternal,” Koen Looijmans, senior vice president of retail product experience at Productsup, wrote in an email. “We can look toward Walmart as a giant who is setting an example of this in the space.”

Groceries, a longstanding business for Walmart, have given the company an upper hand over Target the last few quarters, given that consumer staples are a relatively small business for Target. Walmart’s assortment has long skewed in favor of groceries and household essentials, often sold at lower prices. This focus on essentials has paid off as inflation makes consumers of all stripes more price-sensitive.

In past quarters, Walmart grew its market share in the grocery category across various consumer demographics, including high-income shoppers—a trend that continued this quarter. Retaining those shoppers is important, especially when consumers start to shop for discretionary items again. Discretionary purchases, such as apparel and home furnishings, often carry higher margins than grocery.

In a bid to retain those customers, Walmart has carved out its digital capabilities, from online ordering to automating its supply chain. The investments have paid off. E-commerce sales rose 24% in the U.S., the company said, while its automated distribution and fulfillment centers are marking higher productivity.

The company’s third-quarter projection, however, looks softer than what the Street had expected, and that may be weighing on the stock. For the third quarter, Walmart sees earnings per share ranging from $1.45 to $1.50, with the midpoint below the consensus analyst projection for $1.49.

Walmart stock is down 1.4% in Thursday morning trading Thursday, while Target stock is 1.2% higher, and the
S&P 500
is flat. In July, Barron’s wrote favorably about Walmart stock, calling it a buy.

Walmart stock trades at 23.9 times forward earnings, slightly higher than its five-year average multiple of 22.5 times, and well above Target and
Kroger
(KR). multiples of 15.2 times and 10.4 times, respectively. Among the big-box retailers, only
Costco Wholesale
(COST) commands a higher valuation, 36.2 times.

Write to Sabrina Escobar at [email protected]