Earnings Preview | In the storm of consumption downgrade, can Walmart Inc. (WMT.US) Q2 earnings support Wall Street's high valuation?

Global retail giant Walmart Inc. (WMT.US) will release its second-quarter results for fiscal year 2027 (covering May to July 2026) before the U.S. stock market opens on August 20. As a super retail terminal catering to the consumption needs of over half of the U.S. population, Walmart Inc.'s earnings report is often viewed as one of the most critical barometers for gauging American consumers willingness to spend and the overall economic climate. According to Wall Street consensus expectations, the market anticipates that Walmart Inc.'s second-quarter revenue will reach $188.8 billion, a year-on-year increase of 6.45%. Adjusted earnings per share (EPS) are expected to be $0.75, a year-on-year growth of approximately 10.3%. The market holds high expectations for Walmart Inc.s performance guidance this quarter, even exceeding the official upper targets released by management in the first quarter. Core performance expectations: Likely to exceed guidance upper limit Notably, Walmart Inc.s own guidance appears conservative, forecasting net sales growth at constant currency of 4% to 5% for Q2 (down from 5.7% in Q1), and adjusted EPS of $0.72 to $0.74. This leaves room for a "better than expected + raising yearly guidance" scenario, and Bank of America analyst Christopher Nardone expects Walmart Inc. to get back on this rhythm this quarter. However, there has been a divergence in detailed expectations. Deutsche Bank Aktiengesellschaft analyst Krisztina Katai projects that comparable store sales growth for Walmart Inc. in the U.S. will be 3% to 3.5%, below the Wall Street consensus expectation of 3.7%. For the full fiscal year 2027, Wall Street generally expects adjusted EPS to be around $2.89, significantly higher than the companys official guidance of $2.75 to $2.85. This implies that Wall Street is anticipating that management will raise the annual performance targets in this quarter. Inflation and consumption: Structural pressure under K-shaped differentiation The biggest variable affecting Walmart Inc.'s performance comes from the continued deterioration of the U.S. consumer environment. In July, the U.S. CPI increased by 3.4% year-on-year, while core CPI rose by 2.5%, although it has retreated from previous highs, it remains significantly above the Federal Reserve's 2% target. More concerning for the market, retail sales in the U.S. fell by 0.6% month-on-month in July, marking the largest single-month decline since May 2025, far below the market's expectation of a 0.1% increase. The University of Michigan's August consumer confidence survey indicates a significant decline in consumer sentiment due to war, rising bond yields, and political uncertainties surrounding GEO Group Inc., with low-income and elderly groups experiencing particularly drastic decreases. As a "barometer" of the U.S. consumer economy, Walmart Inc. has observed clear signals of consumer differentiation. Chief Financial Officer John David Rainey pointed out during the May earnings call that consumers are exhibiting typical K-shaped characteristics under financial pressure: high-income households earning over $100,000 annually show strong consumer confidence and are the main source of Walmart Inc.s market share growth; meanwhile, low-income consumers are "more budget-constrained and may be experiencing financial distress." An alarming detail is that, this spring, the amount of fuel purchased per visit at Walmart Inc. and Sam's Club gas stations dropped below 10 gallons for the first time, marking the first occurrence since the COVID-19 pandemic began in 2022. Rainey stated, "This reflects the pressure." At the same time, the stimulative effect from large tax refunds in the first half of the year has completely dissipated, with the personal savings rate in June dropping to a four-year low, as households exhaust precautionary funds and the elasticity of discretionary spending sharply contracts. Cost pressures should not be overlooked either. In the first quarter, surging fuel and transportation logistics costs had a negative impact of about 250 basis points on Walmart Inc.'s operating profit margins, forcing the company to absorb an additional $175 million in fuel costs. Although management indicated that this cost shock is temporary and anticipated a normalization in the second quarter, oil price volatility due to GEO Group Inc. political risks remains a looming threat. The "dual effect" of inflation: Increase in foot traffic vs. profit squeeze While the overall CPI in the U.S. shows a trend of easing, the persistent inflation built up over the past few years keeps prices for groceries and essential goods at elevated levels. Walmart Inc., with its massive purchasing scale and supply chain management capabilities, possesses strong pricing power, allowing it to maintain prices at the industrys lowest levels. This has resulted in continued growth of its market share in the grocery sector. The sustained high prices are squeezing the budget of average households, causing consumers to allocate more of their budgets to essential groceries, thus reducing purchases of higher-margin clothing, electronics, and home goods. This "deterioration of product mix" presents periodic challenges to retailers overall gross margins. Wall Street Perspective: The game of valuation premium and transformation dividends In the face of macro headwinds, Wall Street analysts exhibit a markedly "bullish yet cautious" stance toward Walmart Inc. Among the 48 analysts covering the company, the average target price is $140.85, implying a potential upside of 22% compared to the current stock price of about $115, with a consensus rating of "strong buy." Institutions such as BTIG, UBS Group AG, RBC Capital, and Morgan Stanley have maintained buy or overweight ratings in recent months. Walmart Inc.'s stock price has underperformed the S&P 500 and competitor Target Corporation this year. However, the controversy surrounding valuations is intensifying. Currently, Walmart Inc.'s price-to-earnings (P/E) ratio stands at about 40 times, at a historical high, a valuation that fully reflects the market's expectations for its transformation into a "technology-driven retailer." Erste Group analyst Hans Engel downgraded the rating from "buy" to "hold" in early June, citing that the valuation is significantly stretched compared to retail peers. In contrast, Jefferies Financial Group Inc. analyst Corey Tarlowe holds a relatively optimistic view, suggesting that the conservative performance guidance actually creates space for continued outperformance, stating, "Walmart Inc. will continue to compete for market share through price investments in 2026." The market's core focus is whether the second-quarter operating profit growth can fall within the guidance range of 7% to 10%. If actual data confirms management's judgment that "the impact of fuel costs is only temporary," the pathway for the stock price to rebound from $120 to Wall Streets average target price will open up; conversely, if the data falls on the low end and third-quarter guidance trends cautiously, the investment logic supporting this retail giant with a P/E of 40 will weaken. Beyond macro volatility, Walmart Inc.'s business model is undergoing structural evolution, providing a buffer against cyclical fluctuations. Chief Financial Officer Rainey clearly pointed out in May that advertising and membership fee revenues together account for about one-third of Walmart Inc.'s total operating profit, which "is completely different from Walmart Inc. ten years ago." In the first quarter, global e-commerce sales grew by 26%, U.S. delivery business grew by 45%, third-party platform sales surged by nearly 50%, and advertising business grew by 37%. The expansion of these high-margin businesses is changing Walmart Inc.s traditional grocery business model that relied on low-margin, high-volume sales. Deeper changes are occurring at the operational efficiency level. Currently, about 60% of Walmart Inc.'s stores receive goods from automated distribution centers, and nearly half of the e-commerce fulfillment centers have fully automated processing capabilities. Investments in supply chain automation not only reduce labor costs but also enhance inventory turnover efficiency. In the context of consumers increasingly shifting towards low-margin essentials and weak sales of high-margin discretionary products, this strategy of "leveraging volume to compensate for price and using efficiency for profit" has become key for Walmart Inc. to maintain its profit margins.