Walmart reported their fiscal Q1 ’26 earnings results last Thursday morning, May 15th, 2025 and while actual EPS beat consensus by 5%, revenue slightly missed for the quarter and maybe more importantly, and something rare for Walmart since 2022, inventory grew 4% y-o-y while revenue grew 3%, that ratio usually being reversed, i.e. typically revenue growth is always greater than inventory growth on a year-over-year basis.
John David Rainey, Walmart’s CFO, went to great pains saying Walmart was “very comfortable” with their inventory position. Maybe it makes sense for general merchandise retail giant to be pre-ordering and building inventory in advance of July 8th, but investors will have a better look in mid-August ’25 when Walmart reports their Q2 ’26 numbers.
The post-earnings analysis was almost entirely about tariffs and the pending tariffs for Walmart as it seems to be for most US companies, to the exclusion of Walmart reporting several favorable developments with last week’s earnings release:
1.) Ecommerce – now approaching 20% of total of total Walmart revenue – has finally turned profitable, which should definitely help margins over the next few years. The US and Sam’s ecommerce biz were both profitable, while international was slightly unprofitable, but globally, ecommerce is is profitable thanks in part to delivery costs and what Walmart management referred to as increasing density of delivery (more houses in delivery areas for lower cost per trip.)
2.) Walmart Connect, the advertising business grew 31% in the US and was up 50% “across markets” per the conference call. personally, I’ve always thought this was “margin-rich” revenue since unlike the core retail business, there is lower cost associated with advertising, particularly as the retailer scales the business.
3.) Long forgotten since it’s #2 to Costco, Sam’s Club has had a remarkable turnaround the last few years under Kath McLay, the segment’s CEO who appears to have done a remarkable job turning around Sam’s while competing with the warehouse club giant, Costco. Peak operating margins for Sam’s historically look to be 3%, i.e. whenever the warehouse club has seen a 3% operating margin like it did this quarter, the margin tends to recede, but there’s no question McLay and her team have put a remarkable strong of quarterly comp’s. Let’s see if operating margins can eventually expand with the better comp’s.
Management noted that Walmart’s operating income grew over 10% the last two fiscal years, even though this year’s guidance was for half that, and more importantly, what I thought was an important statement, was that management noted that “advertising and membership, as an example, was a quarter of our profits” (this quarter).
Walmart Connect and Membership as well as Fulfillment (and I’m really not sure what that segment is yet, although I suspect it’s the automated fulfillment centers) are the new revenue streams that while still small relative to Walmart’s expected $700 billion in revenue for fiscal ’26, will / should add to margins in the coming quarter and years.
Summary / conclusion:
The most overlooked aspect to the ecommerce profitability is that a previous drag on profits is now a contributor to profits, which is significant for a business that generates $700 billion in annual revenue, with a 5% – 7% operating margin.
Walmart’s secular growth outlook – if you look at analyst models – is that retail giant generates 3% – 4% revenue and 5% – 7% operating income growth over long periods of time, at least the last 15 years when Walmart and Amazon were faced with competing head-on across the continental US, but now Walmart may be able to fatten profit margins, and possible revenue as ecommerce becomes more profitable and new revenue streams like Walmart Connect (advertising) and membership begin to grow.
Probably for good reason, Walmart isn’t breaking this revenue streams out for investors, as the businesses are relatively new, but as John David Rainey said on the conference call, if the “flywheel” revenue streams accounted for 1/4 of the last quarter’s profitability, and e-commerce is nearing 20% of total revenue, I’d hope investors get a look at the breakdown of revenue at some point in the next year.
To their credit Amazon breaks out all their businesses (in terms of revenue, not margins) and for Amazon, advertising, which is just 8% – 9% of Amazon’s total revenue is growing high-teens every quarter, along with AWS. Amazon doesn’t give the operating margins for their various revenue segments, (except AWS), and AWS was 63% of Amazon’s total operating profit in Q1 ’25.
One final comment on Walmart’s valuation: most investors cite the lofty PE of 35x as a reason to avoid the stock, but you can tell most of these so-called investors were never analysts before becoming traders or portfolio managers. Walmart has over 10,000 stores, with about half that in the United States, which generates significant depreciation expense.
While Walmart’s PE is in the mid 30x, Walmart’s price-to-cash-flow is often half that PE, or 15x – 18x, which still isn’t screamingly cheap, but it puts the retailer in perspective, in terms of valuation. In terms of quality-of-earnings, Walmart’s operating cash-flow relative to net income is typically over 200% or 2x, which is very healthy, again given the depreciation expense add-back.
In my opinion, the more meaningful valuation metric for Walmart is price-to-sales, which has recently moved over 1x for the first time in 87 quarters or 21 years. That could mean Walmart is trading too rich, or it could also imply that the retailer is now poised to narrow the gap with Amazon now that it’s e-commerce operation is profitable, and operating margins are poised to permanently expand.
With all the worries about tariffs post the Walmart earnings release, the stock didn’t sell off very much.
This blog will look to add Walmart on any pullback to the mid to low $80’s, if the stock gets there.
This blog has written extensively on Walmart over the years, but never owned the stock in size until 2022 – 2023 given that anyone who wasn’t mentally-impaired knew knew that America’s greatest brick-and-mortar retailer, was still having their clock cleaned by Amazon. See a history of this blog’s articles in the February ’25 earnings preview. Walmart has finally figured out the e-commerce component and has made it profitable around the brick-and-mortar model. That’s saying something. Amazon’s AWS division truly makes Amazon unique though, and probably allows Amazon to generate a much higher operating margin, than it would from it’s “e-commerce” segment alone.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can lose principal even for short periods of time. The above information may or may not be updated and if updated, may not be done in a timely fashion. Readers should gauge their own comfort with portfolio volatility and adjust accordingly.
Thanks for reading.