Earnings Preview | A Safe Haven Amid the Consumption Downgrade Storm: Can Walmart (WMT.US) Q2 Earnings Support Wall Street's High Valuation?

According to Zhitong Finance APP, global retail giant Walmart (WMT.US) will announce its fiscal year 2027 Q2 results (corresponding to May to July 2026 in the calendar year) before the US market opens on August 20. As a super-sized retail terminal that covers the consumption needs of more than half of the US population, Walmart's report card has always been regarded as the most crucial "barometer" for observing American consumer willingness and the macroeconomic climate.

According to Wall Street consensus, the market expects Walmart's Q2 revenue to reach $188.8 billion, up 6.45% year-over-year; adjusted EPS is projected at $0.75, a YoY increase of about 10.3%. Market expectations for Walmart's earnings guidance this quarter are quite high, even exceeding the official upper-end target set by management in Q1.

Core Performance Expectations: Likely to Exceed Guidance Ceiling

It is noteworthy that Walmart's own guidance is rather conservative, expecting Q2 net sales at constant exchange rates to grow 4%-5% (below Q1's 5.7%) and adjusted EPS of $0.72–$0.74. This leaves room for the traditional scenario of "beat expectations + raise full-year guidance," and Bank of America analyst Christopher Nardone expects Walmart to return to this rhythm this quarter.

However, detailed forecasts have become polarized. Deutsche Bank analyst Krisztina Katai expects Walmart US same-store sales growth of 3% to 3.5%, below Wall Street consensus of 3.7%.

For fiscal year 2027, Wall Street broadly expects adjusted EPS to reach about $2.89, significantly higher than the official company guidance of $2.75 to $2.85. This suggests that even before the open, Wall Street is already anticipating that management will raise its full-year targets this quarter.

Inflation and Consumption: Structural Pressure Amid K-Shaped Divergence

The biggest variable for Walmart's results comes from the ongoing deterioration in the US consumer environment. In July, US CPI rose 3.4% year-over-year, and core CPI rose 2.5% year-over-year. Though these figures have receded from previous highs, they remain significantly above the Federal Reserve's 2% target.

What is more worrying for the market is that US retail sales in July fell 0.6% month-over-month, marking the biggest monthly drop since May 2025 and well below the expected increase of 0.1%. The University of Michigan's August consumer sentiment survey shows that due to war, rising bond yields, and geopolitical uncertainty, consumer sentiment has dropped significantly, with declines especially prominent among low-income and older groups.

As the "barometer" of US consumer economy, Walmart has observed clear signals of consumption divergence. CFO John David Rainey pointed out in the May earnings call that, under financial pressure, consumers are displaying typical K-shaped characteristics: highly confident consumption among households with annual incomes above $100,000, who have become the primary source of Walmart’s market share gains; while lower-income consumers are "much more budget-conscious and may be experiencing financial distress."

An especially telling detail: This spring, the average amount per refueling at Walmart and Sam's Club gas stations fell below 10 gallons for the first time since the 2022 COVID-19 pandemic. Rainey stated bluntly: "It's a reflection of pressure." At the same time, the one-off consumption stimulus effect brought by large tax refunds in the first half has completely faded, June's personal savings rate fell to a four-year low, precautionary household funds continue to be depleted, and the elasticity of discretionary spending has contracted sharply.

Cost pressures are equally significant. In Q1, surging fuel and logistics costs negatively impacted Walmart's operating profit margin by about 250 basis points, with the company forced to absorb an additional $175 million in fuel costs. Although management indicated that this cost impact is temporary and expects normalization in Q2, oil price volatility caused by geopolitical risks remains a Damocles’ sword hanging overhead.

The “Double-Edged Effect” of Inflation: Customer Flow Growth vs Profit Squeeze

Although the overall US CPI trend is softening, stubborn inflation accumulated over past years has kept prices of groceries and essential goods elevated.

Leveraging its massive purchasing scale and supply chain management, Walmart has significant pricing power and can maintain industry-low prices. This has enabled Walmart to continuously grow its market share in groceries.

Persistently high prices have crowded out ordinary households’ budgets, causing consumers to allocate more towards essential foods and reduce purchases of higher-margin clothing, electronics, and household goods. This "worsening product mix" is posing a short-term challenge to overall retailer gross margins.

Wall Street’s View: The Game of Valuation Premiums and Transformation Dividends

In the face of macro headwinds, Wall Street analysts hold an apparent "bullish but cautious" stance on Walmart. Among 48 analysts covering the company, the average target price is $140.85, implying 22% upside from the current approximate $115 price, with a consensus rating of "Strong Buy". Institutions such as BTIG, UBS, RBC Capital, and Morgan Stanley have all maintained Buy or Overweight ratings in recent months.

Walmart’s stock price has underperformed the S&P 500 and rival Target this year

However, valuation debates are heating up. Walmart’s current P/E ratio is about 40x, a historical high, and this pricing fully reflects market expectations for its "tech-driven retailer" transition. Erste Group analyst Hans Engel downgraded the stock from "Buy" to "Hold" in early June, citing a significantly higher valuation compared to retail peers. Jefferies analyst Corey Tarlowe holds a relatively optimistic view, believing conservative guidance actually creates room for continued outperformance: "Walmart will continue to invest in prices to win market share in 2026."

The core market focus is whether Q2 operating profit growth can fall within the high end of the guidance range of 7% to 10%. If real data validate management’s view that "fuel cost impact is only temporary," the path for the stock price to rebound from $120 to Wall Street consensus targets will open; otherwise, if data are on the low end and Q3 guidance turns cautious, the investment logic supporting this 40x P/E retail giant will weaken.

Beyond macro volatility, Walmart’s business model is undergoing structural evolution, providing a buffer against cyclical turbulence. CFO Rainey pointed out in May that advertising and membership fee income now account for about one-third of total operating profit, "a stark contrast to Walmart a decade ago."

In Q1, global e-commerce sales rose 26%, US delivery services grew 45%, third-party platform sales rose nearly 50%, and advertising business climbed 37%. The expansion of these high-margin businesses is changing Walmart’s traditional low-margin, high-volume grocery business model.

Deeper changes are happening in operational efficiency. Currently, about 60% of Walmart stores receive goods from automated distribution centers, and around half of e-commerce fulfillment is already fully automated. Supply chain automation investments are not only reducing labor costs but also improving inventory turnover efficiency. In an environment where consumers are shifting more towards low-margin essentials and high-margin discretionary sales are weak, this strategy of "making up in volume, exchanging efficiency for profit" has become the key for Walmart to maintain margins.