Inflation boosts Walmart's top line. But consumers spend more on food and consumables, putting pressure on margins.

Walmart Inc., (No. 2 in the 2021 Digital Commerce 360 Top 1000) reported a 12% year-over-year increase in U.S. ecommerce sales during Q2 of its fiscal year 2023.

Overall comparable sales rose 6.5% for the or the 13-week quarter, compared to the comparable period a year earlier. The retailer says it also gained market share in the grocery category but did not provide specific data.

Walmart U.S. sales for the quarter were $105.13 billion, up 7.1% from $98.19 billion a year earlier. Consolidated revenue — which includes international sales and those of the retailer’s Sam’s Club warehouse unit — grew to $151.38 billion. That’s up 8.2% from $139.87 billion a year earlier. For the six months ended July 29, consolidated sales grew 5.4% to $294.43 billion, from $277.03 billion a year earlier.

Walmart says its global advertising business grew nearly 30% year over year, led by its Walmart Connect ad operation in the U.S., and website ads sold on Flipkart, Walmart’s Indian ecommerce unit.

The effects of inflation

“Our sales were well ahead of plan, with inflation lifting our average transaction size, but we know that the amount and persistence of inflation is negatively affecting many families,” Walmart CEO Doug McMillon said during a conference call with analysts on Tuesday, according to a Seeking Alpha transcript.

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As Q2 progressed, McMillon said food inflation continued to rise and Walmart saw “a heavier mix of sales in food and consumables in many of our markets and that put pressure on margins overall.”

Operating income for the quarter fell 6.8% to $6.85 billion, compared with $7.35 billion for the comparable period a year earlier. For the six months ended July 29, operating income was $12.17 billion, down 14.7% from $14.26 billion a year earlier.

Consolidated net income for the quarter was $5.15 billion, up 20.4% compared with $4.28 billion in the year-ago period. For the six months ended July 29, net income was $7.20 billion, up 2.8% year over year from $7.01 billion.

At the end of the first quarter, McMillon said, the costs of food and fuel, a heavier mix of sales in low-margin food and consumables, and excess general merchandise inventory were among Walmart’s biggest challenges. But now, he says, the retailer has made progress reducing inventory levels, though it came at a cost.

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“The aggressive approach we took to move through apparel in particular put financial pressure on us, but it helped relieve pressure on our stores and through our supply chain,” McMillon said.

Outlook updates

Walmart says it maintains its outlook for the third quarter and the remainder of the fiscal year. Walmart says it expects consolidated net sales in Q3 to grow about 5% year over year. It expects a negative effect of about $1.3 billion from currency fluctuations.

In the core Walmart U.S. business, Walmart expects comparable year-over-year sales growth of about 3.0%, excluding fuel. The retailer also expects consolidated operating income to decline 8.0% to 10.0% compared with a year earlier.

For the rest of fiscal 2023:

  • Walmart expects consolidated net sales growth of about 4.5%. Excluding divestitures, consolidated net sales growth will be about 5.5%, the retailer says.
  • Walmart expects U.S. comparable sales growth, excluding fuel, of about 3% in the second half of the year. For the full year, the retailer expects U.S. comparable sales growth, excluding fuel, to be about 4%.
  • Walmart expects global adjusted operating income to decline 9.0% to 11.0%, which is better than Walmart’s prior guidance of a decline of 11.0% to 13.0%. The update reflects performance in the second quarter. Excluding divestitures, Walmart expects consolidated adjusted operating income to decline 8.0% to 10.0%.

McMillon added that Walmart continues to see Walmart+, its paid rewards program, as a central part of the business and continues to improve it. This week, Walmart announced that, starting in September, Walmart+ members will receive a Paramount+ subscription at no additional cost.

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“The premium streaming service offers a broad content offering with original series, movies, family shows and live sports. We are excited about the coming launch, and we know our members will be, too,” McMillion said.

For the quarter ended July 29, Walmart reported:

  • Walmart U.S. sales of $105.13 billion, up 7.1% from $98.19 billion a year earlier.
  • Consolidated revenue of $151.38 billion, up 8.2% from $139.87 billion a year earlier.
  • Operating income of $6.85 billion, down 6.8% compared with $7.35 billion for the comparable period a year earlier.
  • The cost of sales grew to $115.84 billion, up 10.1% from $105.18 billion a year earlier.
  • Consolidated net income of $5.15 billion, up 20.4% compared with $4.28 billion in the year-ago period.

For the six months ended July 29, Walmart reported:

  • Consolidated sales of $294.43 billion, up 5.4% from $277.03 billion a year earlier.
  • Operating income of $12.17 billion, down 14.7% from $14.26 billion a year earlier.
  • The cost of sales grew to $222.69 billion, up 6.8% from $208.46 billion a year earlier.
  • Consolidated net income of $7.20 billion, up 2.8% year over year from $7.01 billion a year earlier.

Percentage changes may not align exactly with dollar figures due to rounding.

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