Tariffs are coming down, and the market is getting excited. Since the U.S. and China announced a tariff deal, the S&P 500 (^GSPC -1.61%) is up 5%, bringing it back into a year-to-date gain. But the new deal hasn't gotten rid of tariffs entirely, and the market is taking these tentative steps with consideration for potential negative fallout.
U.S. companies are also still cautioning about how tariffs could affect their businesses. On Walmart's (WMT -1.35%) earnings call last week, CEO Doug McMillon warned about potential repercussions. President Trump responded on social media that Walmart makes billions of dollars in sales, and that it should "eat the tariffs." But can it?
Let's take a look at what's happening at Walmart, and how tariffs could play into it.
Image source: Walmart.
Another strong quarter for America's largest retailer
Walmart's warning came along with a solid earnings report. For the fiscal 2026 first quarter (ended April 30), sales increased 2.5% year over year, and operating income was up 4.3%. E-commerce continues to be a strong growth driver, increasing 22% in the quarter. It's developing its advertising business, and ad sales were up 50%.
These results included some of the impact of new tariffs, which management said started in late April and continued into May. It didn't change its original guidance for fiscal 2026 though, and the market gave it a lukewarm response.
Does Walmart really need to raise prices?
Walmart is a discount retailer, and unlike premium retailers, it's already trying to give customers the best deal. It's able to be more affordable through several means.
Most notable is its scale, which gives it leverage with suppliers. Walmart is the largest retailer in the world, with 10,750 global locations. Specifically in the U.S., it has more than 4,600 locations, which is way more than any other retailer. For comparison, Target has almost 2,000 locations, Costco Wholesale has more than 600 U.S. warehouses, and Kroger owns 2,700 stores. It also has several owned brands, which are cheaper to produce and give it more control over price, and its stores are more warehouse style than that of a premium retailer.
Walmart's core merchandise is groceries, which are known for low margins. Retailers make this up with volume. According to several studies, Walmart came in as the cheapest store to buy groceries, even cheaper than warehouse king Costco in one study. That means it's already employing strict pricing models, and it's easy to see why tariffs could eat into that.
Look no further than Walmart's profit margin to understand how that could happen.
WMT Profit Margin data by YCharts
Walmart is the largest company in world by sales, with $685 billion in trailing-12-month sales. So yes, that does translate into billions of dollars in profits, too. But it needs healthy profits, correlated to its size, to keep running.
Price hikes are coming
McMillon acknowledged this basic fact on the first-quarter earnings call, saying, "Given the magnitude of the tariffs, even at the reduced levels announced this week, we aren't able to absorb all the pressure, given the reality of narrow retail margins."
There are some mitigating factors. Walmart has some newer higher-margin businesses like advertising and an e-commerce membership program that can offset some of the lower-margin businesses. In addition, because of its leverage with suppliers, it can easily manage its inventory to a more favorable effect. Management said that two-thirds of its merchandise is U.S. made and assembled, which limits its exposure to tariff changes to some degree.
McMillon said that some of the pressure from new tariffs isn't all related to China. Most of the Chinese goods are limited to certain categories like toys and electronics, and he said that the company wouldn't mark up food because of tariffs on other products. He presented a broad strategy, including having suppliers change some of their packaging to materials less affected by tariffs and moving more production to the U.S., and he did say that it would absorb tariffs on some products.
Management gave upbeat guidance despite the uncertainty. "In what we believe are the most likely scenarios that we've modeled, we still have the ability to achieve our full-year guidance for both sales and operating income," CFO John David Rainey said. He pointed out that Walmart is well-positioned to manage through these changes at least as well as any other retailer.
It is, and investors should have confidence in Walmart's ability to sweat this out and remain on top of its game.
