Freedom: Slower Walmart sales stokes concerns about U.S. consumer demand

Shares of the largest U.S. retail chain Walmart (WMT) fell more than 8% at the open on August 20. Investors were rattled by a sharp slowdown in U.S. comparable sales: in the second quarter they rose 2.6%, the slowest pace in more than six years. At the same time, the company’s total revenue beat market expectations, and Walmart raised its full-year guidance. Freedom analyst Vladimir Chernov believes that pressure on U.S. consumers’ budgets is starting to show even at the country’s largest discounter.

Walmart’s comparable sales grew below expectations

Walmart is the world’s largest retail chain, operating hypermarkets, supermarkets, and online platforms. Beyond traditional retail, the company is developing a marketplace, an advertising platform, and the Walmart+ subscription service. 

Walmart’s U.S. comparable sales in the second quarter increased by 2.6% versus expectations of 3.7% growth. The results were affected, among other things, by weaker performance in the pharmacy segment due to regulation of drug prices and more cautious consumer behavior. Shoppers spent less per visit than a year earlier, although purchase frequency did not change. 

Total Walmart revenue rose 5.9% to $187,94 млрд, beating the $186,77 млрд forecast. Net income declined 9.4% to $6,37 млрд, while adjusted earnings were $0,81 per share versus expectations of $0,74. 

In Vladimir Chernov’s view, Walmart’s results cannot be called weak from a fundamental standpoint. In addition to beating revenue expectations, the company continues to expand e-commerce, advertising, and its marketplace, gradually reducing the business’s dependence on traditional retail.

Walmart raised its full-year guidance

Despite the slowdown in comparable sales, Walmart improved its annual outlook. The company now expects net sales growth of 4–5% versus the previous forecast of 3.5–4.5%. The adjusted earnings forecast was raised from $2,75–2,85 to $2,80–2,87 per share. 

For the third quarter, Walmart forecasts sales growth of 3–3.75% and earnings in the range of $0,62–0,64 per share. The EPS forecast came in below the $0,69 consensus. 

Chernov believes that after the initial repricing of expectations, the scope for further sharp declines in Walmart shares looks limited. However, for the stock to return to sustained growth, the company will need to show a recovery in comparable sales in the coming quarters.

Walmart previously reported better-than-expected results and raised its forecast

Freedom previously wrote about Walmart’s second-quarter report. The company’s revenue rose to $187,94 млрд versus the expected $186,77 млрд, and adjusted earnings were $0,81 per share compared with the market forecast of $0,74. Despite weaker comparable-sales momentum in the U.S., Walmart raised its full-year adjusted earnings forecast to $2,80–2,87 per share and expects net sales growth of 4–5%.

The digital business is becoming one of Walmart’s growth drivers

In May, Freedom Broker noted the growing role of Walmart’s digital business. In the first quarter, the company’s global online sales increased by 26%, advertising revenue by 37%, and Walmart+ subscription income by 17.4%. Freedom analysts noted that the development of high-margin segments partly offsets cost pressure related to logistics, fuel, healthcare, and digital infrastructure. 

Not an individual investment recommendation.