Near-term comparable-store sales are under pressure, but the eCommerce flywheel and underlying profit growth continue to support the long-term Overweight thesis on Walmart

Overview

This report reviews Walmart's 2FQ27 results, focusing on the slowdown in comparable-store sales, one-time disruptions to operating profit, eCommerce flywheel profitability, and the valuation pullback. Morgan Stanley believes macroeconomic pressure may continue to constrain comparable-store sales over the next one to two quarters, but the company's structural earnings power remains intact and the eCommerce flywheel is expected to reaccelerate in F'28e. It therefore maintains its Overweight rating.

Core views

Morgan Stanley believes 2FQ27 was a quarter affected by multiple disruptions, with relatively noisy headline figures, but these factors did not alter its constructive view. Weakening confidence among lower-income consumers pressured recent comparable-store sales, while underlying operating profit growth and the eCommerce flywheel remained strong. The firm expects Walmart U.S. comparable-store sales may remain below historical averages over the next one to two quarters, but the eCommerce flywheel is building momentum and could rebound in F'28e. It therefore maintains its Overweight rating while reducing its price target from $140 to $125, implying 20% upside from the $103.84 share price. The bull and bear cases imply 49% upside and 23% downside, respectively, leaving the risk-reward skewed to the upside. The greatest recent pressure comes from the consumer environment. Walmart U.S. comparable-store sales growth slowed to 2.6% in 2FQ27, below 4.1% in 1FQ27, 4.6% in F'26, and the approximately 4% to 5% range of the preceding two years. Lower-income consumers are an important customer group for Walmart, and their financial pressure continues to rise, with performance weaker than that of middle- and higher-income groups. General merchandise growth also slowed from the mid-single digits in 1FQ27 to the low single digits. Higher gasoline prices further constrained discretionary spending. Health and wellness created an approximately 80-basis-point headline drag on 2FQ27 comparable-store sales, including an approximately 125-basis-point adverse impact from MFP regulations, although this factor did not affect gross profit dollars. The report expects Walmart U.S. comparable-store sales to remain within a 2% to 3% range in 2FH27e while these macroeconomic headwinds persist. Headline operating profit growth should be assessed after excluding refunds and price investment. Adjusted operating profit grew 17.4% on a constant-currency basis in 2FQ27, of which approximately 750 basis points, or roughly $600mn, came from tariff refunds that had not yet been passed back to consumers through lower prices during the quarter. Underlying operating profit growth was therefore approximately 9.9%. The midpoint of 3FQ27e guidance implies approximately 3% adjusted operating profit growth, but includes an approximately 800-basis-point drag from using the remaining roughly $600mn for price investment. Excluding this factor, underlying growth is approximately 11%. The currently implied 4FQ27e adjusted operating profit growth range is approximately 3% to 7%, including an approximately 100-basis-point drag from the timing shift of India's BBD event. Performance at the upper end of the range would approach the approximately 10% underlying adjusted operating profit growth achieved over the past three years. Morgan Stanley believes the guidance is achievable because Walmart has consistently met or exceeded the high end of its guidance range, while the eCommerce flywheel is increasing the mix of high-margin revenue and absolute operating profit. The eCommerce flywheel remains the central engine of incremental profit. Online sales grew approximately 24% year over year in 2FQ27, Walmart Connect revenue excluding Vizio grew 43%, and Walmart+ membership revenue increased by approximately the high-20% range or more. The flywheel's incremental operating margin remained approximately 11%, as high-margin membership and advertising revenue offset online losses associated with the expansion of convenience services and rapid delivery. Third-party Marketplace sales, which are primarily general merchandise and accretive to profit, again grew approximately 50%. The firm estimates that quarterly earnings from the eCommerce flywheel reached a record of approximately $1.1bn, demonstrating that the business model has shifted from merely increasing online sales to generating profit jointly through advertising, membership, Marketplace, and scale efficiencies. However, Walmart's share of incremental retail sales declined markedly. Morgan Stanley estimates that its share fell from approximately 11.2% in Q4'25 and approximately 7.8% in Q1'26 to approximately 5.7% in Q2'26, roughly half the relatively stable 10% to 11% level seen from 2024 to 2025. Amazon and Costco also slowed over the same period: after adjusting Amazon for approximately $4bn to $4.5bn in Prime Day GMV, Amazon is estimated to have declined by approximately 165 basis points and Costco by approximately 50 basis points, but Walmart experienced the largest absolute decline. The report attributes this to three factors: its customer base is more skewed toward lower-income consumers; pharmacy represents a higher proportion of its business, and MFP regulations created an approximately 125-basis-point drag on U.S. comparable-store sales, without which its incremental share is estimated at approximately 7.7%; and Walmart has a lower mix of discretionary general merchandise, while discretionary categories have recently outperformed essentials and consumables in the current macroeconomic environment. Valuation history suggests the current derating may be approaching a bottom. The report screened 25 years of weekly forward 12-month P/E data and identified five derating cycles lasting more than six months with compression exceeding 20%: a 48% decline from FY04 to FY07, 20% from FY07 to FY08, 29% from FY10 to FY12, 22% in FY16, and 35% from FY21 to FY23. The median decline was approximately 29%, and the median duration was 19 months. The current P/E has already declined approximately 26% over about six months, from its February peak of 44.9x to 33.5x. The magnitude of the pullback is approaching the historical median, but it has occurred in only about one-third of the time taken by previous cycles. Historically, median comparable-store sales growth when valuations stopped declining was 1.5%, while Walmart's latest figure is 2.6%, already within the historical range associated with valuation stabilization. The report also presents the counterargument that valuation remains elevated: the current forward 12-month P/E of approximately 33.5x is about 44% higher than the approximately 23x level historically supported by comparable-store sales growth of 3.0% to 4.5%. However, Morgan Stanley believes this relationship primarily reflects the pre-2020 business model. Walmart has since altered its profit structure through eCommerce, advertising, membership, supply chain, and delivery capabilities, reducing the comparability of the old valuation range. The firm therefore places greater weight on the current approximately 26% valuation pullback, which is already approaching the median of previous cycles, and on this basis concludes that valuation may be near a bottom. The earnings forecast revisions reflect a balance between near-term macroeconomic pressure and the long-term value of the flywheel. Morgan Stanley revised its Walmart U.S. comparable-store sales forecasts for F'27e, F'28e, and F'29e from 3.3%/4.0%/4.0% to 2.9%/2.5%/4.0%; total revenue growth forecasts from 5.6%/5.5%/5.6% to 5.5%/4.5%/5.7%; and adjusted operating profit growth forecasts from 8.2%/10.1%/7.9% to 9.3%/7.4%/8.0%. The corresponding adjusted EPS forecasts are $2.88/$3.13/$3.39, compared with previous forecasts of $2.85/$3.16/$3.44. In the base case, adjusted operating margins are expected to be 4.5%/4.6%/4.7%. The $125 base-case price target is based on a blended P/E of approximately 36.8x applied to F'29e EPS of $3.39, down from the previous 44.2x P/E applied to F'28e. It is also equivalent to approximately 18x EV/EBITDA on F'29e EBITDA of roughly $56.5bn. The 36.8x multiple remains above Walmart's approximately 21x average P/E over the past decade, a premium the firm believes is supported by accelerating eCommerce profitability, a widening price advantage over competitors, and Walmart's transformation from a traditional brick-and-mortar retailer into an eCommerce and supply-chain disruptor. Scenario analysis further defines the risk-reward. The bull-case price target is $155, based on approximately 38x F'29e P/E and approximately 20x EV/EBITDA. It assumes Walmart U.S. comparable-store sales growth of 3.9%/4.5%/5.5% from F'27e to F'29e, revenue growth of 6.5%/6.2%/7.0%, adjusted operating profit growth of 14%/12%/18%, operating margins of 4.7%/4.9%/5.4%, and EPS of $3.02/$3.45/$4.12. The base-case price target is $125. The bear-case price target is $80, based on approximately 29x F'29e EPS of $2.81 and approximately 14x EV/EBITDA. It assumes U.S. comparable-store sales growth of 2.6%/2.0%/3.0%, revenue growth of 5.2%/3.8%/4.6%, adjusted operating profit growth of 5.2%/3.2%/-1.4%, operating margins of 4.3%/4.3%/4.1%, and EPS of $2.76/$2.86/$2.81.

Analysis framework

The report first separates macroeconomic and one-time factors in the 2FQ27 results, excluding tariff refunds and subsequent price investment from operating profit growth to assess underlying earnings. It then separately analyzes the eCommerce flywheel comprising online sales, advertising, membership, and Marketplace, along with its profit contribution. The firm next compares the recent performance of Walmart, Amazon, and Costco based on their shares of incremental retail sales and uses 25 years of forward 12-month P/E history to assess the current stage of the valuation pullback. Finally, the report updates operating forecasts from F'27e through F'29e and derives its price target through bull, base, and bear cases using P/E, EV/EBITDA, and SOTP frameworks.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Forward-year P/E valuation

  The report uses F'29e EPS as the basis for valuation, applying an approximately 36.8x P/E in the base case to derive a $125 price target and using different P/E multiples to construct bull- and bear-case price targets.

• Valuation MethodologyEV/EBITDA valuation

  EV/EBITDA cross-check valuation

  The report cross-checks the price targets against enterprise value multiples based on F'29e EBITDA, with the base, bull, and bear cases at approximately 18x, 20x, and 14x, respectively.

• Valuation MethodologySOTP Segment Valuation

  SOTP price target framework

  The report explicitly states that the $125 price target is supported by an SOTP framework designed to reflect the differing earnings characteristics of traditional retail and businesses such as eCommerce, advertising, and membership.

• Valuation Methodology

  Bull-, base-, and bear-case scenario analysis

  The report assigns comparable-store sales, revenue, operating profit, margin, EPS, and valuation multiple assumptions to each of the three scenarios, thereby presenting a risk-reward range of $155, $125, and $80.

• Valuation Methodology

  25-year historical P/E derating screen

  The firm compares five historical derating cycles that lasted more than six months and compressed by more than 20%, using the magnitude of decline, duration, and comparable-store sales growth to assess whether the current valuation is approaching a bottom.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Normalization of operating profit growth

  The report excludes the effects of tariff refunds and price reinvestment from adjusted operating profit, normalizing the headline 17.4% growth rate to an underlying rate of approximately 9.9% and evaluating subsequent guidance on the same basis.

• Industry/Sector Analysis Framework

  Incremental retail sales share funnel analysis

  The report estimates Walmart's share of incremental retail sales and compares it with Amazon and Costco to measure how recent customer traffic, category mix, and macroeconomic pressure have affected competitive performance.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare forecasting framework

  Unless otherwise specified, the report's operating metrics and earnings forecasts are based on the Morgan Stanley ModelWare framework, with distinctions among company actuals, the firm's estimates, and consensus figures.

Asset mapping & comparison

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

• Walmart Inc (WMT.US)

  The report believes Walmart has recently been affected by weakness among lower-income consumers and slowing comparable-store sales, but its eCommerce, advertising, membership, and Marketplace businesses continue to drive structural earnings growth.

  Strengths

  Scale, price advantage, supply-chain capabilities, expanding eCommerce reach and profitability, and high-margin advertising and membership revenue.

  Weaknesses

  Its customer mix is more skewed toward lower-income groups, pharmacy represents a higher proportion of the business and is affected by MFP regulations, and its mix of discretionary general merchandise is lower. Its share of incremental retail sales has recently declined more than those of Amazon and Costco.

  Comparison

  Walmart's share of incremental retail sales was approximately 5.7% in Q2'26, representing the largest decline among Walmart, Amazon, and Costco. However, the report believes its business model has changed since before 2020, limiting the comparability of historical absolute valuation ranges.

  Risks

  Continued pressure on lower-income consumers and fuel expenses, eCommerce growth falling below 15%, comparable-store sales below 2%, renewed expansion of eCommerce losses, or higher-than-expected Flipkart losses.

Key data

• 2FQ27 Walmart U.S. comparable-store sales growth2.6%Below 4.1% in 1FQ27 and 4.6% in F'26
• 2FH27e U.S. comparable-store sales forecast2%-3%Reflects continued pressure on lower-income consumers and higher gasoline prices
• 2FQ27 adjusted operating profit growth17.4% (constant currency)Includes an approximately 750-basis-point, roughly $600mn net benefit from tariff refunds
• 2FQ27 underlying operating profit growthApproximately 9.9%Excludes the impact of tariff refunds not yet used to reduce prices
• 3FQ27e underlying operating profit growthApproximately 11%Headline guidance midpoint is approximately 3%, including an approximately 800-basis-point drag from price investment
• Online sales growthApproximately 24%Year-over-year growth in 2FQ27
• Walmart Connect revenue growth43%2FQ27 year-over-year growth excluding Vizio
• Marketplace sales growthApproximately 50%Third-party Marketplace maintained strong growth
• Quarterly eCommerce flywheel earningsApproximately $1.1bnEstimated by Morgan Stanley to be a record high
• Share of incremental retail salesApproximately 5.7%Q2'26, below approximately 7.8% in Q1'26 and approximately 11.2% in Q4'25
• Current NTM P/EApproximately 33.5xDown approximately 26% from the February peak of 44.9x
• Median historical sustained derating declineApproximately 29%The median duration of the five historical cycles was 19 months
• F'27e/F'28e/F'29e adjusted EPS$2.88/$3.13/$3.39Previous forecasts were $2.85/$3.16/$3.44
• Base-case price target valuationApproximately 36.8x F'29e P/E and approximately 18x F'29e EV/EBITDACorresponds to a $125 price target and approximately $56.5bn in F'29e EBITDA

Impact & implications

The report believes the near-term slowdown in comparable-store sales primarily reflects pressure on lower-income consumers, fuel costs, and the headline impact of MFP regulations rather than a breakdown of Walmart's structural earnings thesis. Advertising, membership, Marketplace, and eCommerce scale efficiencies continue to improve the profit mix, enabling the company to deliver close to double-digit underlying operating profit growth even in a more moderate sales environment. The price target reduction reflects recent macroeconomic pressure and valuation multiple compression, but the firm believes the current derating is approaching the historical median decline and that the risk-reward remains skewed to the upside.

Risks

• If financial pressure on lower-income consumers and higher fuel expenses persist, Walmart U.S. comparable-store sales could remain below expectations for an extended period.
• eCommerce losses could widen again after a temporary moderation, weakening the flywheel's contribution to operating profit.
• If U.S. eCommerce growth falls below 15% and comparable-store sales remain below 2%, the structural growth thesis will come under pressure.
• Higher-than-expected Flipkart losses could weigh on overall earnings performance.
• The current NTM P/E of approximately 33.5x remains about 44% above the approximately 23x level historically associated with comparable-store sales growth of 3.0% to 4.5%, so valuation could compress further.

What to watch

• Monitor whether Walmart U.S. comparable-store sales can stabilize at 2% to 3% over the next one to two quarters and reaccelerate in F'28e.
• Watch changes in lower-income consumer fundamentals, consumer confidence, and fuel expenses.
• Track U.S. eCommerce growth and the growth rates of Walmart Connect, Walmart+ membership, and Marketplace sales.
• Observe whether underlying operating profit can grow approximately 11% after the approximately $600mn of price investment is implemented in 3FQ27e.
• Watch whether 4FQ27e adjusted operating profit growth can reach the upper end of the approximately 3% to 7% range.
• Track U.S. eCommerce margins, U.S. EBIT growth, and the quarterly earnings contribution from the eCommerce flywheel.
• Observe whether the share of incremental retail sales can recover from its approximately 5.7% level in Q2'26.