Walmart surprises with net income up 20.4% in the second quarter

Walmart surprised equity analysts on Tuesday (Aug. 16) reporting better-than-expected second fiscal quarter earnings just one week after the Bentonville-based retail giant reduced guidance for the quarter and the rest of the year by roughly 10%.

Walmart reported consolidated net income of $5.149 billion, up 20.4% from a year ago. On a per-share basis earnings totaled $1.88, before adjustments of 11 cents for non-recurring insurance and investment gains. The adjusted earnings of $1.77 per share also blew past Wall Street consensus of $1.62 which sent the share price up 5% in early trading.

Revenue totaled $152.9 billion, up 8.4% year over year, fueled by inflation. Revenue was up 9.1% on a constant currency basis. Through the first half of fiscal 2023, Walmart’s net income totaled $7.203 billion, up 2.8% from a year ago. Revenue totaled $294,428 billion, up 5.4% from the same period last year.

“We’re pleased to see more customers choosing Walmart during this inflationary period, and we’re working hard to support them as they prioritize their spending. The actions we’ve taken to improve inventory levels in the U.S., along with a heavier mix of sales in grocery put pressure on profit margin for the second quarter and our outlook for the year. We made good progress throughout the quarter operationally to improve costs in our supply chain, and that work is ongoing. We continue to build on our strategy to expand our digital businesses, including the continued strength we see in our international markets,” Walmart CEO Doug McMillon said in the release.

Walmart U.S. saw comp sales grow 6.5% in the second quarter and eCommerce growth was 12%. Walmart U.S. CEO John Furner said inventory positions improved through the quarter as the retailer made deeper markdowns in areas like apparel and home.

Walmart U.S. reported revenue totaling $105.1 billion, up 7.1% from a year ago. Transactions increased 1% and the average ticket was 5.5% higher than a year ago, fueled by inflation. E-commerce sales contributed 1% to the segment’s overall comp gains in the quarter. While the top line growth was strong, Walmart U.S. saw its operating income fall 6.7% in the quarter to $5.7 billion, due in part because of heavy markdowns to move excess seasonal inventory and continued margin pressures from persistent inflation across the business.

Walmart said progress has been made in moving excess inventory such as seasonal apparel through markdowns and there is still work to be done in other categories like electronics and home. The company has also reduced storage costs by eliminating a large percentage of storage containers since the first quarter. Also Walmart said billions of dollars in inventory orders have been canceled in recent weeks amid the shift in shopping patterns.

Sam’s Club reported comp sales growth of 9.5% and membership income rose 8.9% to an all-time high. Net sales totaled $21.9 billion, up 17.5% from a year ago. Transactions were up 9.5% in the quarter with average tickets flat to a year ago. E-commerce contributed 1.7% of the overall sales comp in the period. Operating income fell 35% to $400 million as the segment worked through inventory to ready itself for back-to-school and holiday.

Kath McLay, CEO of Sam’s Club, said for the past two years clubs were chasing inventory trying to keep up with demand and when the buying patterns shifted in January Sam’s opted to aggressively deal with the inventory overruns.

Walmart International net sales were $24.4 billion, an increase of $1.3 billion, or 5.7%, negatively affected by $1 billion from currency fluctuations. Walmart International saw double-digit comps in three largest markets of Mexico, Canada, and China. Operating income for the international segment totaled $1.1 billion, up 28% on a constant-currency basis.

Walmart also reported its global advertising business grew nearly 30% in the quarter led by Walmart Connect in the U.S. and Flipkart in India. Walmart said Walmart Connect grew customers by 121% in the quarter from a year ago.

“We are making progress addressing our inventory and there is still some work to do. But, we are excited that more people from diverse backgrounds are choosing Walmart for value and this is allowing us to attract new customers,” McMillon said during the earnings call.

Walmart reported market share gains in food and consumables amid price rollbacks for opening price points and private label products. McMillon said the private brand growth rate doubled in the quarter. He also touted the growth of the GoLocal delivery service that has performed more than 1 million deliveries for other businesses. He said this business will have 5,000 pickup locations by the end of the year.

“Using our technology and logistics expertise we will help small businesses grow while helping our gross margin expand with GoLocal,” McMillon said.

He said continued growth of the ancillary businesses like Walmart Connect and GoLocal will help the retail giant clawback some of the operating expense delta that has persisted in recent quarters.

Walmart’s new Chief Financial Officer John Rainey reiterated lower guidance for the third quarter and full year to be down between 9% and 11%. He said excluding divestitures earnings for the fiscal 2023 will decline between 8% and 10%. Rainey said the business is resilient and in a better position now than in prior periods of economic weakness.

Ben Bienvenue, an analyst with Stephens Inc., said Walmart’s results were a bit better than everyone expected and the third quarter looks to be off to a better start than feared given consumer demand uncertainty. He reiterated his overweight or “buy” recommendation for the stock and the price target and earnings estimates are under review.

Shares of Walmart (NYSE: WMT) traded higher on the earnings report at $140 per share in the morning session, up around 6% in heavy volume, after a sell-off three weeks ago with the company’s reduced guidance announcement. Over the past 52 weeks the share price has traded between $117.27 and $160.77. Year-to-date shares are down 3.23%.