[Click eStock] Why Did Walmart's Stock Fall Despite Strong Earnings?

With Walmart set to announce its earnings on August 20, analysts suggest that the key point for this quarter will be whether the company raises its annual earnings outlook, rather than the results themselves.

On August 12, Jae Woon Cho, a researcher at Daishin Securities, stated, "Although Walmart is the largest offline retailer in the United States, its growth over the past few years has not come from its stores, but from online, advertising, and membership revenues." He added, "In the previous quarter, the company reported revenue of $177.75 billion, which was 1.7% above the market consensus, and a gross margin of 25.14%, improving year-on-year for the ninth consecutive quarter. Nevertheless, the stock price fell by 7.27% on the day of the announcement, as the market was disappointed not by the results, but by the conservatism of the company's own guidance. Whether a similar scenario plays out again is the biggest variable this time."

Walmart shares are currently trading at a price-earnings multiple of 40.2 times expected 12-month earnings, 46% higher than the five-year average of 27.5 times. Cho commented, "With such a premium, even a moderate earnings beat does little to boost the stock price. On the contrary, if the results fall short of expectations, the downside could be significant, as evidenced by the more than 7% drop last quarter."

Walmart’s 40x multiple cannot be explained simply by traditional retail metrics. The market justifies this premium based on alternative revenue sources such as advertising, memberships, and the marketplace. Cho said, "These areas already generate about one-third of operating profit and have been driving up the gross margin regardless of seasonality. In the last quarter, 0.29 percentage points of the U.S. gross profit margin improvement came from these mix changes. Walmart’s recent $1.4 billion acquisition of French ad tech firm Vibe.co is seen as a move to expand into connected TV advertising."

Investment remains a headwind. Cho pointed out, "Free cash flow has turned negative, and capital expenditures are still near their peak. While the fact that about half of logistics center automation upgrades have been completed supports the possibility of passing the investment peak in the next fiscal year, the extent to which cash flow recovers this quarter will be a key factor in the valuation debate."

This quarter, external variables such as fuel costs and tariff refunds are likely to affect Walmart’s profit margin. The forecast does not include a $175 million fuel cost headwind or potential tariff refunds under the Defense Production Act in the U.S., both of which could impact margins. Cho explained, "If the refunds are confirmed in the second half of the year, they will directly add to the upside potential. The company has offered a full-year earnings-per-share outlook of $2.75–2.85, while the market consensus is $2.91, reflecting this conservative approach. Walmart has set low guidance for four consecutive years, only to raise it multiple times later. The main point to watch is whether the first upward adjustment comes this quarter."

Even if Walmart beats the consensus, the stock’s reaction is expected to be limited if the company does not raise its annual guidance. Cho forecast, "If earnings exceed expectations and the full-year EPS guidance is raised above $2.85, it would confirm the trajectory justifying the 40x multiple and could prompt a stock revaluation. Conversely, if the outcome merely meets expectations, the high anticipations underpinning buy ratings could turn into downward pressure."

This content was produced with the assistance of AI translation services.