Analysis: WMT

Before the opening bell on Tuesday, Walmart (WMT) reported solid second-quarter results. On the top line, total revenues of $141.048 billion (+2.4% YoY) exceeded the $137.017 billion consensus. On the bottom line, adjusted diluted earnings of $1.78 per share exceeded expectations of $1.57 per share.

"We had another strong quarter in every part of our business. Our global eCommerce sales are on track to reach $75 billion by the end of the year, further strengthening our position as a leader in omnichannel. We grew market share in U.S. grocery, added thousands of new sellers to our marketplace, rapidly grew advertising businesses around the world, and we're finding innovative ways to commercialize our data and build technology. We have a unique ecosystem of products and services designed to serve customers in broader, deeper ways, and we're grateful to our associates for making it all happen," President and CEO Doug McMillon said in the press release.

Operating Segments

Digging into the various operating segments, Walmart U.S. delivered solid results with net sales of $98.2 billion (+5.3% YoY), exceeding estimates of $96.716 billion. Comparable sales was much stronger than anticipated, increasing 5.2% in the quarter versus a 3.0% estimate driven by "strong underlying business trends, a robust U.S. economy and stimulus spending." Comp sales were up 14.5% on a two-year stack. Breaking down the comp result we saw a 6.1% increase in transactions offset by a 0.8% contraction in comparable average ticket (though comp ticket was up 26% on a two-year stack).

Looking at comparable sales growth in key categories, the company saw a mid single-digit increase in grocery as 6% sales growth reflected market share gains (according to Nielsen) and "modest ticket inflation." On a two-year stack basis, comps were up in the low double-digits. Health & Wellness comp sales increased mid-teens, and general merchandise comps were up low single-digit.

E-commerce net sales cooled a bit, however, but continued to grow with 6% YoY net sales growth in the quarter and contributing about 20 basis points to the comp sales figure. E-commerce sales are up 103% on a two-year stack basis. Also worth noting, Walmart Connect advertising sales were up 95% YoY as new advertisers ramped with management commenting on the call that they "expect the rapid growth to continue." As we have called out previously, advertising is proving to be another rapidly growing revenue line item as the team builds out and leverages its omnichannel capabilities.

U.S. adjusted operating income was $6.1 billion (+12.0% YoY), well above estimates of $5.432 billion as the gross profit rate expanded 20 basis points and benefited from COVID vaccines and the lapping of pandemic-induced closures of Auto Care Centers and Vision Centers. A reduction in markdowns and the growth of Walmart Connect sales noted above also contributed to the gross profit increase. On the other hand, unsurprisingly, supply chain costs were a headwind in the quarter.

Meanwhile, the operating expense rate decreased 49 basis points with the positive leverage reflecting strong sales, $1 billion decline in COVID costs (which benefited leverage by ~100 bps) and lapping last year's business restructuring charge, though this was partially offset by wage increases, marketing and technology investments.

Walmart International net sales were $23.0 billion (-15.2% YoY) and beat out expectations of about $21.36 billion. On a constant currency basis, net sales were $20.6 billion (-24.0% YoY), with divestitures accounting for an $8.9 billion YoY reduction. Divestitures aside, Walmart International saw retained market growth of 12.7% with strong sales growth in Flipkart (India), Mexico, and China. E-commerce net sales contributed 19% of total net sales.

Adjusted operating income was $0.9 billion (-3.1% YoY) and was nicely above estimates of $779 million. Divestitures accounted for a $256 million YoY reduction in operating income. The gross profit rate contracted 76 basis points as Walmart saw a 35 basis point negative impact from divestitures and a 41 basis point negative impact to the retained market gross profit rate "due to mix shift to lower margin formats, partially offset by markdown optimization"

The operating expense rate decreased 85 bps thanks to a 20 bps positive impact from divestitures and a 65 bps positive impact from retained market operating expense rate leverage - though this was partially offset by pandemic-related sales restrictions. Additionally, there was a ~24 bps positive impact due to a ~$36 million reduction in retained market COVID-related expenses.

Sam's Club net sales were $18.6 billion (+13.9% YoY) with fuel and were better than estimates of $17.13 billion. Aiding segment revenues was strong e-Commerce sales, which grew 27% YoY thanks to "strong curbside performance and solid direct-to-home contribution." Without fuel, sales increased 7.7% YoY. Comparable sales (with fuel) increased 13.9% YoY (+7.7% without fuel) or 22.6% on a two-year stack basis (+21% without fuel).

Looking under the hood at the drivers of the strong comparable sales, fresh/freezer/cooler saw low double-digit growth; grocery and beverage saw mid-teens growth; consumables comp growth was in the high single-digit range; home and apparels comps increased low double-digits; and wellness saw mid single-digit comp growth. On the other hand, technology, office, and entertainment comps declined mid single-digits.

Membership income increased 12.2% YoY with the company reporting a record total member count in the quarter. Renewal rates were up almost 260 bps with Plus member renewal rate increasing over 455 bps. Plus penetration rate surged over 755 bps to an all-time high.

Adjusted operating income with fuel was $0.7 billion (+11.5% YoY), above the $581 million consensus, as the gross profit rate declined by 88 basis points due to an "unfavorable fuel mix and lower fuel rate." Operating expense rate declined 82 basis points as higher fuel sales positively affected operating expanse leverage, though wage investment and lower tobacco sales partially offset the tailwind. COVID-related costs also declined by ~$80 million, which benefited leverage by ~50 bps in the quarter.

FY 2022 Expectations

In addition to the better-than-expected quarter, management improved its full-year outlook in several key areas. Management now expects consolidated net sales in constant currency to be "slightly positive" (up from a low single-digit decline previously forecast). Excluding divestitures, management expects consolidated sales to growth of 6% to 7% (up from low-to-mid single-digit growth). In dollar terms this represents growth of "more than $30 billion," a strong guide versus expectations coming into the print for full year sales to decline by ~$4.6 billion YoY.

The comp sales growth outlook was nudged up to 5% to 6% ex-fuel for Walmart U.S. (up from up low single-digits) and to 7.5% to 8.5% ex-fuel and tobacco at Sam's Club (also up from up low single-digits).

Walmart International net sales (on a constant currency basis) including divestitures was tightened to a decline of 21.5% to 22.5% (from a 20% to 25% decline previously forecast). Excluding divestitures, net sales are now expected to be up 7% to 8% (versus mid single-digits growth previously forecast).

Consolidated expense leverage was also tightened to the upside (think, removed the low end) with management now guiding "slightly leverage" (versus maintain rate, or slightly leverage previously guided forecast).

No changes were made to capex, with management continuing to expect around $14 billion to be spent this year. On the call, the team reminded investors, "These investments are aimed at increasing assortment to broaden our appeal with customers and get product positioned and picked efficiently to deliver it faster. These investments will increase capacity, help support the growth of Walmart+ and improve productivity."

For consolidated operating income, management now expects to see an increase of 9% to 11.5% in constant currency (up from mid single-digits). Ex-divestitures, consolidated operating income is now expected to increase 11.5% to 14% in constant currency (up from a high single-digit increase previously expected). Walmart U.S. operating income is now expected to grow 11% to 13.5% (versus high single-digits guided for in the prior quarter).

As for earnings, management now expects between $6.20 and $6.35 per share (versus high single-digits - or low double digits ex-divestitures), well ahead of the $6.00 per share consensus. No change was made to effective tax rate expectations of 24.5% to 25.5% for the year.

Management also guided for the third quarter. They expect Walmart U.S. comp sales growth to be up 6% to 7%, excluding fuel. Earnings per share is expected to be between $1.30 and $1.40 per share, which at the $1.35 midpoint comes in ahead of the $1.32 consensus coming into the print.

Bottom Line

Overall, a very solid quarter from Walmart and one that supports the recent strength we have seen in the stock. While the stimulus spending was a benefit that won't be around forever, we believe the strong guidance reflects solid underlying fundamentals including market share gains in grocery and investments in e-Commerce, advertising, and Walmart+ are what investors should focus on and given the results today, are what will ultimately drive shares higher in the future.

Additionally, we are pleased with the solid cost control as indicated by the simple reiteration of capex as investment spend was a key source or pressure on shares earlier this year. Lastly, we believe members should note the more detailed language on guidance this time around (actual numbers rather than the more less descriptive terminology we got last time around), something that we believe speaks to an improvement of management's visibility as vaccines rates continue to increase.

We look forward to discussing the print more on today's Daily Rundown later this morning.