J.P. Morgan believes Walmart’s pullback has largely priced in key concerns, while alternative profit pools and share gains continue to support buying

Overview

The report assesses Walmart’s second-quarter results, updated FY26 guidance, and risk-reward following the share-price pullback. J.P. Morgan acknowledges that US comparable sales missed expectations and lowers its earnings forecasts and price target, but believes the market has priced in the main downside scenarios, while market share gains, improvement during the back-to-school season, the lagged volume effects of price investments, and expansion of alternative profit pools such as Marketplace, advertising, and membership continue to support its Overweight view.

Core views

The report first concludes that the sell-off following second-quarter results has largely priced in near-term concerns. J.P. Morgan had already lowered its Walmart comparable-sales forecast three weeks earlier. Actual Walmart US comparable sales grew 2.6%, below the 3.6% consensus expectation and J.P. Morgan’s 3.2% forecast, broadly within the high-2% range anticipated by bears; the share price also entered the $100—$105 risk range previously identified in the report. The report argues that remaining bearish largely depends on relative valuation, the assumption that price investments will not generate lagged demand elasticity, and the view that 2027 will face a difficult comparison from tariff reimbursements, but these assumptions overlook share gains, sales timing, and improvements in alternative profit pools. In terms of operating trends, Walmart US continues to gain share. Grocery sales grew at a mid-single-digit rate, while the overall industry grew only 1%—2%; excluding the Health & Wellness business, US comparable sales increased 3.4%. Overall second-quarter comparable sales grew 2.6%, traffic rose 1.5%, and average ticket increased 1.1%, but pharmacy deflation created a 125-basis-point headwind, while gasoline prices and fading stimulus effects added approximately 30 basis points of pressure. Health & Wellness shifted from low-single-digit growth in the prior quarter to a low-single-digit decline, affected by 900 basis points of regulatory pricing pressure; general merchandise growth also slowed from the mid-single digits to the low single digits, although toys, fashion, and the home and durable-goods Marketplace businesses remained strong. The report emphasizes that pressure on low-income consumers was most pronounced in June, while high-income consumers continued to drive share gains. Accordingly, the near-term weakness reflects category and timing differences rather than a reversal of the long-term market-share thesis. The timing of the back-to-school season is a key basis for the report’s expectation that third-quarter trends will improve. The back-to-school season is one week later than in prior years, and current-quarter data does not yet include the three most critical weeks; college back-to-school sales have already been “exceptionally strong,” and sales volumes are expected to peak over the following two weeks. Management also expects price investments to have an initial deflationary impact, but unit-volume momentum to strengthen over time. On this basis, J.P. Morgan forecasts Walmart US comparable-sales growth of 2.7% in the third quarter and 3.1% in FY26; the company’s guidance for second-half comparable sales is 2.5%—3%, while the 60-basis-point impact from egg deflation in the second quarter is expected to gradually fade. The company raised its FY26 guidance because first-half performance exceeded expectations: consolidated sales are expected to grow 4%—5% on a constant-currency basis, operating income by 7%—8.5%, and EPS is expected to be $2.80—$2.87. The guidance assumes that second-half price investments drive share gains. Walmart US’s maximum fair-pricing actions will create an approximately 125-basis-point drag on second-half and full-year sales, with GLP products offsetting 50 basis points of that impact; this factor weighs on revenue, but because the related business carries lower margins, the mix effect is actually favorable to profit, and incremental-margin expectations are unchanged. Sam’s Club and International are expected to grow faster than the US first-party business, while BBD timing will create a 100-basis-point drag on third-quarter corporate sales and a nearly 600-basis-point drag on International, followed by a similarly sized positive impact in the fourth quarter. Third-quarter guidance continues to indicate a pronounced difference in quarterly cadence. The company expects third-quarter net sales growth of 3%—3.75%, operating income growth of 2%—4%, and EPS of $0.62—$0.64. Based on J.P. Morgan’s calculations, this implies fourth-quarter EPS of approximately $0.71—$0.76, well below the Consensus Metrix estimate of $0.81. The report therefore argues that the second and third quarters should be considered together because tariff reimbursements and price investments occurred near quarter-end, meaning the associated profit and reinvestment effects are primarily being redistributed within the fiscal year rather than simply reflecting structural earnings deterioration. Gross margin is one of the areas where the report differs most sharply from the bearish view. Second-quarter corporate gross margin was 25.4%, up 90 basis points year over year and above the 24.6% consensus expectation; Walmart US gross margin increased approximately 160 basis points year over year, while International declined approximately 15 basis points. Within the US business, net tariff benefits contributed approximately 40 basis points, while the remaining approximately 120 basis points primarily came from Marketplace turning profitable on a year-over-year basis, 52% Marketplace sales growth, 38% advertising growth, and the favorable mix effect from weakness in the low-margin Health & Wellness business. The report therefore believes that pressure in Health & Wellness has not undermined the incremental-margin thesis. Tariff benefits will reverse between quarters, but the report does not believe that a profit cliff in 2027 is inevitable. Approximately $600 million of combined tariff benefits for the US and Sam’s Club are expected to reverse in the third quarter as price investments are completed; the second-quarter tariff tailwind to net income was approximately $0.05 per share. However, management expects indirect tariff benefits, such as supplier price concessions, to provide funding for 2027, with an amount approximately twice the size of the $2.9 billion direct benefit pool. J.P. Morgan forecasts third-quarter corporate gross margin of 24.3%, up 10 basis points year over year, and FY26 gross margin of 24.5%, up 30 basis points year over year. Expenses remain under pressure. Second-quarter selling, general, and administrative expenses exceeded consensus expectations, with the expense ratio deteriorating by approximately 40 basis points year over year, primarily due to US medical and liability claims costs and increased depreciation from capital investment. The US business deteriorated by approximately 70 basis points year over year, partly offset by labor efficiencies; International improved by approximately 30 basis points, supported by cost discipline and mix changes; and Sam’s Club deteriorated by approximately 20 basis points excluding fuel, reflecting technology investment and liability expenses. J.P. Morgan now expects FY26 selling, general, and administrative expenses to equal 21.0% of sales, up 20 basis points year over year. Even so, excluding the 750-basis-point growth contribution from tariff reimbursements, Walmart’s second-quarter operating income still reached the high end of guidance. Digital and other profit sources continue to accelerate. Global e-commerce sales grew 23% year over year to 24% of net sales; Walmart US e-commerce grew 24%, including 43% growth in store-fulfilled delivery, 38% growth in advertising, 43% growth in Walmart Connect, and 52% growth in Marketplace. International e-commerce grew 19%, Sam’s Club e-commerce grew 26%, and club-fulfilled delivery achieved triple-digit growth. Enterprise-wide membership and other income grew 11.2%, while global membership-fee income rose 17%; US membership and other income grew 15.6%, International grew 11.8%, and Sam’s Club membership fees grew 6%. The report believes these growth rates indicate that the market is underestimating the contribution of alternative profit pools to gross margin and earnings growth. The medium- to long-term view is built on scaling alternative profit pools and the benefits of artificial intelligence and automation. Management’s five-year plan supports a recovery in Walmart US operating margin to above 7% and a group operating margin of 6%; J.P. Morgan derives implied EPS of approximately $4.20, with the market debate centered on whether that level will be achieved in calendar 2028 or 2029. If incremental margins, cash flow, and EPS growth accelerate in tandem, EPS growth could rise to the mid-teens or higher, and the report believes the share price still has room to re-rate upward. Regarding forecasts and valuation, J.P. Morgan lowered its FY26 adjusted EPS forecast from $3.00 to $2.92, a 2.7% reduction, and its FY27 forecast from $3.47 to $3.30, a 5.1% reduction. The Dec-26 price target was reduced from $137 to $125, based on approximately 19x EV/EBITDA versus 20x previously, corresponding to approximately 38x earnings. Based on its 2026 forecast, Walmart currently trades at approximately 18x EV/EBITDA and 36x earnings. High-quality compounders such as TJX and O’Reilly Automotive trade in a similar EV/EBITDA range, while Costco commands a higher valuation at 28x EV/EBITDA and 45x earnings. Despite lowering its forecasts and valuation multiple, the report maintains its Overweight rating and concludes that buy-side earnings expectations are more likely to rise than fall further.

Analysis framework

J.P. Morgan first compares actual comparable sales, gross margin, and expense performance with its own forecasts, consensus expectations, and bullish and bearish expectation ranges, then breaks down the effects of pharmacy deflation, gasoline prices, stimulus effects, back-to-school timing, and category mix on sales. The report then bridges the contributions of tariff benefits, Marketplace, advertising, membership income, and expense changes to margins and uses company guidance to estimate the earnings cadence for the third and fourth quarters. Finally, it evaluates medium- to long-term earnings capacity using the five-year margin target and EPS trajectory, then determines the price target using EV/EBITDA, the P/E ratio, and peer-company valuations.

Methodology notes

• Valuation methodologyEV/EBITDA valuation

  EV/EBITDA relative valuation

  The report derives its Dec-26 price target of $125 using approximately 19x EV/EBITDA and compares this with Walmart’s current approximately 18x multiple and the valuation ranges of TJX, O’Reilly Automotive, and Costco.

• Valuation methodologyPE/PEG valuation

  P/E cross-check

  The report converts 19x EV/EBITDA into an approximately 38x P/E ratio and compares it with Walmart’s current approximately 36x and Costco’s approximately 45x P/E ratios to cross-check the target valuation.

• Industry/sector analysis frameworkVolume-price decomposition

  Decomposition of comparable sales into traffic, average ticket, inflation, and volume

  The report uses 1.5% traffic growth, 1.1% average-ticket growth, pharmacy and egg deflation, price investments, and subsequent unit-volume momentum to explain why comparable sales face near-term pressure but may subsequently improve.

• Company fundamentals and financial frameworkOperating/financial leverage analysis

  Incremental-margin and expense-leverage analysis

  The report separately examines gross margin, selling and administrative expenses, business mix, and alternative profit pools to determine whether sales growth can translate into faster growth in operating income, EPS, and cash flow.

• Quantitative/factor/portfolio theoryStyle factor analysis

  Quantitative style exposures and correlations

  The report presents Walmart’s rankings across value, growth, momentum, quality, and low-volatility factors and provides its historical correlations with the market, industry, interest rates, the US dollar, credit spreads, and quantitative styles as supplementary indicators of the stock’s style characteristics.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Walmart Inc (WMT.US)

  The core company covered by the report; market share gains and expansion in e-commerce, advertising, Marketplace, and membership income are viewed as sources of medium- to long-term profit growth.

  Strengths

  Grocery growth above the industry rate, traffic and high-income consumer share gains, rapid expansion of global e-commerce and alternative profit pools, and long-term upside from automation and margin improvement.

  Weaknesses

  Second-quarter Walmart US comparable sales missed expectations, Health & Wellness was weighed down by regulatory pricing and deflation, selling and administrative expenses were under pressure, and recent tariff benefits will reverse in the third quarter.

  Comparison

  TJX and O’Reilly Automotive trade in a similar EV/EBITDA valuation range; Costco commands a higher valuation than Walmart at 28x EV/EBITDA and 45x P/E.

  Risks

  Consumers reducing spending on higher-margin discretionary products, competitive pricing compressing sales and merchandise margins, alternative profit pools contributing less than expected, and deterioration in International profitability.

Key data

• Walmart US second-quarter comparable sales+2.6%Below the +3.6% consensus expectation and J.P. Morgan’s +3.2% forecast; +3.4% excluding the impact of Health & Wellness
• Second-quarter traffic and average ticketTraffic +1.5%, average ticket +1.1%Average-ticket growth was unchanged from the first quarter
• FY26 consolidated sales growth guidance+4%—+5%Raised full-year guidance on a constant-currency basis
• FY26 operating income growth guidance+7%—+8.5%Constant-currency basis
• FY26 EPS guidance$2.80—$2.87The company’s updated full-year guidance
• Third-quarter guidanceNet sales +3%—+3.75%, operating income +2%—+4%, EPS $0.62—$0.64Reflects the reversal of tariff benefits and the timing of price investments
• Second-quarter corporate gross margin25.4%Up 90 basis points year over year and above the 24.6% consensus expectation
• Change in Walmart US gross marginUp approximately 160 basis points year over yearApproximately 40 basis points came from net tariff benefits, with the remainder primarily from Marketplace, advertising, and business mix
• Global e-commerce growth+23%E-commerce sales reached 24% of net sales
• Walmart US digital-business growthE-commerce +24%, Marketplace +52%, advertising +38%Walmart Connect grew 43%, and store-fulfilled delivery grew 43%
• Membership and other income+11.2%Enterprise-wide year-over-year growth; global membership-fee income grew 17%
• FY26 adjusted EPS forecast$2.92Previously $3.00, reduced by 2.7%
• FY27 adjusted EPS forecast$3.30Previously $3.47, reduced by 5.1%
• Long-term margin targetAbove 7% for Walmart US and 6% for the groupOperating-margin levels supported by management’s five-year plan
• Long-term implied EPSApproximately $4.20The market debate centers on whether this level will be achieved in calendar 2028 or 2029
• Price target and valuation$125, approximately 19x EV/EBITDA and approximately 38x P/EThe Dec-26 price target was previously $137, with the prior valuation multiple at 20x EV/EBITDA

Impact & implications

The report believes the second-quarter comparable-sales miss mainly resulted from the low-margin Health & Wellness business, deflation, and sales timing and does not change Walmart’s trend of gaining grocery share and increasing traffic. If back-to-school volumes, unit growth following price investments, and alternative profit pools continue to materialize, they could partly absorb the earnings impact of reversing tariff benefits and expense pressure while accelerating medium- to long-term incremental margins, EPS, and cash flow; however, reductions in earnings forecasts and the valuation multiple lowered the price target from $137 to $125.

Risks

• Consumers may reduce spending on higher-margin discretionary products when tightening their budgets, while general merchandise accounts for approximately 30% of the Walmart US business mix.
• More aggressive pricing from traditional competitors and online-only companies could hurt both sales and merchandise gross margin.
• The contribution from alternative profit pools in Walmart US could fall below the report’s expectations.
• International profitability could deteriorate.

What to watch

• Monitor whether the three most critical weeks of the back-to-school season can accelerate third-quarter Walmart US comparable-sales trends from current levels.
• Monitor whether price investments lead to improvements in unit volumes and market share following the initial deflationary impact.
• Monitor whether gross margin can reach the 24.3% forecast after approximately $600 million of tariff benefits reverse in the third quarter.
• Monitor whether indirect tariff benefits, such as supplier price concessions, can prevent a profit cliff in 2027.
• Monitor whether Marketplace profitability, advertising, membership income, and e-commerce growth can continue expanding alternative profit pools.
• Monitor whether pressure from medical costs, liability claims, depreciation, and technology investment within selling and administrative expenses eases.