By any conventional measure, Walmart (NYSE:WMT) deserves a 10 on its latest earnings report. Comparable sales were strong, e-commerce sales surged to their fastest pace in a year, and the company delivered solid growth in international markets. The retail giant even boosted operating income by 6% in constant currency, which it had struggled to do in previous quarters, and adjusted earnings per share increased from $1 to $1.08, beating analysts' estimates of $1.01.

Walmart also lifted its guidance for the year, calling for adjusted earnings per share (EPS) of $4.75-$4.85, up from a previous range of $4.65-$4.80, and it sees U.S. comparable sales of "at least 3%," better than its earlier forecast of "about 3%."

Despite the stellar results, Walmart shares still declined 2% on Thursday after the report came out and lost another 2% on Friday. What gives? Before we examine that question, let's take a closer look at the key numbers. 

A Walmart tractor-trailer on the road

Image source: Walmart.

Business as usual

  • Comparable sales rose 3.4% at Walmart U.S. stores and increased 5.7% at Sam's Club locations, excluding fuel and tobacco. At Walmart U.S. stores, two-year stack comps were up more than 6% (i.e. the sum of this quarter's and the prior-year quarter's comps increases exceeded 6%), the first time the company has had a two-year comp over 6% in more than a decade.
  • Performance in the international segment also impressed as the business delivered positive comparable sales in 9 out of 10 of its foreign markets and all four of its largest ones. In Mexico, Walmart's biggest international market, comps rose by a brisk 6.3%, and the company posted comparable sales growth of 2% in the U.K., its sixth consecutive quarter of sales growth there. This indicates that the company has put its former problems in the U.K. behind it with the help of the merger of its Asda subsidiary with Sainsbury's.   
  • E-commerce sales jumped 43% at Walmart U.S. stores as the company continues to expand programs like grocery pickup with nearly 2,100 locations, as well as grocery delivery, where it will have 800 locations serving 40% of the U.S population by the end of the year, and Pickup Towers, which are expected to reach 700 stores by the end of the year. E-commerce has become a big enough part of the business to drive overall comparable sales significantly higher as it contributed 140 basis points to the company's comparable-sales growth this quarter. At Sam's Club, e-commerce sales were up 32%, lifting comparable sales by 130 basis points. 
  • Finally, management's decision to lift earnings per share and comparable-sales guidance for the full year indicates the company expects this momentum to continue into the key holiday season.

What's the rub?

Though Walmart missed estimates of $125.6 billion on the top line as it posted $124.9 billion in revenue, up 1.4% from a year ago, the figure was hurt by currency exchange rates. In currency-neutral terms, revenue increased 2.4%, to $126.1 billion. Even ignoring the currency translation, the revenue miss alone isn't enough to justify the 4% slide after the report.

Instead, these are two reasons that seem to explain the sell-off. Either the market is nervous about the company's growth continuing next year or it believes the stock is fully priced. It's likely some combination of the two.

There's little question that Walmart is executing on its initiatives to build online sales through programs like grocery pickup and improving customer service to bring more traffic into stores. However, those investments have come at a cost as the company has struggled to grow profits alongside comparable sales.

Online sales, especially in the build-out phase, tend to carry a lower margin than in-store sales, and Walmart saw its gross margin fall 28 basis points during the quarter, in part due to the higher costs of e-commerce. That weakness was offset by leverage gains in operating expenses as higher same-store sales lowered the percentage cost of occupancy expenses.

However, analysts expect continuing challenges on the bottom line as they see adjusted earnings per share falling from a projected $4.79 this year to $4.68 next year. Comparisons in 2019 will be more difficult as the company laps the benefit of this year's tax cut.

Additionally, Walmart shares aren't exactly cheap for a company expected to struggle on the bottom line. The retailer's price-to-earnings (P/E) ratio is 20, slightly less than the S&P 500's at 22.3 but higher than peers like Target at 15.7 and Home Depot at 19. This indicates that the market remains generally skeptical about retailers.  

Even after trading sideways for much of 2018, Walmart stock is still up 73% over the last three years so resistance to the stock is likely to remain until the retailer can deliver consistent earnings reports. The holiday quarter and next year's guidance will be key to determining near-term stock direction.

Walmart is making all the right moves as it builds out a strong omnichannel business, but for now, shareholders will just have to be patient.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.