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Strong demand across income levels boosts Walmart's ( WMT )

revenue

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Walmart's ( WMT ) e-commerce sales jump 25%, aiding overall growth

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Second-quarter profit below expectations, first miss in 3

years

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CEO warns tariff costs increasing as inventory replenished

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Walmart ( WMT ) stock falls

By Savyata Mishra and Siddharth Cavale

Aug 21 (Reuters) -

Walmart's ( WMT ) results

WMT.N

on Thursday show U.S. consumers across the spectrum are

still flocking to the retailer's stores despite economic

headwinds, but shares dipped as the company's margins ebbed and

inventory costs rose.

The world's largest retailer has scooped up market share

from rivals as wealthier consumers frequent the store more

often, worried about the effects of tariffs on prices. That's

fueled an 85% surge in the stock over the last year-and-a-half

that some analysts say has made its valuation too lofty.

Shares were down 4% in midday trading, as its second-quarter

profit was lower than expected, registering Walmart's ( WMT ) first

earnings miss in more than three years. Its 12-month forward

price-to-earnings ratio of 36.64 is roughly double the industry

median and nearly three times higher than Target's ( TGT ).

Investors also focused on Walmart's ( WMT ) gross margins for the

quarter, which fell short of their expectations, even though the

companny raised its fiscal year sales and profit forecasts.

While U.S. gross margins rose 26 basis points, overall gross

margins were about flat at 24.5% versus 24.4% last quarter,

missing consensus estimates of 24.9%, according to brokerage

D.A. Davidson.

"Expectations were high for a margin beat and we didn't get

that, so we're getting a little bit of a pullback on the stock,"

said Steven Shemesh, RBC Capital Markets analyst.

Still, the Bentonville, Arkansas-based chain's results

showed it has continued to benefit from growing price

sensitivity among Americans, earning revenue of $177.4 billion

in the second quarter. Analysts on average were expecting

$176.16 billion, according to LSEG data. Adjusted earnings per

share of 68 cents in the second quarter fell short of analyst

expectations of 74 cents.

Consumer sentiment has weakened due to fears of tariffs fueling

higher inflation, hitting the bottom lines of some retail

chains, but Walmart's ( WMT ) sales have remained resilient. Companies

have been able to withstand paying those import levies through

front-running of inventories, but as those products are sold,

the next shipments are pricier, Walmart ( WMT ) CEO Doug McMillon said.

"As we replenish inventory at post-tariff price levels,

we've continued to see our cost increase each week," he said on

a call with analysts, noting those costs will continue rising in

the second half of the year. The effects of tariffs have so been

gradual enough for consumer habits to change only modestly.

Walmart ( WMT ) had warned it would increase prices this summer to

offset tariff-related costs on certain goods imported to the

U.S., a move that drew criticism from President Donald Trump.

Consumer-level inflation is increasing modestly, while wholesale

inflation spiked in July to its fastest rate in more than three

years.

According to an S&P Global survey released on Thursday, input

prices paid by businesses hit a three-month high in July, with

companies citing tariffs as the key driver. Prices charged by

businesses for goods and services hit a three-year high, as

companies passed along costs to consumers. A day earlier, rival

Target ( TGT ) warned of tariff-induced cost pressures.

Walmart ( WMT ) got a boost from a sharper online strategy as more

customers relied on home deliveries. Its global e-commerce sales

jumped 25% during the second quarter, and Walmart ( WMT ) said one-third

of deliveries from stores took three hours or less.

SHOPPERS ADJUST TO HIGHER PRICES

McMillon expects current shopping habits to persist through

the third and fourth quarters. He noted middle- and lower-income

households are making noticeable adjustments in response to

rising prices, either by reducing the number of items in their

baskets or by opting for private-label brands. This shift has

not been seen among higher-income households, which Walmart ( WMT )

defines as those earning over $100,000 annually.

Walmart ( WMT ) expects annual sales to grow in the range of 3.75%

to 4.75%, compared to its prior forecast of a 3% to 4% increase.

Adjusted earnings per share are expected in the range of $2.52

to $2.62, compared to its previous range of $2.50 to $2.60.

Chief Financial Officer John David Rainey said the company

is looking at more possible financial outcomes than before

because of trade policy talks, uncertain demand, and the need to

stay flexible for future growth. Based on what it saw in the

second quarter, Walmart ( WMT ) expects the impact on margins and

earnings from the higher cost of goods to be smaller in the

current quarter than it previously thought, Rainey said.

"Broad consumer and macro trends remain favorable to

Walmart ( WMT ), especially in the shape of consumers wanting to

maximize bang for their buck," said Neil Saunders, managing

director of retail consultancy GlobalData.

Walmart's ( WMT ) total U.S. comparable sales rose 4.6%, beating

analysts' estimates of a 3.8% increase. The company noted strong

customer response to over 7,400 "rollbacks," its term for

discounted prices, with 30% more rollbacks on grocery items.

Average spending at the till rose 3.1% from an increase of

0.6% last year, but growth in customer visits fell to 1.5% from

3.6% in the year-earlier period. Walmart ( WMT ) logged 40% growth in

marketplace sales, including electronics, automotive, toys, and

media and gaming.

Two-thirds of what Walmart ( WMT ) sells in the U.S. is

domestically-sourced, executives had said last quarter, which

gave it some insulation from tariffs compared to competitors.