Walmart

Walmart's fiscal 2027 second quarter included US comparable sales growth of 2.6% on traffic and ticket growth of 1.5% and 1.1%, respectively. Adjusted operating income grew 10%, when excluding a 7% boost from tariff refunds. Shares sank 9% on Aug. 20 after the results.

Why it matters: While Walmart US' comparable sales experienced a deceleration (lowest since 2020), we believe the firm's expanding digital ecosystem, marketplace density, and commitment to low prices allow it to defend traffic, share of wallet, and profitability against competition. We don't believe the sales slowdown is entirely demand-driven. Although pharmacy pricing legislation (implemented January) acted as a 125-basis-point headwind in the quarter, core categories' comparable sales held around 3%-4%. We forecast Walmart US comparable sales to average 4.2% annually over the next decade. This trajectory is underpinned by its unmatched scale and low-price leadership, offering a vast product assortment that caters to financially stretched consumers across income cohorts.

The bottom line: We retain our $81 fair value estimate on wide-moat Walmart. We believe shares are overvalued even after the selloff. In our view, the market assumes high-margin advertising and memberships will permanently lift operating margins well above 6% historical peaks. We view this as unrealistic, as persistent mix headwinds from low-margin grocery and fierce industry competition stand to cap gains.

Key stats: Global advertising revenue grew 38% and membership income rose 17%. We see these high-margin revenue streams as providing dry powder to profitably defend traffic and maintain price gaps relative to conventional grocers. We forecast high-margin alternative revenue streams to reach nearly 41% of operating profit by fiscal 2036, up from over 25% in fiscal 2026. This mix shift offsets a declining profit contribution from core US merchandise, which we project will fall to just under 50% from roughly 62%.

We have raised our fair value estimate for Walmart to $81 per share from $70, primarily reflecting an upgraded long-term growth and margin profile for its global advertising business. Our updated valuation implies a fiscal 2027 EV/adjusted EBITDA multiple of 13.5 times.

Amid inflation and retail trade-down, its domestic operations remain the core driver of Walmart’s financial prospects, accounting for nearly 70% of revenue and operating income. We forecast US revenue to grow at a 4.5% CAGR supported by modest ticket gains and resilient traffic trends. Growth is underpinned by Walmart's dominant 31% share of US online grocery and expanding 20% digital sales mix, which continue to capture convenience-driven demand as e-commerce drives smaller, more frequent baskets akin to Amazon. Grocery, which accounts for about 60% of US sales, anchors recurring visits and supplier leverage while monetizing higher-margin categories like general merchandise, health, and private label.

Membership and advertising form the second value driver, reshaping Walmart’s earnings mix. We forecast membership income to grow at 8.5% annually, driven by 4% Sam’s Club member growth, a 10% midcycle price hike, and Walmart+ adoption across higher-income households. We project Walmart Connect to grow 15.5% annually, growing to a nearly 13% share of retail media advertising spending (from 8%) via real-time shopper data from 270 million weekly visits. At 70%-80% operating margins, these segments account for nearly 41% of operating profit by the end of our 10-year explicit forecast. This should buoy its consolidated operating margin and reduce its reliance on merchandise sales. However, it will not fully offset the decline in higher-margin discretionary items in the sales mix.

On a consolidated basis, we forecast 4.6% consolidated revenue growth and an operating margin rising from 4.3% in fiscal 2026 to 5.9% by fiscal 2036, driven by automation efficiencies and scaling high-margin revenue. We expect COGS as a share of revenue to decline 70 basis points as procurement and supply chain improvements take hold while SG&A falls 90 basis points through fixed-cost leverage and productivity gains, reflecting genuine efficiency improvements rather than structural cost cuts.

We assign Walmart a wide moat grounded in its industry-leading cost structure and stout brand intangible assets. We surmise that these competitive advantages will remain durable due to Walmart’s unmatched scale, operational discipline, and continuous reinvestment in technology and infrastructure. These advantages are most evident in the company’s US operations, while Sam’s Club demonstrates more modest but defensible strengths. In contrast, Walmart’s international arm lacks sufficient scale and differentiation in most markets to earn an economic moat, in our view. Quantitatively, Walmart’s consolidated return on invested capital has consistently exceeded our estimate of its weighted average cost of capital (7%) with a five-year average return of 14.7%. We believe that as Walmart continues to invest in strengthening its competitive position, its ROIC will remain above its WACC for at least the next two decades.

The cornerstone of Walmart’s wide moat is its cost advantage. At over $700 billion in annual revenue, Walmart is the largest retailer in the world. Its scale enables meaningful purchasing leverage with suppliers, allowing the company to negotiate favorable terms that competitors, especially regional grocers or general merchandise retailers, cannot match. Walmart’s massive sales volume also allows fixed costs such as supply chain logistics, IT infrastructure, and corporate overhead to be spread across a vast revenue base. For example, its investments in automated distribution centers and last-mile fulfillment capabilities become more economically efficient at Walmart’s scale than for smaller competitors. According to Walmart CEO John Furner, the company cut unit costs by 20% year over year as of April 2025, using its next-generation automated distribution centers compared with its manual fulfillment centers. He went on to say that by the end of calendar year 2025, Walmart expects to drive an over 30% improvement in costs across its network. Given the structural characteristics of mass-market retail (thin margins, perishable inventory, and high fixed costs), scale becomes critical to profitability. Walmart’s ability to operate efficiently in this environment while maintaining pricing leadership gives it a structural cost advantage that its peers cannot replicate.

Walmart has long been recognized for its logistics expertise, with its supply chain often regarded as a model of operational excellence. Initiatives such as vendor-managed inventory, centralized purchasing, and cross-docking at distribution centers reduce inventory carrying costs and stockouts. Walmart US also continues to invest heavily in automation through initiatives such as retrofitting all 42 of its US regional distribution centers with automation technology, implementing AI-driven replenishment task-management tools, and building next-generation fulfillment centers using robotics. These investments, while capital-intensive, aim to cut labor costs and improve inventory throughput over time, initiatives that are largely out of reach for smaller, niche retailers. In June 2024, Walmart CFO John Rainey conveyed, “When we automate one of these DCs, we see roughly twice the throughput with half the headcount. And so the math on this is very, very compelling.” While utilizing this technology does not give Walmart an edge by itself, since other retailers can invest similarly, achieving this at such a large scale puts the firm on the cutting-edge of supply chain efficiency, reinforcing its competitive position.

Walmart’s long-standing everyday low price, or EDLP, strategy plays a dual role: it communicates price leadership to the consumer and simplifies operations by reducing promotional complexity. Walmart’s pricing strategy is a key factor in its 14% share of US grocery spending (including e-commerce grocery). EDLP encourages customer loyalty through offering a vast assortment of around 140,000 stock-keeping units, ranging from leading name brands to Walmart’s private-label offerings, that many competitors cannot match in terms of pricing or brand assortment; Target houses around 80,000 SKUs and Dollar General around 10,000. Importantly, because of its perceived price leadership, Walmart doesn’t need to undercut on every item. Walmart’s sales per square foot in the US ($696 in fiscal 2026) have consistently outpaced Target’s ($418) for the last two decades, while its operating profit per square foot also trumps peers at $33 in its most recent fiscal year; Kroger ($27) and Target ($19) pale in comparison.

The supplemental factor supporting Walmart’s wide moat is the intangible assets it holds, which aid in generating new revenue streams. We think Walmart benefits from a highly trusted consumer-facing brand that stands for value, reliability, and convenience. The Walmart name is synonymous with low prices and wide selection, which serves as the backbone of the value proposition the company offers. The company’s private-label penetration (representing about 30% of sales, through brands like Great Value and Equate) contribute to this and allow for higher margins despite lower prices relative to branded fare, while also unlocking more first-party data and analytics. Beyond brand trust, Walmart’s digital ecosystem, which is built around Walmart+, its mobile app, and proprietary shopper data, have created intangible assets in the form of behavioral data, shopping patterns, and geographic analytics. This is increasingly valuable in the context of its advertising platform. The company’s brand equity and consumer trust serve as a subtle but meaningful barrier to entry.

Walmart’s scale, customer data, and closed-loop measurement capabilities enable it to offer targeted digital advertising with clear attribution, which is particularly attractive to consumer product manufacturers and direct-to-consumer brands to help track the return on ad spending. Ryan Mayward, senior vice president at Walmart Connect, noted that with the repetition of a brand’s ads in both targeted search and display channels, consumers are much more likely to buy the brand’s products and tend to spend 40% more on those items. The more advertisers participate, the more refined the targeting becomes, thus increasing returns for advertisers and drawing in a greater share of retail media ad spending. Walmart Connect provides advanced closed-loop tracking that only a few retailers outside of Amazon (which serves as the gold standard for ad revenue, at $69 billion in 2025) can match. Walmart’s ability to monetize proprietary data and physical/digital shelf space through advertising is a clear example of a moat-enhancing intangible asset derived from Walmart’s scale, foot traffic, and digital integration.

Walmart+ has carved out a meaningful niche, supporting its brand and further accentuating the company’s moat, with an estimated 54 million-plus paid members, according to eMarketer (boasting a five-year CAGR of 27%), contributing around $1.9 billion in revenue in membership fees as of fiscal 2026. Walmart’s CFO, John Rainey, said that Walmart+ members (who spend twice as much as traditional Walmart customers) are starting to behave more like Amazon shoppers, with more frequent purchases and smaller basket sizes. We posit Walmart+ supports the broader ecosystem by incentivizing higher spending and deeper engagement with the Walmart platform, boosting stickiness, and creating long-term customer value.

Sam’s Club possesses elements of a cost advantage while also contributing to Walmart’s overall intangible asset strength. Its membership model provides recurring, high-margin revenue (80%-90% of which flows to the bottom line), while scan-and-go, self-checkout, and digital enhancements improve the customer experience. However, unlike Costco, it lacks the same brand loyalty and global scale, reflected in its lagging market share of the US warehouse club industry at just 30% share against Costco’s 64%.

In contrast to its dominant standing on its home turf, we surmise Walmart international lacks moat-worthy characteristics in most of its markets. Fragmented retail environments, supply chain challenges, and inconsistent regulatory regimes require a diverse set of expertise, which challenges its ability to maintain long-term pricing power. While markets like Mexico (Walmex) and India (Flipkart) hold strategic value, these markets aren’t significant on a consolidated basis. Previous exits from the UK, Argentina, and Brazil illustrate that management is focused on only maintaining operations where it can achieve scale.

When taken together, we posit that Walmart’s unrivaled cost advantage and reinforcing intangible assets, both carefully cultivated over decades of strategic investment, operational discipline, and relentless focus on customer value, warrant a wide economic moat rating. Its ROICs consistently exceed our estimate of its weighted-average cost of capital, and we have conviction that these returns will persist for at least the next 20 years, a hallmark of a wide-moat business. Its ability to profitably offer low prices at scale, while boasting a sophisticated supply chain, robust private-label offering, and trusted brand, places it in a rare class of retailers with durable competitive advantages. While the broader retail landscape is rife with disruption and margin pressure, we believe Walmart’s structural efficiencies, digital transformation, and disciplined capital allocation position it to defend its edge over time.

Walmart Connect is profitably compounding sales at a high-double-digit rate, with 70% operating margins, creating a durable profit stream as it captures retail media advertising spending using real-time data from 270 million weekly shoppers.

Expansion of private-label penetration boosts margins while reinforcing Walmart’s value message and defending its share.

Walmart+ adoption drives nearly twice as much shopping frequency per member, reinforcing share gains with fuel, delivery, and media perks appealing to higher-income households.

Digitally native rivals like Amazon, Shein, and Temu could erode wallet share in discretionary categories, which make up 25% of Walmart’s sales and carry higher margins than grocery.

Rising employee wages (up 30% in five years) and raw material inflation could outpace productivity gains, constraining margin improvement.

International operations may fail to scale and realize the same level of brand resonance in the US, with past failures in the UK, Germany, and Argentina, which would depress returns on invested capital.