Wal-Mart (WMT.US) delivered a mixed bag in its latest quarterly report. Although revenue and profit kept growing and the full-year guidance was lifted, a clear slowdown in U.S. same-store comparable sales growth, coupled with regulatory headwinds in its pharmacy business, sent shares tumbling 9.2% in a single day after the earnings release, marking the steepest daily drop since May 2022. In the aftermath, several investment banks including JPMorgan, BMO Capital, and TD Cowen cut their price targets, yet most maintained "Buy" or "Overweight" ratings. The core debate now centers on whether the pharmacy drag is merely a temporary setback and whether Wal-Mart's lofty valuation can be justified by high-growth segments such as advertising, its marketplace platform, and membership programs.
Looking at the headline numbers, Wal-Mart generated $187.9 billion in revenue for the quarter ending July 31, up 5.9% year-over-year, with non-GAAP adjusted earnings per share of $0.81. Operating profit surged 28.8% on a reported basis, or 17.4% on an adjusted constant-currency basis. The profit figures got a boost from tariff refunds, partially offset by the company's own price cuts. Based on this performance, management raised its full-year outlook, now forecasting constant-currency sales growth of 4% to 5% for the fiscal year, up from a prior range of 3.5% to 4.5%, with adjusted EPS expected between $2.80 and $2.87.
What's Driving the Selloff
What truly rattled the market, however, was the U.S. same-store comparable sales figure. Wal-Mart's U.S. comp sales grew just 2.6% in the quarter, a notable deceleration from 4.6% a year earlier and 4.1% in the prior quarter. Transaction volume rose 1.5%, while the average ticket increased only 1.1%, signaling that consumers are still spending but are becoming more cautious. CFO John David Rainey noted in an interview that shoppers remain resilient, with real wage growth keeping pace, making the environment manageable. Yet the company's guidance for the upcoming quarter of 3% to 3.75% sales growth suggests further slowing lies ahead.
Management attributed part of the comp sales slowdown to the pharmacy business. Rainey explained during the earnings call that pricing pressures tied to the maximum fair price drug regulation shaved roughly 125 basis points off U.S. same-store comparable sales for the quarter, above the 100 basis points the company had initially projected at the start of the year. Excluding the health and wellness segment, Wal-Mart's U.S. comp sales growth would have been closer to 3% to 4%, consistent with the range the company has sustained over the past two and a half years. Additionally, the company expects fuel costs to rise by more than $2 billion this year, adding further cost pressure. CEO John Furner described the quarter as solid overall, with sales growth at the upper end of guidance and adjusted operating income up 17.4% on a constant-currency basis. He emphasized that the pharmacy headwinds masked robust performance in groceries, general merchandise, and e-commerce. But investors clearly focused on the reality of decelerating growth rather than management's explanations.
Wall Street Trims Targets but Stays Largely Constructive
Following the earnings release, JPMorgan lowered its price target on Wal-Mart from $137 to $125 while keeping an "Overweight" rating. Notably, the bank had already cut its same-store sales estimates three weeks before the report, yet actual results still came in below its revised forecasts. JPMorgan analysts described the pre-earnings situation as a "mess," with multiple factors intertwining and making the stock's direction hard to predict. Still, the bank believes the selloff has largely run its course, and as advertising, marketplace, and membership businesses continue to expand, Wal-Mart's trajectory should improve.
Other banks followed suit. BMO Capital cut its target to $126, citing the same comp sales slowdown and weakness in health and wellness; TD Cowen lowered its target to $125, also pointing to the 2.6% comp sales growth; and Bernstein maintained an "Outperform" rating, highlighting Wal-Mart's strong margins as a reason for confidence. According to data, of the 32 analysts covering Wal-Mart, 29 recommend "Buy," 3 recommend "Hold," and none recommend "Sell." The average price target stands at roughly $130, implying about 25% upside from the current share price near $104. Wall Street, in sum, remains tilted toward optimism, albeit with reduced near-term expectations.
New Ventures Emerge as Growth Engines
Despite the pharmacy drag, Wal-Mart is cushioning the pressure by diversifying its revenue streams. Global advertising revenue climbed 38% year-over-year, U.S. marketplace sales surged 52%, global membership income rose nearly 17%, and the first half of the fiscal year marked the best-ever period for new sign-ups to the Walmart Plus membership program. CFO Rainey noted that nearly half of the quarter's profit growth came from membership, advertising, and marketplace operations rather than the traditional core retail business. He also pointed out that e-commerce advertising is growing faster than overall e-commerce sales, boosting incremental margins. On the e-commerce front, global online sales grew 23% year-over-year, with international markets seeing e-commerce account for 30% of sales, driven by strong growth in China, India, and Canada. Sam's Club U.S. e-commerce sales rose 26%, and since launching one-hour delivery in April, club delivery volumes have grown by triple digits.
CEO Furner also highlighted that the company executed more than 11,000 "Rollbacks" price reductions during the quarter, up from 7,200 at the end of the first quarter. He believes these price cuts will first boost volumes, followed by market share gains over subsequent quarters. Food category market share data for the quarter appeared strong, seemingly supporting management's stance. JPMorgan analysts observed that Wal-Mart's profit channels are now more diversified than in the past, and these emerging businesses are growing rapidly enough to offset the pharmacy drag. The bank added that bearish arguments assume price cuts won't generate lagged benefits, meaning promotions only erode profits without lifting traffic or share. But management's commentary and the food share data suggest the company holds a different view on the effectiveness of its pricing strategy.
Lessons from Past Big Drops: Modest Recoveries and Valuation Pressures
Wal-Mart's 9.2% single-day decline last Thursday was its largest since May 2022 and the fourth-largest daily drop in the past 15 years. As of this writing, the company's market capitalization stands at approximately $825 billion. Over the past decade, adjusting for dividend reinvestment, Wal-Mart has delivered shareholders returns exceeding 400%. Historically, the stock's performance after its three previous larger daily declines has been decent but hardly spectacular. On October 14, 2015, shares fell 10% after management warned of a profit decline the following year; a year later, the stock was up about 14% from that day's close. On February 20, 2018, shares dropped 10.2% on holiday-season e-commerce growth slowdown and margin compression; a year later, the stock was roughly 6% higher than the closing price, though still below pre-decline levels. On May 17, 2022, shares plunged 11.4% as soaring costs severely dented profits; a year later, the stock had gained about 14% from that day's close, just returning to the level before the drop. Overall, investors who bought after those three major declines saw positive returns a year later, but the gains were modest, and measured from the day before each plunge, the stock merely filled the gap or remained below prior levels. In contrast, after a 7.3% drop on May 21 this year following the first-quarter earnings, Wal-Mart's shares were still about 14% lower than that day's close three months later, having yet to recover.
A key difference this time versus the past three episodes is that those earlier selloffs were accompanied by bad news on the profit front: a profit warning in 2015, margin squeeze in 2018, and cost spikes in 2022. This time, Wal-Mart raised its full-year guidance and delivered robust earnings, but its third-quarter sales guidance of 3% to 3.75% growth indicates revenue momentum continues to fade. Investors are not reacting to a profit shock but are instead downgrading revenue growth expectations. On valuation, based on the midpoint of the updated full-year adjusted EPS guidance, the current share price implies roughly 37 times forward earnings, significantly above the company's ten-year average P/E of about 25 times. With projected earnings compound annual growth of 8.7% over the next five years, the stock is far from cheap. Even after the steep drop, shares remain about 9% above the 52-week low and about 23% below the 52-week high. This is still a richly valued stock, just "not as expensive" as it was.