Walmart 2Q FY27 Earnings Update: Slower Comps, but the Digital Flywheel Remained Intact

Since our last update in end-May, Walmart’s shares were traded broadly sideways, as market were cautious on continued strength in e-commerce and higher margin commerce solutions businesses would offset by management cautious guidance amid its elevated valuation.

Fast forward to 20 August, Walmart delivered a mixed 2Q FY27 results, with revenue rose 5.9% y/y to USD187.9bn, while EPS increased 19.1% to USD0.81, ahead of consensus of USD0.74, despite tariff refunds accounted for approximately USD0.05 per share. Notably, the market’s focus on the quarter earnings was on Walmart US, where comps (comparable store sales) grew only 2.6% against expectations of around 3.8%. This was partly offset by continued strength elsewhere in the group, with Sam’s Club delivering 4.4% comparable sales growth and Walmart International net sales rising 7.9% in constant currency, supported by 19% e-commerce growth. Nevertheless, the share price fell -9% post earnings, largely driven by the softer US comp and weaker 3Q guidance outweighed the higher full year guidance.

Overall, we believe pharmacy pricing was only part of the weakness in Walmart US. While MFP (Maximum Fair Pricing) continued to reduce Health & Wellness sales, higher fuel prices and the fading benefit from 1Q tax refunds also weighed on lower income consumers, leading to slower transaction growth. Yet, the earnings impact was less severe than the headline comp suggests, given that pharmacy is a low margin category, while the higher margin commerce solutions or digital businesses continued to scale. Hence, at the group level, stripping away the estimated contribution from tariff refunds, underlying operating income growth remained close to 10%. We therefore lower our Walmart US comp assumptions, but continue to expect advertising, membership and Marketplace to provide enough incremental profit to keep group operating income growth ahead of sales.

Figure 1: Walmart’s share price.

Figure 2: Walmart 2Q FY27 key financial performance.

Source: Walmart, Claude compilations.

Consumer macro and pharmacy pressure slowed Walmart US comps

Although Health & Wellness was the largest drag on Walmart US comparable sales, the central debate on this quarter earnings result is the moderation in consumer demand, where comparable sales excluding Health & Wellness grew approximately 3.4%, albeit better than the reported 2.6%, it is still below the pace of recent quarters. On top of that, the comp miss was broader than pharmacy pricing alone, with transaction growth slowed to 1.5% from 3.0%, with general merchandise slowed to low single digit growth from mid single digits in 1Q FY27.

Overall, we believe the slower consumer growth was mainly reflecting higher fuel prices and the fading benefit from tax refunds seen in 1Q FY27, placing a greater pressure on lower income households, which represent a meaningful share of Walmart’s customer base. As such, with consumer sentiment still subdued and the retail backdrop becoming more promotional and more value seeking, we expect the macro backdrop will likely limit the pace of recovery in Walmart US comps.

Meanwhile, Health & Wellness added another layer of pressure. Though the Maximum Fair Pricing has implemented in January 2026, we saw a greater impact on Walmart US comps in 2QFY27 by approximately 125bps, widening from around 100bps in 1Q FY27. Yet, in our view, we believe market had already anticipated most of the pharmacy pressure since the MFP January implementation. And moving forward, we expect the pharmacy headwind to persist throughout FY27, as Walmart will only begin to lap the first group of Maximum Fair Prices in 1Q FY28.

Nevertheless, the impact on earnings should remain limited, as prescription volumes continued to grow at a mid-single digit rate and market share gains remained intact, suggesting the pressure came from lower revenue per prescription rather than weaker volumes. As pharmacy is a low margin category, the drag on reported sales should remain materially greater than the impact on gross profit.

Meanwhile, despite the weaker quarter, moving forward, we expect the tariff refund reinvestment, which had lifted rollbacks by July, together with back to school demand, could support transactions and drive a sequential improvement in sales, partly offset the continued pharmacy pressure within Health & Wellness.

Figure 3: Both the Walmart US comparable stores sales growth and traffic growth saw declining.

Figure 4: Walmart US merchandise category performance details.

Tariff funded rollbacks should support 2H FY27 transactions

With US demand showing signs of moderation, the key question for the second half is whether Walmart’s price investments can bring back transactions. According to management, Walmart received nearly all of its tariff refunds in 1H FY27 and, in response to the softer consumer backdrop, the company has reinvested essentially the full amount by increasing the number of rollbacks from approximately 7,200 at the beginning of the quarter to around 11,000 by July to lower prices, to absorb supplier cost increases rather than passing them on to customers.

Notably, most of the rollbacks were introduced towards the end of the quarter, which we believe their full impact on either sales or gross profit has not reflected in the latest earnings results. At the same time, we expect some price investments to flow through gross profit only after the rollback inventory is sold. Accordingly, the lower prices resulting from the additional rollbacks are the reasons why the management’s higher full year guidance through stronger traffic and market share gains.

Nevertheless, while our base case is that stronger transactions will allow Walmart to recover part of the initial ticket pressure and reinforce its market share gains, subdued traffic would make further rollbacks less productive and place greater pressure on retail margins once the tariff refund has been fully deployed.

Figure 5: Management has raised its full year guidance for FY2027.

Source: Walmart, Claude compilations.

The digital flywheel remains the engine of incremental profit

Despite the weaker Walmart US comp, the underlying earnings result remained resilient, with operating income growing 17.4% in constant currency, while gross margin increased to 25.4%. Although the tariff refund contributed approximately USD600mn, underlying operating income still grew close to 10% excluding this benefit, near the upper end of management’s previous 7%–10% guidance.

The robust result continues to reinforce our view that Walmart’s earnings growth is becoming less dependent on retail sales alone and more dependent on the broader higher-margin businesses. To break this down further, we continued to see stronger traction in Walmart US e-commerce sales, which grew 24%, while Marketplace expanded 52% and global advertising and membership revenue increased 38% and 17%, respectively.

Moving forward, we remain constructive on these higher margin commerce solutions businesses, which should help sustaining gross profit despite softer US transactions. This provides Walmart with greater capacity to reinvest in prices without placing the full burden on retail margins, strengthening the flywheel between e-commerce growth, Marketplace participation, advertising revenue and customer traffic. That said, while the aforementioned tariff refund boosted 2Q earnings, we note that its subsequent reinvestment could further weigh on operating income growth in 3Q.

The key risk is that the additional rollbacks fail to generate sufficient volume, where weaker fixed cost leverage would place more pressure on advertising, membership and Marketplace to sustain group earnings growth. Therefore, while our base case is expecting increasing rollbacks and back to school season to support the comp growth, 2H FY27 transaction growth would be the key figures to monitor ahead.

Figure 6: E-Commerce growth remains robust.

Figure 7: Commerce solutions business remains at high double digits growth.

Reiterating HOLD on Walmart

We reiterate our HOLD rating on Walmart. The weaker Walmart US comp points to a broader moderation in consumer demand, with transaction growth slowing to 1.5% and general merchandise growth also easing. Notably, this is the first time Walmart US has delivered a comp below 3% since 2019, with the prior seven quarters all coming in above 4%. On top of that, monthly comparable sales at US retail peer Costco (excluding the impact of gas prices) remained robust, growing 6.9% in July, raising concerns over whether Walmart is losing market share in the US retail space. Nevertheless, on the other hand, Walmart’s underlying earnings result remained resilient, and we continued to see the commerce-solutions flywheel spinning, with operating income growing close to 10% excluding the tariff refund, supported by continued growth in advertising, membership and Marketplace. On top of that, Walmart International, Sam's Club continue to scale steadily.

We also note that the macro backdrop has become less supportive. Walmart has been a structural beneficiary of the K-shaped economy (as highlighted in the previous earnings update), gaining share as lower income households traded down while also attracting more upper income customers. We believe this remains intact. However, the lower income household (half of Walmart customer base) is now under more visible pressure from higher energy costs, while a renewed pickup in inflation remains a risk. We would therefore prefer to see the price investments convert into stronger transactions before turning more positive.

As such, applying a fair P/E of 38x, which reflects the transition towards a flywheel built on commerce solutions and e-commerce, we derive a target price of USD132, implying upside potential of 27.0% based on our FY29 estimates. While we maintain our HOLD rating on Walmart, the recent share price selloff offers a relatively better entry point for investors seeking exposure to Walmart.

As such, we lower our fair P/E to 34x from 38x, still reflects a substantial premium for the transition towards a flywheel built on commerce solutions and e-commerce while taking the coming years pharmacy headwinds ahead. We derive a target price of USD118, implying upside potential of 13.8% based on our FY29 estimates. While we maintain our HOLD rating on Walmart, the recent share price selloff offers a relatively better entry point for investors seeking exposure to Walmart.

Table 1: Valuation Summary.

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.