Walmart (WMT -0.12%) delivered another blowout earnings report Tuesday morning.
Investors responded to the numbers with a shrug, sending the stock down modestly on the news on fears about a slowdown in the third quarter, but the results were undeniably strong. U.S. comparable sales jumped 9.3%, driven by 97% e-commerce growth. Overall revenue rose 5.6% to $137.7 billion, topping estimates of $135.5 billion, and adjusted earnings per share surged from 23% to $1.56, easily beating expectations of $1.25. The increase in profits came as gross margin improved, e-commerce losses narrowed, and the company overcame an additional $1.3 billion in incremental spending.
The COVID-19 pandemic was a tailwind for much of the business during the quarter as more consumers relied on Walmart for food, cleaning supplies, and general merchandise for home maintenance and improvement. However, there were three areas in particular that stuck out as key drivers of the strong second-quarter results.
Image source: Walmart.
1. E-commerce sales accelerated
Walmart's U.S. e-commerce business is coming into its own and even saw sales accelerate by 74% in the first quarter, the February-April period, to 97% in the second quarter. Online sales were strong internationally as well, more than doubling in key markets like Mexico, China, and Canada, and rose 98% in the U.K.
U.S. e-commerce sales made up six percentage points of the 9.3% comparable sales growth, and Walmart's third-party marketplace saw sales grow by triple digits in the quarter. That business is critical to its future in e-commerce and its profitability. Amazon's marketplace has emerged as one of its most profitable businesses, and it remains one of Walmart's biggest opportunities, especially as online sellers are eager for a rival to counter Amazon's dominance. In June, Walmart announced a partnership with Shopify to bring 1,200 sellers to its marketplace, which could pave the way to further growth in third-party sellers.
The company also noted significantly lower losses in e-commerce in the quarter due to growth in the marketplace, higher overall sales, and growth in higher-margin categories like home and apparel, which was a key driver in profit growth in the quarter. U.S. e-commerce sales hit an estimated $10 billion in the quarter, making it the clear No. 2 e-commerce business in the U.S. behind Amazon.
2. Sam's Club flexed its muscles
Walmart's membership business, Sam's Club, has traditionally been a sore spot for the company, growing slowly and lagging behind sector leader Costco.
However, sales at Sam's Club soared in the second quarter as stocking-up behavior on consumer staples continued during the period. Comparable sales at Sam's Club, excluding fuel and tobacco, jumped 17.2% with the help of 39% growth in e-commerce. Membership also soared, up more than 60% from a year ago, its highest growth rate in more than five years, and membership income increased 7.8% from the year before. The company also noted improvements in renewal rates as well as greater penetration for its higher-priced Plus memberships.
The strong growth in sales at Sam's Club paid off on the bottom line as well, as operating income jumped 23.3% to $592 million. Those new members are likely to stick around after the pandemic, which could continue to drive significant growth in the warehouse business.
Sam's Club only makes up about 12% of Walmart's sales companywide, but the business has significant growth potential as its revenue is less than half that of Costco's.
3. Government stimulus provided an assist
Walmart stock was up as high as 6% in premarket trading after the company released its numbers, but the stock cooled off as management warned that it expected sales to slow down as government stimulus measures, including a $600 weekly payment for unemployed workers, come to an end.
Management noted that comparable sales growth slowed about 4% in July as stimulus measures approached an end, and though it didn't give guidance for the third quarter, the company implied that sales growth would slow as business had begun to normalize.
Overall retail sales in the country had recovered all of their losses by July, returning to pre-pandemic levels in spite of the unemployment remaining in double digits, thousands of businesses struggling or closing, and continuing uncertainty. CEO Doug McMillon seemed to believe that government stimulus was the biggest tailwind for the company in the quarter, saying, "My sense is that the order of things, the order of tailwinds that impacted the business were one, stimulus, two, eating at home, three, being at home, and all the things that you wanted to do to have the indoors and outdoors be more pleasurable."
While Walmart clearly executed during the second quarter, the company's performance, as well as the rest of the retail sector's, clearly got a lift from government payments. Without another stimulus package from Congress, Walmart's sales, as well those of its retail peers, are likely to decelerate in the third quarter.
Nonetheless, with strong improvements to its e-commerce business, a number of rivals weakening, and its "everyday low prices" model well-positioned for a recession, Walmart should emerge from the pandemic in strong shape.
