Slower Sales Do Not Mean the Earnings Algorithm Has Failed; AI and Sam’s Club Further Support Walmart’s Long-Term Advantages

Overview

Based on on-site discussions with management at Walmart headquarters and Sam’s Club, the report examines whether the recent sales shortfall indicates structural damage to the company’s growth engine. Morgan Stanley concludes that near-term pressures are real, but market share, price leadership, the earnings growth algorithm, and the retail flywheel remain intact, while AI and Sam’s Club’s differentiated merchandise may broaden future opportunities.

Core views

First, the report directly addresses the market debate following the results. Walmart shares fell 10% in one week, with sales growth falling below market expectations for the first time in years and slowing more than Morgan Stanley had previously anticipated. The report believes this was not caused by a single factor but by several simultaneous pressures: further weakening among lower-income consumers, prescription drug pricing weighing on reported comparable sales, and tariff refunds adding noise to the assessment of underlying earnings power. Management acknowledged these pressures but emphasized that Walmart continues to gain share across key competitive categories while delivering strong EBIT growth during the year, and therefore does not view the sales slowdown as evidence of a weakened competitive position. Regarding tariff refunds, management stated that the company would continue investing in price whether or not it received the refunds; absent that benefit, it would seek offsets elsewhere, including measures to address higher diesel costs. Morgan Stanley therefore believes Walmart’s fundamental positioning and price leadership remain difficult to challenge. The second and currently most important debate for the stock is whether slower revenue growth will undermine Walmart’s earnings algorithm. Management believes that even if comparable sales remain at only 2%—3% amid prescription drug pricing headwinds and persistent pressure on lower-income consumers, the company can still deliver its targeted EBIT and EPS growth. Morgan Stanley estimates F’28e EPS at approximately $3.13, above the estimates it heard from some investors in the week before the report was published. The report forecasts EPS rising from $2.65 for the fiscal year ended January 2026 to $2.88 in F’27e, $3.13 in F’28e, and $3.39 in F’29e, and expresses greater confidence in high-single-digit to low-double-digit earnings growth. The report emphasizes that management’s conviction remains strong, but actual operating data must now demonstrate whether more moderate comparable sales can coexist with the targeted earnings growth rate. Third, the valuation has become easier to justify following the share-price decline. Walmart currently trades at approximately 33x earnings versus approximately 45x a year ago; the report believes the question has shifted from whether the company deserves a premium to how large that premium should be. Morgan Stanley does not assert whether the appropriate multiple is 28x, 32x, or 35x, but believes the flywheel comprising e-commerce, marketplace, advertising, and membership remains in motion and supports high-single-digit to low-double-digit earnings growth. The incremental margin on e-commerce sales has reached the low double digits, meaning that negative store-only comparable sales currently look more like noise and are not yet sufficient to disrupt the overall earnings trajectory. The $125 price target corresponds to a blended P/E of approximately 36.8x F’29e EPS of $3.39, or approximately 18x EV/EBITDA based on F’29e EBITDA of roughly $56.5 billion. The 36.8x multiple exceeds Walmart’s approximately 21x average P/E over the past decade, but the report believes the company’s transformation from a brick-and-mortar retailer disrupted by Amazon into an e-commerce and supply-chain innovator supports a valuation premium. Fourth, discussions with management made Morgan Stanley more constructive on AI commerce and advertising. In an AI shopping environment, Walmart’s scale, breadth of merchandise, pricing, fulfillment speed, customer relationships, and transaction data give it the opportunity to serve as the platform for final fulfillment and transaction completion regardless of where consumers begin their shopping journey. The report divides AI commerce into three categories: first, conversational commerce, in which AI uses prompts to help solve specific shopping needs. Walmart’s Sparky has already been used for discrete purchase decisions and complex tasks such as generating a complete ingredient list for meals, and management described its early performance as very strong. Second is agentic commerce in the narrower sense, in which an agent determines where to fulfill a need based on price, speed, and merchandise selection; Walmart’s traditional retail advantages are equally applicable in a machine-comparison environment. Third is automated commerce, in which AI predicts or executes purchases with little or no human involvement. The common feature across all three models is that even if the consumer journey begins outside Walmart, the company can still capture the final transaction through its fulfillment capabilities. Advertising represents the more incremental insight from the AI discussion. The market is concerned that hyperscale technology companies or AI platforms could become new intermediaries, taking away customer relationships and advertising budgets that would otherwise belong to Walmart. However, the early evidence observed by management over the past six months supports the opposite conclusion. Walmart has not seen these platforms aggressively pursue advertising opportunities through disintermediation, while the company still controls first-party data and can connect ad exposure to actual purchase behavior. As Walmart enters more AI interaction interfaces, the number of connectable touchpoints among consumers, brands, and transactions may increase, expanding rather than compressing the advertising addressable market. Referral traffic from two hyperscale technology platforms is rising, and Morgan Stanley estimates that their combined share has reached the mid-single-digit range; customers acquired through these channels generate GMV approximately 2x the average Walmart.com transaction. This indicates that external AI platforms are not only driving traffic but also bringing significantly higher-value transactions, providing early evidence that AI integration is beginning to translate into actual purchases. Finally, the report believes Sam’s Club’s merchandising strategy is delivering results. Warehouse clubs are inherently curated-merchandise models: Costco carries approximately 3,000—4,000 SKUs, Sam’s Club approximately 4,000—5,000, and BJ’s approximately 8,000, meaning every item must justify its shelf space. Fewer SKUs can improve efficiency but also reduce tolerance for merchandising mistakes. Sam’s Club currently emphasizes not only the lowest price but also greater value, novelty, and distinctiveness through offerings such as ready-to-eat foods, freshly squeezed orange juice, and an expanded fragrance assortment. This strategy is particularly important as new store openings in the U.S. warehouse club channel peak in 2026 and competition intensifies for store visits, members, and wallet share. Sam’s Club posted 4.4% comparable sales growth excluding fuel in 2FQ27, and the on-site research increased Morgan Stanley’s conviction that differentiated merchandising contributed to this performance. The report believes Sam’s Club is converting Walmart’s scale and purchasing power into shelf competitiveness in a more distinctive way.

Analysis framework

The report begins with the post-earnings share-price reaction and sales shortfall, separating the effects of lower-income consumers, prescription drug pricing, and tariff refunds. It then stress-tests the competitive position and earnings algorithm through discussions with Walmart’s chief executive officer, chief financial officer, head of AI, and Sam’s Club management. Next, it combines management’s views with Morgan Stanley’s EPS forecasts, earnings multiples, and incremental margins to assess whether the valuation is supportable. Finally, it validates new growth pathways through AI referral traffic, transaction GMV, and on-site observations of Sam’s Club merchandising.

Methodology notes

• Valuation MethodP/E and PEG Valuation

  Target valuation based on a blended P/E

  The report supports its $125 price target using F’29e EPS of $3.39 and a blended P/E of approximately 36.8x, comparing this multiple with the current approximately 33x, approximately 45x a year ago, and the ten-year historical average of 21x.

• Valuation MethodEV/EBITDA valuation

  EV/EBITDA cross-check valuation

  The report also validates the price target using F’29e EBITDA of approximately $56.5 billion and approximately 18x EV/EBITDA, so the valuation does not rely solely on EPS.

• Competition and Strategy FrameworkMoat / competitive advantage

  Competitive advantages derived from price, scale, fulfillment, and first-party data

  The report uses Walmart’s price leadership, merchandise selection, fulfillment speed, customer relationships, and transaction data to explain why it can continue gaining share and capturing final transactions in both traditional retail and AI shopping environments.

• Industry/Sector Analysis FrameworkSupply-demand framework

  U.S. warehouse club capacity and competitive analysis

  The report incorporates the peak in industry store openings in 2026 to analyze how additional capacity intensifies competition for store visits, members, and wallet share, while explaining the importance of differentiated merchandise.

• (Out-of-Vocabulary Method)

  Management interviews and on-site operating stress test

  Through meetings with Walmart senior management and visits to Sam’s Club, the research team cross-checked market concerns about slowing sales against management’s assessments of share, earnings growth, AI, and merchandising strategy.

• (Out-of-Vocabulary Method)

  Morgan Stanley ModelWare framework

  Unless otherwise specified, the report’s metrics are based on the Morgan Stanley ModelWare framework, with forecast values presented on the basis of Morgan Stanley Research estimates.

Asset mapping & comparison

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

• Walmart Inc (WMT.O, WMT US)

  The report believes Walmart faces near-term sales pressure, but its market share, earnings algorithm, AI commerce opportunities, and Sam’s Club merchandising strategy continue to support a relatively constructive view.

  Strengths

  Price leadership, scale and purchasing power, broad merchandise selection, fulfillment speed, first-party transaction data, and the flywheel of e-commerce, marketplace, advertising, and membership.

  Weaknesses

  Weakening lower-income consumers and prescription drug pricing are weighing on comparable sales, while the current valuation remains significantly above the ten-year historical average.

  Comparison

  The target valuation of approximately 36.8x P/E exceeds Walmart’s ten-year historical average of approximately 21x; its warehouse clubs carry approximately 4,000—5,000 SKUs, between Costco’s approximately 3,000—4,000 and BJ’s approximately 8,000.

  Risks

  Renewed expansion of e-commerce losses, U.S. e-commerce growth falling below 15%, comparable sales below 2%, and higher-than-expected Flipkart losses.

Key data

• Stock RatingOverweightThe industry view is In-Line.
• Price Target$125.00The price target maintained in the report.
• Reference Share Price$103.70August 21, 2026 closing price.
• Recent Share-Price Performance-10%The decline in Walmart shares during the preceding week as stated in the report.
• Comparable-Sales Pressure Scenario2%—3%The sales range within which management believes the earnings growth algorithm can be maintained despite prescription drug pricing and pressure on lower-income consumers.
• Annual EPS Forecasts$2.65 / $2.88 / $3.13 / $3.39Corresponding respectively to the fiscal years ending 01/26, 01/27e, 01/28e, and 01/29e.
• Annual P/E45.0x / 36.0x / 33.2x / 30.6xCorresponding respectively to the fiscal years ending 01/26, 01/27e, 01/28e, and 01/29e.
• Dividend Yield0.8% / 1.0% / 1.0% / 1.0%Corresponding respectively to the fiscal years ending 01/26, 01/27e, 01/28e, and 01/29e.
• Current Valuation Versus One Year Ago~33x vs. ~45xComparison of the current earnings multiple with that of one year ago.
• E-Commerce Incremental MarginLow double digitsThe report believes flywheel businesses are driving low-double-digit incremental margins on e-commerce sales.
• AI Platform Referral TrafficMid-single-digit rangeMorgan Stanley’s estimate of the combined referral traffic share from two hyperscale technology platforms.
• GMV From AI-Referred CustomersApproximately 2xGMV from these customers is approximately 2x the average Walmart.com transaction.
• Sam’s Club Comparable Sales+4.4%2FQ27 comparable sales growth excluding fuel.
• Warehouse Club SKUsCostco ~3,000—4,000；Sam’s Club ~4,000—5,000；BJ’s ~8,000Used to illustrate the efficiency and merchandising risks of the curated-merchandise model.
• Price Target P/E Basis~36.8xBased on F’29e EPS of $3.39; Walmart’s ten-year historical average P/E is approximately 21x.
• Price Target EV/EBITDA Basis~18xBased on F’29e EBITDA of approximately $56.5 billion.
• Market Capitalization$826,591mmCurrent market capitalization shown in the report’s table.
• 52-Week Price Range$135.16—$95.42The range shown in the report’s table.

Impact & implications

The report believes the recent sales slowdown is more likely the result of several overlapping near-term factors than a structural breakdown in Walmart’s market share, price advantage, or earnings flywheel. If 2%—3% comparable sales can still support the targeted EBIT and EPS growth, the current valuation of approximately 33x will be easier to support than the approximately 45x level of a year ago. High-value referral traffic from AI platforms also indicates that external shopping interfaces may not disintermediate Walmart and could instead become new channels for customer acquisition, GMV, and advertising market expansion. Sam’s Club’s differentiated merchandising should also help address intensifying competition in the U.S. warehouse club channel in 2026.

Risks

• An upside risk is that alternative flywheels accelerate comparable sales to the mid-single-digit to high-single-digit range.
• An upside risk is that U.S. e-commerce continues to grow above 40%, supported by retail media, membership, first-party and third-party businesses, and automation.
• An upside risk is continued grocery market-share gains that further deepen the competitive moat.
• A downside risk is that e-commerce losses expand again after a temporary moderation.
• A downside risk is that U.S. e-commerce growth falls below 15% while comparable sales fall below 2%.
• A downside risk is that Flipkart losses exceed expectations.

What to watch

• Monitor whether subsequent operating data can demonstrate that Walmart can still deliver its targeted EBIT and EPS growth with comparable-sales growth of 2%—3%.
• Monitor the duration and impact of pressure on lower-income consumers and prescription drug pricing headwinds.
• Monitor Morgan Stanley’s subsequent review of the sales funnel to explain the combination of factors behind the slowdown this quarter.
• Monitor the share of AI platform referral traffic, whether the approximately 2x GMV performance of referred customers persists, and whether this traffic converts into advertising opportunities.
• Monitor U.S. e-commerce growth, incremental margins, and whether e-commerce losses remain on an improving trajectory.
• Monitor whether Sam’s Club’s differentiated merchandising can continue driving traffic, membership, and comparable sales after the industry’s 2026 store-opening peak.