Walmart Q2 Results Better Than Feared But 2nd Half Outlook Cautious

After resetting Q2 financial guidance three weeks ago (see 2207260009) due to price cuts it had to take on bloated electronics and apparel inventory, Walmart finished the fiscal Q3 quarter ended July 31 “stronger than we had anticipated,” said CEO Doug McMillon on the company’s Tuesday earnings call. Walmart sales in the quarter were “well ahead of plan,” with higher prices lifting the average transaction size. Supply chain costs, too, were better than expected, McMillon said.

Walmart’s Q2 revenue grew 8.4% to $152.9 billion; operating income fell 6.8% to $6.9 billion. Management remained cautious about the remainder of the year. “We know that the amount and persistence of inflation is negatively affecting many families,” said McMillon. He noted an increase in the number of middle- and higher-income consumers shopping at the discount retailer.

For Q3, Walmart expects consolidated net sales growth of 5%, an operating income dropoff of 8%-10% and 3% year-on-year comp sales growth for Walmart U.S. For the full year, it expects consolidated net sales growth of 4.5%, an operating income decline of 9-11%, and 4% year-on-year comp sales growth for Walmart U.S. The retailer expects a second-half impact of $1.3 billion due to foreign currency exchange rates. Shares closed 5.1% higher Tuesday at $139.37.

Chief Financial Officer John David Rainey, on his first call as Walmart CFO, said Walmart U.S. comp sales grew 6.5% to $105.1 billion; transactions ticked up 1% in the quarter, and average ticket grew 5.5% on higher prices. E-commerce contribution was about 100 basis points, up from 20 basis points in the prior-year quarter.

The company's global advertising business grew about 30% vs. the 2021 quarter, McMillon said, saying improvements in first-party shopper data led to performance improvements for advertisers. The number of active advertisers was up 121% year on year. Advertising is part of a company strategy to diversify the portfolio with higher-margin products and services that will result in "more durable earnings streams as they scale," he said.

Walmart made progress selling through excess inventory, “especially in hardline categories,” Rainey said. It cleared most summer seasonal inventory, but it’s still working on reducing “exposure to other areas such as electronics, home and sporting goods,” he said. Walmart canceled “billions of dollars in orders” to line up inventory levels with expected demand going into the second half, Rainey said. Actions put in place this quarter will help stores be well positioned for the holiday season, he said.

Walmart is taking additional price cuts in Q3 to clear inventory in the second half, Rainey said. McMillon said he hopes Q3 markdowns won’t be at the same level of Q2 ones, “assuming that nothing changes with the consumer.” Sales strengthened at the end of the quarter, but markdowns were a significant contributor to lower gross margins in Q2.

Of the $11 billion Walmart had in excess inventory in Q2, Rainey attributed 40% to inflation. Its most acute inventory issues were in apparel last quarter; in Q3, “it’s home electronics and apparel that stand out the most," Rainey said.

Walmart padded its Walmart+ membership service with a streaming perk. Beginning in September, subscribers will get a subscription to Walmart+ at no extra cost, McMillon said. Consumer Intelligence Research Partners said last week Walmart+ membership had stalled at 11 million (see 2208110031). Rainey said the number of Walmart+ subscriptions continues to grow but he didn’t give details. Membership at Sam’s Club stores was up 9% in Q2, he said.