Walmart (NYSE: WMT) share prices surged following the Q2 release in what amounts to a strong trend-following signal. The caution is that the market gapped strongly with the action, suggesting a pullback to reaffirm support is due. The takeaway for investors is that the Q2 results gave the market what it wanted, and higher share prices are likely, but volatility is also expected over the next few days and weeks. 

Walmart Has Beat and Raise Quarter: Shares Rise 5% 

Walmart had a solid quarter with strengths in all segments and regions, leading to outperformance and increased guidance. The company reported $169.3 billion in net sales, a gain of 4.8% over last year. The revenue outpaced the consensus by 110 basis points, but as strong as it is, growth is slowing sequentially and YoY, which will factor into the volatility. A 4.2% comp drove sales in the US; transactions are up 2.9%, and the ticket average is up 3.4%. 

International sales are up a stronger 7.1% on increased tickets and transaction sizes, revealing an increased market share. Ad sales are up 26%, led by a 30% increase in the US, and Sam’s Club was also strong. Sales at the membership outlet are up 4.7% and 5.5% ex-fuel and will likely accelerate due to the membership increase. Membership increased by 14.4% as consumers leaned into cost-saving efforts, indicating strength for retailers  Costco Wholesale (NASDAQ: COST), BJ’s Wholesale Club (NYSE: BJ), and PriceSmart (NASDAQ: PSMT). 

Margin news also favors investors. The company reported increased consolidated gross and operating margins, resulting in leveraged gains on the bottom line. The GAAP earnings are down YoY but include a one-off that shaded the core strength. The adjusted earnings, which include an $0.11 per share loss on investment, are up 9.8% and outpaced consensus by 300 bps. 

The guidance is good, but another factor that will play into volatility. The company issued its Q3 guidance and raised the full-year estimates to above the prior high-end range but only in alignment with expectations. Revenue is forecasted to grow 3.75% at the mid-point, below the 3.88% consensus target. 

Walmart Continues to Build Value for Shareholders 

Walmart improved shareholder value in Q2. The balance sheet details include a severe reduction in cash and equivalents compounded by a 2% inventory reduction, offset by reduced debt and increased equity. The company says inventory levels are healthy going into the fall season, so there is no concern. The reduction in cash is balanced by the reduced debt and increased property, leaving the equity up 6%. 

Even negative cash flow is not a problem. The outflow in Q2 is minimal and accounted for by increased repurchase activity and decreased debt issuance. The share count was down by an average of 0.33% at the quarter’s end, and no debt was issued. Investors may expect to see debt issuance pick up in Q3, but again, no red flags are raised. The company’s debt is well-managed, and leverage is low, at only 0.4x equity and less than 0.15x assets. 

Analysts Say the Higher Multiple is Warranted

The analysts' response to the news is favorable to higher share prices. The initial reaction is that strengths in all metrics warrant the stock’s higher-than-usual price multiple as growth exceeds expectations. Automation and AI are expected to continue impacting the near- and long-term results, sustaining top-and-bottom-line growth and the upward trend in analysts' sentiment. Analysts are raising targets, leading this market to a range above the consensus and a new all-time high when reached. 

The price action in premarket trading is strong. The market exceeds the analysts' consensus target and may continue higher without a price pullback. The risk for investors today is chasing prices while emotions are high; as strong as the action is, the gap between the prior close and the indicated open is significant and not likely to remain open long. An intraday pullback in the action could easily bring this market back to the $71 level or lower before it continues higher.