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Walmart Raises Its Outlook on U.S. Strength

By Demitri Kalogeropoulos – Aug 16, 2019 at 4:40PM

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The retailer's home market saved the day in the fiscal second quarter.

Investors had been looking forward to having some important questions answered by Walmart (WMT -1.93%) this week. The world's biggest retailer has a unique window into the strength of consumer spending around the world, after all. Its fiscal first-quarter report, meanwhile, offered some tantalizing hints at a potential growth acceleration, too.

On Thursday, Walmart largely delivered the answers that shareholders were looking for, with robust sales in most markets leading to a modest upgrade to its 2019 outlook.

Let's dive right in.

A man shops for groceries.

Image source: Getty Images.

Holding momentum

Sales gains slipped to below 3% in the core U.S. market for the first time in more than a year. However, its 2.8% gain was still worth celebrating. The growth came following a 4.5% spike in the prior year period that made comparisons tougher this time around. And yet Walmart still managed to boost customer traffic and average spending with help from a 37% spike in digital sales. Its two-year growth rate exceeded 7%, management said, to mark another record that investors haven't seen in more than 10 years.

"Customers are responding to the improvements we're making...and we're gaining market share," CEO Doug McMillon said in a press release. That likely spells bad news for key rival Kroger (NYSE: KR), which has lost ground to Walmart over the last two years after chipping away at the leader's share for the better part of a decade.

Profitability improved, with operating income rising 4% compared to a 3% sales uptick. Executives credited their efficiency gains, which allowed for aggressive pricing, as a key driver behind the surprising pace of profit expansion. It's especially good news for the business to see the e-commerce segment posting healthier margins after last year's weak result. "The productivity loop is working," McMillon explained.

Capital investments and outlook

The demand pace supported elevated capital spending as Walmart poured cash into store remodels that brought grocery delivery and pickup to hundreds of additional locations. The retailer still expects to spend about $11 billion on these improvements in fiscal 2020 in a multichannel strategy that's every bit as aggressive as Target's. Both retailers credit their flexible shopping offerings, where customers can easily switch between in-store and online purchasing, as key to their recent growth rebounds.

Looking ahead, McMillon and his team lowered their outlook for the international side of the business due to weakening results out of the U.K. and Canada. Yet strength in the U.S. market is more than offsetting that slump so that global sales are now on pace to expand a bit faster than they originally predicted. Walmart lifted its earnings outlook slightly for the same reason.

Investors can expect to see lots of spending over the next six months as Walmart brings next-day delivery services to essentially its entire U.S. store footprint. These latest results suggest that these investments are paying off, though, as they're helping produce surprisingly strong growth that's offsetting soft results internationally. They've also supported a boost to Walmart's outlook for the second consecutive year. "I'm pleased that our first half results and continued momentum across the business position us to raise our guidance for the year," CFO Brett Biggs said in a conference call with investors.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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