Walmart Sees Strong Q2 Results, With Inflation a Driver

Walmart grocery interior feature

Walmart reported 12% second-quarter ecommerce growth, up 18% vs. 2020, as it gained market share in grocery and passed 1 million deliveries for its GoLocal service that provides last-mile service for other retailers including Home Depot, with inflation helping attract more upscale shoppers.

“We expect inflation to continue influence the choices that families make, and we’re adjusting to that reality so we can help them more,” Walmart CEO Douglas McMillon said on an earnings call. “Regardless of the inflation level and as we work through the places where we have too much inventory, we continue to make progress on our strategy.”

In fact, that inflationary pressure is leading to an unusual result: shoppers higher up the income ladder hitting Walmart to save, helping the company gain market share in grocery.

“In the Walmart U.S. business, we have seen mid- to higher-income customers come to Walmart looking for value,” McMillon said. “As you would expect, food and consumables, in particular, are places where they’re looking to save some money. That’s not a total surprise. I think the strength of it is encouraging.”

McMillon said Walmart is becoming a more digital and omnichannel retailer — for instance, increasing the volume of ecommerce orders fulfilled from stores by 40% — while growing ancillary businesses including 3P fulfillment and advertising.

Q2 revenue increased 8.4% to $152.9 billion, and earnings per share were $1.77, ahead of a Refinitiv analyst consensus of $1.62 per share. Big-box discount rival Target, on the other hand, saw its net income drop 90% from the prior year, as inventory and clearances for the holiday season weighed heavily on the bottom line.

“If we hadn’t dealt with our excess inventory head on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potential,” Target’s Chief Financial Officer Michael Fiddelke said on a call with reporters, per CNBC. “While our quarterly profit took a meaningful step down, our future path is brighter.”

Like Target, Walmart last month reduced its quarterly and year-end profit targets due to over-stocked inventory and plenty of discounting as well as slower sales of higher-margin products. Same-store sales were up 6.5%, and up 11.7% vs. two years ago.

“As we moved through Q2, food inflation continued to tick up, and we continue to see a heavier mix of sales in food and consumables in many of our markets, and that put pressure on margins overall,” Walmart CEO Douglas McMillon told analysts on the earnings call.

As far as inventory levels, McMillon said Walmart acted “quickly and aggressively” on markdowns starting in March across certain categories. “We’ve made good progress to reduce inventory levels where we focused, and taken markdowns,” he said.

While the markdowns affected margins, McMillon said it relieved pressure on stores and the supply chain, with the number of shipping containers in its system halved since Q1.

Walmart GoLocal, which was launched a year ago, uses crowdsourcing through its Spark Driver platform. McMillon said the company expects to have 5,000 pickup locations by year’s end, “and client satisfaction scores are strong.”

“We continue to sign up larger-scale customers, and we’re making strides on the bigger unlock, which are small and medium-sized businesses,” he said. “Our technology and expertise will help so many of these businesses grow while contributing to our operating margins over time.”