To The Moon

$Wal-Mart(WMT)$ This quarter (FY26 Q2) saw "strong revenue, weak profits, and upward guidance." Revenue growth accelerated significantly driven by structural engines such as e-commerce, advertising, and membership programs, leading to revenue exceeding expectations; however, claims expenses from self-insured liability insurance and business integration efforts weighed on profits, resulting in adjusted EPS below consensus estimates, putting short-term pressure on the stock price. Management raised the full-year revenue and EPS range, maintaining the "price power + market share expansion" theme for the second half, and stated that the impact of tariffs will be "gradual and controllable."

Overall, we characterize this quarter as "good with some flaws." The key point to watch is whether the "quality growth" in advertising and e-commerce can be converted into more tangible profit elasticity in the second half of the year. In the long term, this financial report reinforces Walmart's position as a defensive retail giant. We believe that its performance is generally better than average, but the potential flaw lies in its dependence on high-margin businesses, which needs to be further observed.

Key information from the financial report

Revenue and E-commerce

• Data: Q2 total revenue $177.4B, +4.8% (Henghui +5.6%), exceeding market consensus $176.2B; Global e-commerce +25%, U.S. e-commerce +26%, store fulfillment delivery order volume nearly +50%. Compared to the "low 20%" growth rate of e-commerce in Q1, there was a sequential acceleration**.

• Drivers: Core categories such as fresh produce, daily necessities, and OTC products are driving growth, while the integration of e-commerce and brick-and-mortar stores is improving fulfillment efficiency.

• Whether it exceeded expectations: Exceeded (revenue); e-commerce growth also exceeded the expectations of many media outlets.

• Structural changes: Increased online penetration and store fulfillment further solidify the "omnichannel" advantage.

Profit and expenses

• Data: GAAP EPS $0.88; adjusted EPS $0.68 (up 1.5% year-over-year), below consensus estimate of $0.74; operating profit down 8.2%, adjusted for Henghui up 0.4%. Company disclosure: Approximately 560 basis points of the pressure on this quarter's profit came from the United States due to increased self-insured claims expenses for general liability insurance.

• Drivers: Claims expenses and several restructuring/legal projects weighed on results, partially offset by advertising, membership, and operational efficiency improvements.

• Whether it exceeded expectations: Weaker than (EPS).

• Structural changes: The income statement continues to be reshaped by high-margin businesses such as advertising and membership, but this is obscured in the short term by one-time expenses.

Same store and branch

• Data: Walmart U.S. same-store sales** +4.6%(traffic +1.5%, average transaction value +3.1%); Sam’s Club same-store sales (excluding fuel) +5.9% (transactions +3.9%, average transaction value +2.0%). International net sales $31.2 billion (+5.5%)**.

• Drivers: US "price matching" and "rollback" strategies, category mix and membership-driven strategies, and international growth driven by Walmart's Mexico and India businesses.

• Exceeded expectations: US same-store sales exceeded the consensus estimate of around 3.8% tracked by foreign media.

• Structural changes: The US large/optional goods market is showing signs of reaching a turning point with low single-digit positive growth.

Gross profit/advertising/membership

• Data: Gross margin +4bps; global advertising business +46% (including VIZIO), Walmart Connect U.S. +31% (excluding VIZIO); membership fee revenue +15.3%.

• Drivers: High-margin contributions from retail media and membership fees; VIZIO integration drives CTV advertising capabilities.

• Expected comparison: Advertising and membership growth exceeded mainstream expectations.

• Structural changes: Increased weighting of high-margin businesses provides a medium-term lever for improving profit quality.

Signals about the future

Management is generally optimistic about the outlook for the next quarter and the full year, but the guidance adjustment reflects a cautious stance: the company has raised its full-year net sales growth forecast to 3.75%-4.75% (previously 3%-4%), while operating income growth remains unchanged (expected to be 4%-5%). This may indicate a conservative estimate of cost pressures, avoiding overcommitment.

Management emphasized two points during the conference call: First, in response to the increase in procurement costs caused by tariffs, "we will maintain prices at the lowest possible level for as long as possible"; Second, the impact of tariffs is gradual, as "replenishing inventory at post-tariff prices is causing costs to rise weekly, and this trend is expected to continue into Q3 and Q4." The overall tone was cautiously optimistic, focusing more on managing expectations for consumers and the market rather than simply reassuring them.

On the other hand, management continues to emphasize "profit structure restructuring": global advertising +46%, Walmart Connect U.S. +31% (excluding VIZIO), and membership fees +15%, which will provide a "second curve" for profit elasticity. while acknowledging the one-time impact of claims expenses and the temporary pressure on U.S. profits this quarter.

Key Investment Points

1) Structural perspective: long-term trends vs. short-term topics

• A long-term track record of sustainable performance:

  • Omnichannel e-commerce: Q2 US e-commerce +26%, global +25%, and "store fulfillment delivery up nearly +50%" shows that the scale effects of the fulfillment network are still being realized; this type of "offline network + near-field fulfillment" capability has high entry barriers and strong stickiness.

  • Retail Media and CTV Traffic: Advertising +46% (including VIZIO), Walmart Connect U.S. +31%. VIZIO's CTV operating system and addressable advertising capabilities provide a new curve for advertising ARPU and advertising inventory supply.

  • Membership ecosystem: Membership fees +15.3%, Sam's and Walmart+ combo boosts frequency and repurchase, increasing long-term LTV.

• Short-term/emotion-driven factors:

  • Tariff transmission and price wars: Disturbances to unit quantities tend to be more short-term, and management has given a "gradual" forecast.

  • Claims expenses/legal items: More sporadic, but will affect profit momentum in the short term.

2) Discrimination angle: valuation and market expectations

As of the reporting date, Walmart's forward P/E ratio for the next 12 months was approximately 36–37x, significantly higher than its five-year average (according to Reuters), reflecting the market's willingness to pay a premium for the company's structural upgrade to "e-commerce + advertising + membership." Meanwhile, Costco's TTM PE ratio is approximately 55–56x, which remains higher; however, the two companies have different profit curves and exposure to discretionary goods, with WMT exhibiting stronger "defensive + platform-oriented" attributes. Our assessment: WMT's valuation is not cheap but can still be supported by "improved profit quality"; however, if profit elasticity materializes slower than expected, a short-term pullback would not be surprising.

3) Strategic judgment: The driving force behind accelerated platformization

Retail Media Platformization: VIZIO's integration enables Walmart to achieve a more complete "from exposure to conversion" closed-loop data and ad placement on CTV, combined with first-party transaction data and store fulfillment, potentially amplifying the advantages of advertising conversion and attribution. AI and Operational Efficiency: Management again mentioned the consumer-facing "Sparky" AI agent and the employee/developer-facing "Super Agent," with the logic being to improve search/discovery and fulfillment window predictions, thereby leading to more efficient conversions and lower net fulfillment costs. We believe this line will determine the mid-term "step" in e-commerce profit margins.

4) Variables and tracking list (potential catalysts/warnings)

Advertising (Walmart Connect) growth rate (excluding VIZIO) and advertising/GMV penetration rate: If maintained at 30%+, the valuation has the basis for repricing; a slowdown serves as a warning. E-commerce Profitability Path: Focus on unit order net fulfillment cost and store fulfillment ratio; management has stated that e-commerce profitability continues to improve, which is a key validation of profit elasticity. Membership Fees and Activity: Use membership fee revenue growth as a proxy metric; if it remains in the double-digit range, the moat of repeat purchases/frequency will be more stable. Tariff Pass-Through and Average Order Value/Unit Volume: If unit volume declines further or the shift to cheaper brands exceeds expectations, it will suppress same-store quality and gross margin.

Overall, we believe that FY26 Q2 was a quarter characterized by strong revenue growth and an optimized business structure, but with some shortcomings on the profit side. The slight upward revision of the full-year guidance validates the resilience of the core business and the platform transformation. If improvements in advertising and e-commerce profitability materialize as expected, there remains room for valuation expansion; conversely, under the current valuation, we need to wait for profit flexibility to further materialize.