Walmart, the retail giant, is anticipating a persistent expansion in its gross margins, bolstered by strategic investments in supply chain efficiency and automation technologies. This insight was highlighted by BofA Securities in a recent note circulated on Friday. The company reported fiscal second-quarter results that not only exceeded market expectations but also displayed a robust gross margin increase of 43 basis points, reaching 24.4%.
This improvement can be attributed to effective pricing strategies within the United States, alongside other factors noted in an earnings presentation. According to Chief Executive Doug McMillon during an earnings call on Thursday, "So far, we aren't experiencing a weaker consumer overall," indicating a solid consumer base amid varying economic climates. Walmart's performance reflects ongoing sales growth, increasing market shares, and elevated gross margins.
Chief Financial Officer John Rainey underscored this potential by stating, "We're demonstrating that we're able to grow our business on a sustained basis in the absence of price inflation." The gross margin is projected to further improve as the company benefits from higher-margin profit sources such as digital advertising, third-party marketplace accommodations, and fulfillment services.
BofA analyst Robert Ohmes emphasized in a note to clients that these profit streams will help mitigate challenges arising from the sales mix, especially as higher-margin general merchandise continues to lag behind sectors like grocery and health and wellness. In this latest earnings quarter, Walmart reported a 4.2% increase in US comparable sales, surpassing Wall Street's expectations of a 3.5% growth.
The increase can be attributed to multiple factors including broad-based share gains across different income levels, positive transaction growth, revitalized momentum in general merchandise, and substantial growth in US e-commerce channels, as indicated by BofA. Future projections for Walmart are optimistic, with the company now forecasting adjusted earnings for fiscal 2025 to fall between $2.35 and $2.43 per share, an increase from the initial forecast of $2.23 to $2.37.
Furthermore, sales growth is anticipated to lie between 3.75% and 4.75% at constant currencies, up from the earlier target of 3% to 4% growth. As BofA's Ohmes articulated, "We think broad-based share gains should continue for Walmart as its strong value offering and high digital convenience resonate with consumers." Notable efforts contributing to this momentum include ongoing store remodels, the expansion of online stock keeping units, and improving express delivery capabilities, all driving increased transaction and unit strength, along with participation in the Walmart+ program. Walmart+ membership revenue in the United States saw double-digit growth during the quarter, further solidifying the company's foothold in the digital space—and Rainey acknowledged this development during the call.
He stated, "While we're spending more on capital expenditure than we have historically, we're pleased with the returns from these investments, particularly the automation of our supply chain." The company is optimistic that these strategic investments will yield enough returns to enhance its annual return on invested capital consistently. Ohmes reiterated that Walmart's investments in supply chain efficiency, automation, and digital as well as third-party marketplace offerings are crucial in supporting potential sales and gross margin growth.
Moreover, BofA has raised its price target for Walmart's stock to $85 from a previous $75, while maintaining a buy rating. Current Price: $73.44 | Change: +$0.46 | Percent Change: +0.63 $WMT.