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What Investors Missed in Walmart's Q2 Earnings

By Demitri Kalogeropoulos – Aug 23, 2021 at 3:19PM

Key Points

  • The retailing giant has more things going for it than just booming consumer demand.
  • Cash returns are soaring despite increased spending on the business.
  • The holiday season could be another one for the record books.

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A sales growth upgrade wasn't the best news to come out of the retailer's latest earnings report.

Walmart's (WMT -2.33%) recent quarterly results erased a few big concerns that were weighing on investors in early 2021. Sales trends are holding up well despite the pullback in some stimulus measures. Consumers are still eagerly spending in attractive categories like home furnishings and digital ordering. And the chain's last month of the quarter was its strongest in the period, implying accelerating gains into the second half of 2021.

CEO Doug McMillon and his team explained in a recent conference call with investors why they think Walmart has a fundamentally stronger retailing model today than it did before the pandemic struck. Let's look at a few hidden gems from that presentation.

A young shopper uses a card to buy something online.

Image source: Getty Images.

Walmart is more than just a retailer

Walmart's massive consumer business gets most of the attention, mainly because it dwarfs every other global or national enterprise. But the company is so much more than just a retailer.

Its e-commerce division is on track to post $75 billion in annual sales this year, for example. And Walmart gets a big chunk of earnings from subscription services, like membership fees from Sam's Club.

New revenue streams have come on in just the last year or so to start to move the needle, too, such as advertising and data monetization. Sure, the retailing business will likely always be the core profit driver. But Walmart has some serious tech-related opportunities that will only grow with time.

"The phrase, 'serving customers', has traditionally meant one thing at Walmart," McMillion said, "but today it includes serving marketplace sellers, our advertising partners, and those that want to use our fulfillment services or proprietary software."

Enough cash to go around

Walmart posted a jarring slowdown in cash flow, with free cash flow landing at $7.4 billion so far in 2021 compared to roughly $15 billion a year earlier. That shift is partly due to improving inventory levels, but also came from management's elevated spending. The company is on pace to pour $14 billion into the business this year alone.

Still, there was plenty of room for increasing investor returns. In fact, Walmart more than doubled its direct returns, year over year, to $3.9 billion. "We repurchased $2.4 billion of stock in Q2 and $5.2 billion year-to-date," CFO Brett Biggs said, "which is up significantly from last year." That "demonstrate[s] our financial strength and belief in the value of our company," he explained.

The brighter outlook

The fact that July's comps were better than June's has management saying it feels confident in predicting a strong finish to the year. Sales should rise as much as 7%, in fact, with the U.S. segment adding another $20 billion to the footprint in 2021.

The profit outlook got a big upgrade as well, mainly thanks to that strengthening U.S. retailing segment. "We now anticipate higher full year sales growth due to the strong first half performance and an expected good back half of the year," Biggs summarized.

That success means investors can expect to see most of their wishes play out for the business in 2021, with Walmart gaining market share in a growing industry, boosting margins, and delivering more direct cash returns in the form of dividends and stock buybacks.

Sure, there are higher-growth options available in stock niches like digital advertising and e-commerce. But Walmart offers a more diverse mix of steadily rising returns, with small but growing exposure to these attractive industries, too.

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.

Stocks Mentioned

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