Walmart (WMT 0.59%) sold $141 billion worth of stuff in the second quarter. Home Depot's (HD 1.09%) Q2 profits were higher than expected, but shares fell despite that. In this episode of MarketFoolery, Motley Fool analyst Asit Sharma analyzes those stories, as well the latest quarterly report from Roblox. He explains why he's keeping an eye on its cash flow.

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This video was recorded on Aug. 17, 2021.

Chris Hill: It's Tuesday, Aug. 17th. Welcome to MarketFoolery. I'm Chris Hill. With me today, our man in North Carolina, Asit Sharma, thanks for being here.

Asit Sharma: Chris, thank you for having me, so excited to be here today.

Hill: We've got some big retail to talk about and we're going to start with Walmart. $141 billion worth of stuff. That's what Walmart sold in the second quarter. The same-store sale growth in the U.S. was 5%. Their foot traffic is growing. Shares of Walmart are flat, but given what the market is doing today, I almost feel like if the market were flat then Walmart would be up a couple of percentage points, but worth pointing out that it's close to an all-time high.

Sharma: Yes. Walmart's stock is doing well, as you mentioned, that $141 billion in revenue for one quarter boggles the mind for a retailer. It's like those little visualizations on YouTube, when you asked, "Hey, how big is the cosmos, how many stars are there out there?" Take a look and you realize how massive that number is. This is the same way, and yet the company continues to generate increases in sales, really significant increases in profits. I love that their e-commerce sales grew 6% on top of a really difficult comparison from the prior year when everyone was stuck at home. The two-year comparison is 103%. That just shows you how much that e-commerce piece has grown. 

Today, they said that the e-commerce sales are on track to reach $75 billion by the end of the year as an annualized number. Everything about Walmart is big today. But as you mentioned, Chris, the market is down. We got an economic report that said retail sales in the U.S. are down, I think 1.1%, so maybe looking past this quarter and looking ahead, investors might be getting a little bit nervous about what this means for its sales in the current quarter. But I really liked what I saw, I liked the balance. One thing that I want to chat with you about is the shifting of the parts and pieces in Walmart's global revenue. 

Earlier this year, management said, we're going to trim some of these more mature markets where we operate in the U.K, in Argentina, for example, we're going to trim our presence there, but we're going to keep investing in places like Canada, and India, and China. That bet seems to be paying off. The company's international sales were down this quarter just because they don't own as many of those international properties. But I like the way that they're paying attention to where the growth is around the globe. It's not enough just to expand your footprint if you're Walmart, you've got to do it with a lot of strategic direction, and you have to go where those gross dollars are. Because at $141 billion in sales in the quarter, how do you increase that? You've got to go to places like China and India where those sales exist.

Hill: Absolutely, I know he doesn't get as much attention as other CEOs, but Doug McMillon has built up a pretty great track record as CEO of Walmart. He is highly engaged in the business. One of the things I was looking at coming into this report and we're going to get Target's (TGT -1.43%) report on Wednesday morning. We'll see what color they give. I was interested in what Walmart says about back to school. Because it's the second-most-important season for retailers and the language we got out of management off of the call and off of interviews this morning was they're seeing a strong start in back-to-school sales. Obviously, this goes on for another month or so, but it's pretty encouraging when the biggest retailer in the United States is, it provides for me just as a consumer, as someone who is interested in business, and as someone who is interested in the market doing well in general, it provides a pretty nice balance to the retail report that you mentioned earlier.

Sharma: Absolutely, the one caveat hanging over that obviously is the delta variant, but Walmart is reporting that those sales are vigorous and that is an offset to maybe a little bit of what we'll see as this late summer turns into fall in that foot traffic to stores could dip just a bit. But the message today was that despite the delta variant, they're seeing pretty strong foot traffic. I think as a society, we are learning to live with COVID-19, and we are past the stage where we're going to be on total lockdowns, maybe specific localities where delta is running rampant. I should say, but overall, that's a good sign if you're a Walmart investor, which we're learning to cope with as we go along.

Hill: Home Depot's second-quarter profits were higher than expected. No surprise there, the average ticket, which Jason Moser talked about yesterday, was up more than 11%, but we got no guidance for the full fiscal year. Same-store sales were a little bit lower than Wall Street was hoping for, and shares of Home Depot down around 5%, 6% today.

Sharma: Yeah, this one is maybe a little bit more of a deceleration situation. When we look at the big picture, Home Depot has more exposure to Walmart, to life resuming as normal. Of course, Walmart has big grocery components, so they've got a driver for foot traffic. What Home Depot is up against is maybe some tapering off of the do-it-yourself flourish that they saw during COVID. The fact that so many of us were at home buying smaller-ticket items. What I really liked, however, was the fact that they were able to increase their retail sales per square foot appreciably by about 5% year over year to $663. How does that customer transaction dip per ticket? They had an increase in their average ticket size from $74 this time last year to almost $82.50 this quarter. 

To me, that shows some of the versatility that Home Depot is able to lean on. You and I have talked about some of the investments that they've made in the past to be able to move bigger-ticket items, and how Home Depot, even before COVID was investing in its systems to drive in-store ordering. Meaning thereby, if you were a shopper in store, and didn't find what you're looking for, a lot of their tech is pointed toward ease of ordering that item and having it delivered or buying it and picking it up in store later. They've got some flexibility that they are able to push as the retail picture changes. We also should note that there's a lot of puts and takes here for Home Depot that don't necessarily exist for Walmart. One of those is lumber prices, which have been all over the map. Those were at a multiyear peak, and they started to level off. That could be good news for Home Depot, and the bright side, if you want to look beyond this corner, is, I think continued strength in that pro business which both Home Depot and Lowe's cater to. I believe we're going to see more of a resumption of home renovation as home prices just stay at these crazy levels. 

This is good news for a good part of Home Depot's business, and that can actually offset some of what they see in declining do-it-yourself business. I do want to say one more thing here, Chris, and get your take on this. In the conference call today, management talked about how demand is shifting during the week. They are seeing more of weekday performance in store sales and less on the weekends. That says everything to me. That says, hey, people are going out and trying to live life on the weekends again. Hence, I think they're going to target maybe more promotional activity for weekdays, which again, they are more equipped with all the investments they've made to do that vis-a-vis before the pandemic hit.

Hill: I think you've touched on a couple of things for me with Home Depot, and I'll include Target as well in this. They're pointing to nimbleness. Obviously, there's nothing like a crisis to force a business to make decisions quickly and do everything they can to not only survive but also thrive. But when you talk about things like just making it easier for people to make a purchase, you go into a Home Depot, you're looking for something, it's not there, and someone is going to help you. Because you're already in the store, they don't want you to leave and not buy it. They want to do everything they can to say, "Well, look. Let me look at this handheld device. We've got it in these other locations if you want it today. We can have it sent to your house. We can have it sent here, so you can pick it up here. We're going to do whatever we can." 

I mentioned Target, just because I've had that exact experience at both Home Depot and Target, but I think you mentioned Lowe's. It's going to be interesting to see what we get out of Lowe's tomorrow because shares of Lowe's are also down 5% today. I'm assuming that as some number of investors just look at Home Depot and say, if history is any guide, this is probably what we're going to see at a Lowe's. I'm not going to wait to see the numbers tomorrow. It's going to be interesting to see what happens tomorrow. Because Lowe's could surprise and the stock could bounce back up, but there are some people who are not waiting to see what happens tomorrow morning with Lowe's.

Sharma: I'm curious too now that you've brought that up. Sympathy selling today, whiplash by tomorrow, very possible.

Hill: We're going to move from retail to video games. Roblox shares are down a bit today after the loss in the second quarter. It was a bit more than expected. Overall revenue was a bit lower than expected. Keep in mind, Roblox revenue more than doubled from a year ago. Daily active users were up. I get why the stock is down today. But if you're a Roblox shareholder, it seems like there are some good things you can point to in this report and feel better about as an investor while your stock is dropping a little bit.

Sharma: I think the same. This is a company that's growing on me, Chris. The numbers you cite absolutely are impressive. They had an increase in their hours engaged metric of 13% year over year to 9.7 billion. Critically, users over the age of 13, jumped 29% this quarter versus the second quarter of 2020. Why that's important is because so much of Roblox's base is comprised of younger kids who are hitting their parents up to buy virtual currency. This is how Roblox records its revenue and this is how they make their cash flow. It's through selling this virtual currency. What I was interested in, in this report, was the July metrics that the company presented alongside the quarter that just ended. So we got a glimpse into the sequential growth from this reporting period, sort of a first blush at what things are like on the ground today. This was, to me, impressive. Hours engaged in July, up 3.8 billion, that's 22%. Their bookings, which is a measure of the virtual currency they sell during the quarter, were up 19% and sequentially up 10% from June of 2021. The same can be said for revenue, that's up again 111% in July, Chris, so continuing that trend. 

They're projecting 2-4% sequentially from the reporting month they concluded. I think all of this paints a picture of a company that is doing what it needs to do in terms of growing its user base, getting them to stay more on the platform, play more hours. A couple of other things that stand out to me which are important going forward are the efforts the company is making to expand its platform. Maybe to keep kids engaged once they are potentially at risk of aging out, let's say the age of 16 and above. They bought a company yesterday or announced the purchase of a company yesterday called Guilded. This is a competitor to Discord. Basically, it adds a social component to their metaverse, allowing people to chat in real time. The company also is increasing its engagement around the world. Specifically, management mentioned experiences outside of China, rather that are really accelerating in usage. Also, across cultural phenomena in which not only are users in the U.S. are going through the Chinese experiences, but Chinese users are going through the U.S. experiences on their metaverse platform. So there's a lot here, I think, that's positive, if you are a long-term shareholder. Last thing that I wanted to point out here is that cash flow remains very strong. 

Roblox has this long lag period between the time it takes the new customers, to the time it shows or recognizes that revenue on their income statement and shows the cash flow that's generated by that. But the cash flow is extremely strong for this company. I just wanted to point out here that while they have this increasing net loss on a cash basis, they are doing quite well in the six months, and on June 30th, 2021, they generated $336 million in operating cash flow. That's more than a double from $160 million in operating cash flow they generated in the first six months of 2020. Yes, some things to critique here, but I think, on balance, it looks very positive to me.

Hill: This is a $44 billion company. When do they start becoming profitable? Actually, it matters. I'm just wondering if you have a sense from management that this is coming in 2022, if it's a couple years further down the line. Because again, it's a $44 billion company and they're not making money.

Sharma: True. The answer is, when will they start to get operating leverage out of some of these investments they're making on the ground today? The biggest of those is research and development. That jumped from $89 million in the six months that comprised the first half of 2020, to $222 billion odd in the first six months of this year. If you're looking for profitability, it is variable. It is within management's hands, but I don't think they're willing to commit to a firm date. You can read these tea leaves and it's just that, Chris, what you're pointing out. It could be a couple of years down the road before the revenue scaling. 

Plus, some leveling out of these overhead expenses starts to result in profit on the books. I think what we as investors should do, although I am not personally invested in Roblox yet, if you are, as investor, you should keep your eye on that cash flow and just compare the loss each quarter to the cash flow that's generated. Eventually, one has to follow the other. You can't have strong cash flow increasing forever without being reflected in the income statement in terms of profit and net income. I think my best guess, yes, it would be a couple of years' journey from here.

Hill: Asit Sharma, great talking to you as always. Thanks so much for being here.

Sharma: Thank you so much, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stock stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.