Walmart reports stronger-than-expected sales — but shares drop as profits get squeezed by tariffs

Walmart delivered a mixed Q2, exceeding revenue expectations with $177.4 billion (up 4.8% YoY) and achieving strong 4.6% US same-store sales growth, driven by consumers seeking value amid inflation and significant market share gains. However, adjusted EPS of $0.68 missed estimates, and net income plunged 43% as tariff-impacted costs squeezed profits, causing shares to drop 2.6% pre-market. Despite this profit pressure, the retailer boosted its full-year sales and adjusted EPS guidance, indicating confidence in its operational momentum and ability to navigate rising import costs, potentially through selective price adjustments on approximately 10% of items.

Analysis

Walmart's recent quarterly report presents a dichotomy between robust operational execution and significant margin pressure, driven primarily by tariff-related costs. The company exceeded revenue expectations, posting $177.4 billion (a 4.8% year-over-year increase) on the back of strong 4.6% same-store sales growth and a 25% surge in global e-commerce. This top-line momentum, fueled by consumers seeking value amid inflation, allowed Walmart to gain market share from struggling rivals like Target, which saw a 1.9% sales decline. However, this strength was overshadowed by a profit miss, with adjusted EPS of $0.68 falling short of the $0.73 consensus, marking the first such shortfall since May 2022. The primary cause was rising import costs, which squeezed profits and led to a 43% plunge in net income. Despite this, management expressed confidence by raising its full-year guidance for both net sales (to 3.75%-4.75% growth) and adjusted EPS (to $2.35-$2.43). The negative pre-market stock reaction of -2.6% reflects not only the earnings miss but also the stock's lofty 36x forward earnings multiple, which has left little room for error after a 36% gain over the past year.

Key Decisions for Investors

• Investors should weigh Walmart's demonstrated operational strength and market share gains against the clear and rising margin pressures from tariffs, which necessitated the first earnings miss in two years.
• The raised full-year guidance for both sales and adjusted EPS signals management's confidence in navigating the cost environment, but the plan to raise prices on 10% of items should be monitored for its potential impact on consumer demand and competitive positioning.
• Given the stock's high valuation at 36 times forward earnings, the current pullback could be seen as an entry point for long-term believers, though caution is warranted as sustained cost pressures could challenge future profitability and test the premium multiple.