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Walmart Beats Our Expectations

We attribute the outperformance to pandemic-related volatility.

Wide-moat Walmart WMT saw strong second-quarter results despite comparisons to last year's pandemic-sparked sales surge (5.2% comparable growth for U.S. namesake stores, 14.5% two-year stack). While Walmart beat our expectations, we attribute the outperformance to pandemic-related volatility, so our long-term targets of low-single-digit percentage top-line growth and mid-single-digit adjusted operating margins are intact. With only a mid-single-digit percentage increase planned for our $132 fair value estimate, we suggest investors seek a more attractive entry point. The top-line outperformance extended across Walmart's segments (5.2% and 7.7% comparable growth, excluding fuel, at Walmart U.S. and Sam's Club, versus our respective 2.6% and 4.3% forecasts, and $23.0 billion in international revenue against our $22.3 billion mark). Recovery in pandemic-affected categories like auto care and party augmented another strong quarter in grocery, where Walmart gained share domestically on mid-single-digit comparable growth. Cost leverage contributed to a 5.3% adjusted operating margin, up nearly 80 basis points. Management lifted full-year guidance, now calling for $6.20 to $6.35 in adjusted diluted EPS, up from around $6.03 (which was near our prior estimate, which should rise toward the top of the new range). Walmart's advertising business (Walmart Connect) was particularly strong, with U.S. sales nearly doubling and the number of active advertisers up more than 170%. Although e-commerce sales consolidated gains (up 6% in the U.S. for the quarter, and 103% on a two-year stacked basis), we believe Walmart is still in the earlier stages of capitalizing on its ancillary online revenue potential. We suspect advertising, analytics, and other revenue sources will help offset fulfillment costs as digital sales rise and expect Walmart to derive around 30% of its U.S. namesake stores' sales from e-commerce by the end of the next 10 years (from midteens expected this fiscal year).

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