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Walmart Snags 16% Higher Profits in Q3

By Demitri Kalogeropoulos – Nov 19, 2020 at 12:00PM

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The retailer is set for a big holiday selling season.

Investors had been hoping to hear good news in Walmart's (WMT -1.33%) third-quarter earnings report. The world's leading retailer was sure to see slowing growth as compared to the prior quarter due to the end of fiscal stimulus measures. But Wall Street was still expecting strong results in areas like e-commerce sales, profits, and cash flow.

Walmart delivered growth in these key areas in the period that ended in late October, which sets the chain up for a strong finish to a record fiscal year.

A man shopping in a grocery store.

Image source: Getty Images.

Sales trends

Sales trends slowed, as expected, thanks to pressures including the withdrawal of federal financial support and further COVID-19 outbreaks. Comparable-store sales growth in the U.S. landed at 6.4%, compared to 9.3% in the second quarter. Most of that growth came from the digital sales segment, which grew 79% (compared to 97% in Q2) and accounted for 5.7 percentage points of Walmart's 6.4% boost.

The chain noted continued strength across the business, with grocery demand growing as more people eat at home. Its general merchandise categories had been spiking in the context of stimulus checks hitting consumers' bank accounts in Q2, but that division still managed solid growth as people spent aggressively on home furnishings, electronics, and sporting goods. "This was another strong quarter on the top and bottom line," CEO Doug McMillon summarized in a press release.

Soaring profits

The financial wins stole the show this quarter as Walmart achieved a 56% increase in earnings per share. That reported figure included some noise, including currency exchange issues. But adjusted profit growth was still strong at 16%.

Supporting those gains was a modest uptick in gross profit margin to 25% of sales and a slight drop in operating expenses as a percentage of revenue. Those factors resulted in adjusted operating income of $6.6 billion, or 19% higher year over year.

Walmart tiptoed back into buyback spending, allocating $500 million toward share repurchases after having spent nothing in that arena in Q2. That conservative approach indicates management is still feeling cautious about the short-term growth outlook, given further COVID-19 outbreaks and surging unemployment levels in key markets like the U.S. Walmart returned $2 billion to shareholders in Q3, down 24% from the prior year.

A strong finish

Management didn't reinstate a detailed 2020 outlook, even though just a few weeks remain in the fiscal year. But elevated demand trends in niches like consumer electronics imply a strong finish over the holiday shopping season.

Meanwhile, investors have some good reasons to believe Walmart can grow sales again in 2021, even compared to this year's pandemic-lifted results. Executives said many of consumers' newest behaviors, like multi-channel shopping and higher average spending, will persist as the COVID-19 threat fades.

That optimistic reading is balanced against major risks to short-term trends, including sharp recessions in places like the U.S. and Europe. But Walmart removed a few investor concerns in this report by showing it kept growing sales while boosting profitability, even as the pandemic stretched on through October.

Demitri 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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