Pharmacy and fuel pressures do not alter Walmart's core omnichannel profitability improvement thesis

Overview

The report assesses Walmart's 2Q27 results, latest guidance, and model revisions. Despite pharmacy-related pressure on US comparable sales, higher fuel and freight costs, and 3Q27 guidance below expectations, Bernstein continues to believe these factors have not undermined the company's business momentum or the thesis of structural improvement in omnichannel margins, and maintains its Outperform rating and $142 target price.

Core views

Walmart's overall 2Q27 results reached the high end of its previous guidance, with profit significantly exceeding expectations. Net sales were $186.1 billion, up 5.9% year over year and 5.1% in constant currency, approximately 60 basis points above consensus. Gross margin was 25.4%, up approximately 100 basis points year over year and 90 basis points above consensus; constant-currency adjusted EBIT increased 17.4% year over year, with an adjusted EBIT margin of 5.0%, 40 basis points above expectations; adjusted EPS was $0.81, $0.07 above consensus. A major source of the profit beat was tariff refunds: approximately $600 million was recognized on a net basis in 2Q27, equivalent to a contribution of roughly 750 basis points to year-over-year EBIT growth. The report understands that nearly all of the approximately $2.9 billion in tariff refunds has already been received, making the quarterly distribution of this benefit highly timing-dependent. A separate tax matter generated a benefit of $0.11 per share and reduced interest expense by approximately $400 million, broadly offsetting the $0.12-per-share impact from equity investment losses. The main weakness in the US business was comparable sales. Walmart US comparable sales excluding fuel increased 2.6%, below consensus of 3.7%, including transaction growth of 1.5% and average ticket growth of 1.1%. Food sales grew at a mid-single-digit rate, while general merchandise grew at a low-single-digit rate, decelerating from mid-single-digit growth in 1Q27. Management stated that the Maximum Fair Pricing mechanism created an approximately 90-basis-point drag on the health and wellness category; the report's further breakdown suggests that Max Fair Pricing generated roughly 125 basis points of pressure, while GLP-1-related demand contributed approximately 50 basis points, resulting in a net pharmacy-related drag of about 80 basis points. Excluding health and wellness, US comparable sales increased approximately 3.4%. Because the pharmacy business has relatively low margins, Bernstein estimates that its impact on gross margin was only about 10 basis points, meaning weaker sales growth did not translate proportionally into lower profit. US consumer mix and channel shifts continue to support the report's long-term thesis. Management stated that the company gained broad-based share across all income cohorts, with trade-down behavior most pronounced among higher-income consumers. E-commerce contributed approximately 510 basis points to Walmart US comparable sales growth this quarter, also implying that brick-and-mortar comparable sales remained negative. Walmart US adjusted operating income increased 20.6% to $8.12 billion, benefiting from tariff refunds, digital advertising growth, and improved e-commerce economics, partially offset by price investments and expense deleverage. Bernstein therefore believes that the online business is gradually shifting from merely driving sales to improving the profit mix, providing the core basis for structural improvement in omnichannel margins. Other business segments provided stronger growth support. Sam's Club US comparable sales excluding fuel increased 4.4%, above consensus of 4.0%; transactions increased 7.0%, while average ticket declined 2.5%. Membership income increased 6.0%, with membership counts and Plus membership continuing to grow steadily. E-commerce sales increased 26%, contributing approximately 450 basis points to comparable sales, and now account for roughly 20% of net sales excluding fuel; the pharmacy business created a 40-basis-point drag on the segment's comparable sales. Walmart International constant-currency net sales increased 7.9%, above consensus of 5.9%, with the China business growing 20.7%, driven by e-commerce. Currency movements provided a $1.5 billion sales tailwind, while international e-commerce sales increased 19%, primarily driven by store-fulfilled pickup and delivery and marketplace businesses. The company raised its full-year FY27 guidance, although some metrics remained below consensus. Constant-currency net sales growth guidance was raised from 3.5%-4.5% to 4.0%-5.0%, versus consensus of 5.4%; constant-currency adjusted EBIT growth guidance was raised from 6.0%-8.0% to 7.0%-8.5%, versus consensus of 8.2%; adjusted EPS guidance was raised from $2.75-$2.85 to $2.80-$2.87, still below consensus of $2.90. 3Q27 guidance was notably weak, but the report believes this primarily reflects timing mismatches between quarters. The company expects constant-currency net sales growth of 3.0%-3.75%, including a 100-basis-point drag from the timing shift of the Big Billion Days event, below consensus of 5.0%; constant-currency EBIT growth is expected to be 2.0%-4.0%, below consensus of 7.3%; adjusted EPS is expected to be $0.62-$0.64, below consensus of $0.68. Tariff refunds were received early in 2Q27, while price investments will increase in 3Q27, so comparing the two quarters separately would exaggerate profit volatility. Viewed together, 2Q27 and 3Q27 imply approximately 4%-5% constant-currency sales growth and roughly 10% constant-currency EBIT growth, indicating a more stable operating trend than the single-quarter guidance suggests. Bernstein revised its model following the results to reflect a weaker US health and wellness comparable sales outlook, approximately $1 billion in additional annualized fuel and freight costs, and the profit pass-through of roughly $2.9 billion in tariff refunds. The report also describes the fuel headwind as approximately $2 billion in annualized pressure but believes these effects will normalize over the next 24 months. The model table lowers FY27E and FY28E adjusted EPS to $2.95 and $3.38, respectively, from prior forecasts of $3.06 and $3.54. Despite the modest reduction in medium-term EPS, the report believes the pharmacy-related drag has limited impact on profit and that the additional fuel pressure is insufficient to alter Walmart's underlying business momentum or its trajectory of improving omnichannel profitability. On valuation, Bernstein applies a 38.8x P/E multiple to Q5-Q8 forward EPS of $3.66 to derive a $142 target price. The report lists adjusted P/E multiples for FY26A, FY27E, and FY28E of 39.3x, 35.2x, and 30.8x, respectively. Based on the August 20, 2026 closing price of $103.84, the report indicates 37% upside. It therefore maintains its Outperform rating and believes that post-earnings share-price weakness caused by short-term comparable sales and guidance pressure does not alter its investment thesis.

Analysis framework

Bernstein first compares actual 2Q27 results with the company's prior guidance and consensus expectations, then breaks down sales, transactions, average ticket, e-commerce contributions, and profit performance across the US, Sam's Club, and international businesses. It subsequently distinguishes one-off or temporary factors such as pharmacy, tariff refunds, fuel costs, price investments, and event timing shifts, and assesses 2Q27 and 3Q27 together to determine the underlying operating trend. Finally, it incorporates these changes into its medium-term EPS model and calculates the target price using a forward P/E methodology.

Methodology notes

• Valuation MethodologyP/E and PEG Valuation

  Forward P/E target price methodology

  The report applies a 38.8x P/E multiple to Q5-Q8 forward EPS of $3.66 to derive a $142 target price.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of comparable sales by transactions, average ticket, and channel contribution

  The report decomposes US and Sam's Club comparable sales into transactions, average ticket, e-commerce contributions, and category impacts to determine whether sales changes stem from traffic, pricing, channels, or pharmacy-related disruptions.

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Analysis of the transmission from sales growth to gross margin and operating profit

  The report compares comparable sales, gross margin, and operating profit growth and isolates the effects of tariff refunds, advertising, e-commerce economics, price investments, and expense deleverage to assess the actual impact of sales pressure on profit.

• Event Trading and Behavioral FinanceEvent-driven analysis

  Cross-quarter timing impact analysis

  The report jointly assesses the mismatches in tariff refunds, the timing of the Big Billion Days event, and price investments between 2Q27 and 3Q27, avoiding judgments about the underlying operating trend based solely on single-quarter guidance.

Asset mapping & comparison

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

• Walmart Inc (WMT.US)

  The report believes that short-term pressures from pharmacy, fuel costs, and 3Q27 guidance do not alter the company's business momentum or the trend of improving omnichannel profitability.

  Strengths

  Market share gains across income cohorts, higher-income consumer trade-down, growth in e-commerce and digital advertising, improving e-commerce economics, and strong growth in the international business and China market.

  Weaknesses

  US comparable sales below expectations, implied negative brick-and-mortar comparable sales, pharmacy-related sales pressure, rising fuel and freight costs, and 3Q27 guidance below consensus.

  Comparison

  2Q27 gross margin, adjusted EBIT margin, and EPS all exceeded consensus; Walmart US comparable sales fell below expectations, while Sam's Club US and international business growth exceeded expectations.

  Risks

  An unexpected deterioration in the consumer environment, failure to execute new businesses, and increased US regulatory scrutiny.

Key data

• 2Q27 Net Sales186.1B USDUp 5.9% year over year and 5.1% in constant currency, approximately 60 basis points above consensus
• 2Q27 Gross Margin25.4%Up approximately 100 basis points year over year and 90 basis points above consensus
• 2Q27 Constant-Currency Adjusted EBIT Growth17.4%Includes an approximately 750-basis-point year-over-year growth contribution from tariff refunds
• 2Q27 Adjusted EPS0.81 USD$0.07 above consensus
• Walmart US Comparable Sales2.6%Excluding fuel, below consensus of 3.7%; transactions increased 1.5% and average ticket increased 1.1%
• Net Pharmacy-Related DragApproximately 80 basis pointsDrag on Walmart US comparable sales; the report estimates a gross margin impact of only approximately 10 basis points
• Walmart US E-commerce ContributionApproximately 510 basis pointsContribution to US comparable sales growth this quarter, implying negative brick-and-mortar comparable sales
• Sam's Club US Comparable Sales4.4%Excluding fuel, above consensus of 4.0%; transactions increased 7.0% and average ticket declined 2.5%
• Walmart International Constant-Currency Sales Growth7.9%Above consensus of 5.9%, with the China business growing 20.7%
• FY27 Adjusted EPS Guidance2.80-2.87 USDPreviously $2.75-$2.85, versus consensus of $2.90
• 3Q27 Adjusted EPS Guidance0.62-0.64 USDBelow consensus of $0.68
• Adjusted EPS ForecastsFY27E 2.95 USD; FY28E 3.38 USDPrior forecasts were $3.06 and $3.54, respectively
• Target Price Valuation Basis38.8x × 3.66 USDA 38.8x P/E multiple applied to Q5-Q8 forward EPS, deriving a $142 target price

Impact & implications

The report believes that the 2Q27 profit beat included timing-related benefits such as tariff refunds, while weak 3Q27 guidance reflects refund timing mismatches and price investments, so the two quarters should be assessed together. Although the pharmacy business reduced comparable sales, its profit impact was limited; advertising growth and improved e-commerce economics continue to support structural improvement in omnichannel margins. Higher fuel and freight costs led to modest reductions in medium-term EPS forecasts, but Bernstein expects these pressures to normalize over the next 24 months and believes its core investment thesis remains unchanged.

Risks

• An unexpected weakening of the consumer environment in the US or major international markets could slow comparable sales and cause expense deleverage.
• If Walmart's new businesses, including e-commerce and advertising, fail to succeed, its long-term revenue and margin targets could be threatened.
• Walmart's leading position in the US food retail market could result in more stringent regulatory scrutiny.

What to watch

• Monitor the ongoing impact of the US health and wellness category and pharmacy pricing mechanisms on comparable sales.
• Monitor the effects of 3Q27 tariff refund timing, the shift in the Big Billion Days event, and price investments on sales and profit.
• Monitor whether fuel and freight cost pressures normalize over the next 24 months as the report expects.
• Monitor whether e-commerce, digital advertising, and store-fulfilled businesses continue to improve omnichannel profitability.
• Monitor whether trade-down among higher-income consumers and market share gains across income cohorts continue.