Walmart's Strong Performance Reflects U.S. Consumer Preference for Value and Essentials

Walmart announced its second-quarter fiscal year 2025 results on August 15 Eastern Time. Revenue grew by 4.8% year-on-year to $169.3 billion, and adjusted operating income increased by 7.2% year-on-year to $7.9 billion. Adjusted earnings per share were $0.67, up 9.24% year-on-year. Walmart's performance exceeded expectations across the board, and the company raised its full-year guidance for fiscal year 2025. This impressive performance led to a more than 6% increase in after-hours trading.

Due to its primarily retail-focused business, Walmart's performance is also considered an important indicator of U.S. consumer behavior, making this earnings report particularly noteworthy.

At first glance, Walmart's stellar performance this quarter has injected a dose of confidence into the market, alleviating some concerns about persistently weak consumer spending.

Walmart's revenue sources are primarily divided into Walmart U.S., Sam's Club U.S., and Walmart International, with Walmart U.S. being the company's revenue pillar, accounting for approximately 68% of the total revenue.

a. Walmart U.S.

This quarter, Walmart U.S. revenue grew by 4.05% year-on-year to $115.347 billion. The company implemented price reductions on many products, adopting a value-for-money strategy that attracted consumers. Sales increased across various categories, including daily necessities, durable goods, home goods, and fashion products. In terms of stores, Walmart U.S. same-store sales grew steadily by 4.2% year-on-year, driven by strong growth in both foot traffic and sales through physical stores and e-commerce channels.

E-commerce growth was particularly robust, with Walmart U.S. e-commerce sales increasing by 22% year-on-year. This includes approximately a 50% growth in store delivery volumes, a 32% increase in online marketplace sales, and a 30% rise in Walmart Connect advertising services. These gains were primarily due to an increase in the number of distribution centers and the improvement in delivery efficiency.

Source: Company Announcements

b. Sam's Club U.S.

This quarter, Sam's Club U.S. revenue grew by 4.69% year-on-year to $22.853 billion. Excluding fuel, the revenue growth rate was as high as 5.5%. Same-store sales (excluding fuel) grew by 5.2%, mainly driven by increases in food, medical, and health products. E-commerce revenue grew by 22%, indicating high online customer engagement.

Unlike Walmart's value-for-money approach, Sam's Club U.S. targets a more upscale consumer base. Although the revenue growth rate of Sam's Club has not reached the double-digit levels seen in the past two years, it has gradually recovered to above 4%, indicating that spending among high-income consumers is also stabilizing.

Source: Company Announcements

The company's membership numbers have been steadily increasing, which helps improve user engagement and repurchase rates. With the continuous growth in membership, Walmart Plus membership revenue in the U.S. achieved double-digit growth this quarter. Membership numbers and penetration rates at Sam's Club U.S. also reached new highs, driving a 14.4% year-on-year increase in membership revenue.

This quarter, Walmart International revenue grew by 7.14% year-on-year to $29.567 billion, with increases in both transaction volume and per-unit spending. Growth remained strong in food and consumables. E-commerce sales grew by 18% year-on-year, mainly benefiting from store pickup and delivery services, as well as increased penetration of online platform services. Additionally, advertising revenue grew by 23%.

Chart: Walmart International Net Sales (Billion)

Source: Company Announcements

Growth in the international business mainly stems from Walmex in Mexico, the China market, and Flipkart in India.

a. Mexico (Walmex)

Revenue grew by 6.4% year-on-year to $12.8 billion (at constant exchange rates). Same-store sales increased by 5%, with a slight slowdown mainly due to Easter being earlier this year in Q1. New store openings continued, with 25 new stores this quarter and a total of 165 new stores opened over the past year.

b. China Market

Revenue increased by 17.7% year-on-year to $4.6 billion (at constant exchange rates), significantly outperforming Walmex and the Canadian market. Strong growth was driven by Sam's Club and e-commerce operations. Same-store sales grew by 13.8% year-on-year, maintaining high growth and showing a significant improvement over the previous two quarters.

c. India (Flipkart)

The e-commerce business performed strongly, contributing to the growth of the international segment.

The company's profit performance was very impressive. This quarter, the gross profit margin increased to 24.4%. Adjusted operating income grew by 7.2% year-on-year, and adjusted EPS increased by 9.8% year-on-year, mainly benefiting from improved profit margins in both Walmart U.S. and Walmart International.

Chart: Gross Profit Rate

Source: Company Announcements

Although Walmart adopted a price reduction strategy to attract customers, it did not negatively impact the company's profits. Instead, it resulted in positive effects such as increased market share and sales growth, further boosting the company's gross profit margin. Additionally, the losses in the e-commerce business continued to narrow, especially in Walmart U.S. and Flipkart. By increasing delivery density and transaction volume, the cost per order delivery decreased, which helped improve the core e-commerce profit margin. Furthermore, the improvement in the company's business mix is expected to further unlock profits, with growth in advertising and membership revenue contributing to improved profit levels.

On the expense side, the company's operating expense ratio (20.6%) remained roughly the same as the previous quarter, demonstrating excellent supply chain management and cost control capabilities.

In terms of cash flow, the company's operating cash flow for the quarter was $16.4 billion, a year-on-year decline of 10.1%. Free cash flow dropped by 34.9% year-on-year to $5.9 billion, reflecting an increase in capital expenditures.

This quarter's financial report from Walmart indicates that U.S. consumer demand remains stable. However, the overall consumption trend leans towards value-for-money and essential goods, which to some extent benefits Walmart's performance growth. Additionally, as the e-commerce business gradually reaches the breakeven point, the company's profits are expected to be further unlocked.

Performance Guidance:The company expects FY25 Q3 revenue growth of 3.25%-4.25%, with adjusted EPS of $0.51-$0.52, which is roughly flat year-on-year. For fiscal year 2025, revenue growth is projected at 3.75%-4.75%, with adjusted EPS expected to be $2.35-$2.43, representing a year-on-year growth of 6.02%-9.17%. This is an upward revision from previous guidance.

Shareholder Returns:This quarter, the company returned a total of $2.7 billion to shareholders through dividends and buybacks. Over the past year, cumulative returns to shareholders amounted to $10 billion. Given the company's current market capitalization of $588.627 billion, the annualized shareholder return is approximately 1.7%, which is significantly lower than the U.S. risk-free rate, thus lacking attractiveness.

Valuation:The current valuation of the company is a PE (TTM) of 38.11x, with an estimated forward PE for fiscal year 2025 around 30x, indicating that the valuation is not cheap.