Walmart Inc. (WMT.US) saw its stock plunge after earnings, marking the largest drop in four years! Wall Street collectively lowered target prices, yet no one downgraded the stock; JP Morgan stated that "the sell-off is basically completed."

Walmart Inc. (WMT.US) reported a mixed bag in its latest quarterly earnings: while revenue and profit continued to grow, the full-year performance guidance has been raised. However, comparable sales growth in U.S. stores slowed significantly, coupled with headwinds from pharmacy regulations, leading to a 9.2% decline in share price on the day the earnings report was released, marking the largest single-day drop since May 2022. Subsequently, several investment banks, including JPMorgan, BMO Capital, and TD Cowen, lowered their price targets, though most still maintained "buy" or "overweight" ratings. The focal point of market debate is whether the drag from the pharmacy business is a temporary factor and if Walmart Inc.'s high valuation can be supported by high-growth segments such as advertising, marketplace operations, and memberships. From a macro perspective, Walmart Inc. achieved revenue of $187.9 billion for the most recent fiscal quarter (ending July 31), a year-on-year increase of 5.9%; non-GAAP adjusted earnings per share were $0.81; and operating profit grew by 28.8%, with a 17.4% increase at constant currency. The profit figures were buoyed by tariff refunds, partially offset by the companys voluntary price reductions. Based on these results, management also raised its full-year guidance: projecting a fixed currency sales growth of 4% to 5% for the fiscal year, up from a previous estimate of 3.5% to 4.5%; and adjusted earnings per share expected to be between $2.80 and $2.87. Underlying Causes of the Decline However, what the market is truly concerned about is the comparable sales growth in U.S. stores. This quarter, Walmart Inc. reported only a 2.6% increase in U.S. comparable sales, falling short of last year's 4.6% and the previous quarter's 4.1%. Transaction volume grew by 1.5%, with an average ticket price increase of only 1.1%, indicating that while consumers are still spending, they are becoming more cautious. Although Walmart Inc. CFO John David Rainey stated in an interview that consumers are still spending and real wage growth remains aligned, suggesting resilience in this environment, the sales growth guidance for the next fiscal quarter has been set at 3% to 3.75%, indicating that growth may further slow. Additionally, management attributed part of the slowdown in comparable sales to the pharmacy business. Rainey mentioned on the earnings call that pharmacy price pressures related to maximum fair pricing regulations dragged down U.S. comparable sales by approximately 125 basis points this quarter, exceeding the company's earlier estimate of 100 basis points. Excluding health and wellness business, Walmart Inc.'s U.S. comparable sales growth for the quarter was close to 3% to 4%, consistent with the range the company has maintained for the past two and a half years. Moreover, the company anticipates fuel costs will increase by over $2 billion this year, adding some cost pressure. CEO John Furner mentioned that overall, it was a good quarter, with sales growth at the upper end of the guidance range and adjusted operating income growth at 17.4% at constant currency. He emphasized that the headwinds from the pharmacy business obscured the strong performance of other sectors such as groceries, general merchandise, and e-commerce. However, investors are clearly more focused on the slowing growth reality rather than management's explanations. Investment Banks Lower Targets, but Remain Bullish Overall After the earnings release, JPMorgan lowered its target price for Walmart Inc. from $137 to $125 while maintaining an "overweight" rating. In fact, the firm had already lowered its expectations for Walmart Inc.'s comparable sales three weeks prior to the earnings report, and the actual data still fell short of its adjusted forecast. JPMorgan analysts described the situation prior to the earnings report as "a tangled mess," with multiple intertwined factors making it difficult to predict the direction of the stock price. However, the firm believes that the selling has largely run its course, and as advertising, marketplace operations, and membership businesses continue to expand, Walmart Inc.'s trajectory is expected to improve. Other investment banks have taken similar actions. BMO Capital lowered its target price to $126, citing the same reasons for the slowdown in comparable sales and weakness in health and wellness business; TD Cowen cut its target price to $125, also referencing the 2.6% growth in comparable sales; Bernstein maintained an "outperform" rating, highlighting Walmart Inc.'s strong margins as a reason for confidence. According to statistics, among the 32 analysts covering Walmart Inc., 29 recommend "buy," 3 recommend "hold," and there are no "sell" ratings. The average target price is around $130, implying about a 25% upside potential from the current price of approximately $104. This suggests that Wall Street remains generally optimistic, though short-term expectations have been adjusted downward. New Business As Growth Engine Despite the headwinds from the pharmacy business, Walmart Inc. is hedging against pressure through diversified revenue sources. Global advertising revenue grew by 38% year-on-year; sales on the U.S. marketplace increased by 52%; global membership fee revenue grew by nearly 17%; and Walmart Plus added a record number of new members in the first half of the fiscal year. CFO Rainey stated that nearly half of the profit growth for the quarter came from membership, advertising, and marketplace operations rather than from traditional core retail. He also noted that the growth rate of e-commerce advertising has outpaced overall e-commerce sales, driving incremental profit margins up. In e-commerce, global sales grew by 23% year-on-year. In international markets, e-commerce accounts for 30% of total sales, with strong growth in China, India, and Canada; U.S. e-commerce sales for Sam's Club grew by 26%, with club delivery volumes tripling since the one-hour delivery service was launched in April. CEO Furner also emphasized that the company conducted more than 11,000 "Rollbacks" price reduction initiatives in the quarter, up from 7,200 at the end of the first quarter. He believes that price reductions will first increase sales, subsequently leading to market share growth in the following quarters. The quarterly data on food market share showed strong performance, seemingly supporting management's judgment. JPMorgan analysts noted that Walmart Inc. now has a more diversified profit channel than in the past, and these emerging businesses are growing rapidly enough to offset the drag from the pharmacy business. The firm further added that the bearish arguments against Walmart Inc. assume that price reductions do not yield delayed benefits, suggesting that these promotions merely erode profits without boosting customer traffic or market share. However, management's statements and food share data indicate that the company has a different view on the effectiveness of price reductions. Lessons from the Historical Drop: Mild Rebound and Valuation Pressure Walmart Inc. saw a single-day drop of 9.2% last Thursday, marking the largest decline since May 2022 and the fourth largest single-day drop in the past 15 years. As of the time of writing, Walmart Inc.'s market capitalization is approximately $825 billion. Over the past decade, after adjusting for dividend reinvestment, Walmart Inc. has generated over 400% returns for shareholders. Historically, Walmart Inc.'s performance after the previous three larger single-day drops was not dismal, but it was also not spectacular: On October 14, 2015, shares fell by 10% after management warned that profits would decline the following year. A year later, the stock was up about 14% from that day's close; On February 20, 2018, shares dropped 10.2% due to a slowdown in e-commerce growth during the holiday season and margin compression. A year later, the stock was up about 6% from that day's close, but still below the pre-drop level; On May 17, 2022, shares plummeted 11.4% because soaring costs heavily impacted profits. A year later, the stock was up about 14% from that day's close, just returning to the level before the drop. Overall, investors who bought in during these three major drops enjoyed positive returns a year later, though the gains were modest; if measured from the day before the drop, the stock merely filled the gap without rising above previous levels. On May 21 of this year, Walmart Inc. fell 7.3% due to its first-quarter earnings report; three months later, the stock was still about 14% lower than the closing price on that day, having not regained its lost ground. A significant difference this time compared to the past three instances is that previous major drops often coincided with adverse profit news: 2015 was a profit warning, 2018 saw margin compression, and 2022 faced soaring costs. In this instance, however, Walmart Inc. raised its full-year guidance, showing strong profit performance, but the sales guidance for the third quarter was set for 3% to 3.75% growth, indicating a continued slowdown in revenue growth. Investors are not reacting to a profit shock but rather adjusting their revenue growth expectations downwards. In terms of valuation, based on the midpoint of the updated full-year adjusted EPS guidance, Walmart Inc.'s current share price corresponds to approximately 37 times expected earnings, significantly above its ten-year average P/E ratio of about 25 times. Future earnings are projected to grow at a compound annual growth rate of 8.7%, making the current valuation still expensive. Even after the sharp decline, the stock price remains about 9% higher than the 52-week low and about 23% lower than the 52-week high. It remains a stock with a relatively high valuation, albeit less expensive.