Walmart Q2 Preview: Road To Accelerated Margin Expansion Points To A Shiny Future

Investment Thesis - Walmart has successfully navigated challenges from the pandemic, inventory shrinkage, and supply chain inflation, emerging as a renewed retail enterprise with a strong focus on long-term growth [3] - The company's stock has performed well, increasing by 33% in 2024, significantly outperforming the S&P 500's ~11% return [4] - Walmart's strategic initiatives and investments are expected to drive continued growth and performance [3][4] Q1 Earnings Recap - In Q1 FY25, Walmart reported total sales of $161.51 billion, a 6.1% increase, surpassing management's projected growth of 4-5% [5][7] - The company has maintained its share of higher-income households, contributing to growth in transactions and unit volumes [5] - International sales grew by double digits, with significant contributions from China, Walmex, and Flipkart, and e-commerce sales increased by a median of 23% [6][8] Q2 Earnings Expectations - Walmart is expected to report Q2 earnings on August 15, with anticipated consolidated net sales growth of 3.5% to 4.5% and operating income growth of 3.0% to 4.5% [10][12] - The company has raised its guidance for FY25, expecting revenue and operating income to reach the high end of initial projections [9][11] - Analysts are keen to hear management's outlook on consumer spending and international sales growth during the Q2 call [12] Digital and Advertising Growth - Walmart's advertising revenue is growing at over 20%, with significant contributions from Walmart Connect, Flipkart, and Walmex [13] - The company is expected to capture a larger share of non-Amazon retail media search ad spending in the coming years [14][16] - The growth in digital advertising and memberships is anticipated to enhance Walmart's operating income and margin profile [18] Valuation and Market Outlook - Walmart's projected FY25 sales are estimated at $678 billion, with a revenue growth rate of 4.7% [17][19] - The company's valuation indicates limited upside potential as it approaches Q2 earnings, with a forward valuation multiple of ~18x [19][20] - The stock is currently rated as a Hold, pending further insights from the upcoming Q2 earnings report [21]