Walmart Earnings: The Retail Margin Model Is Changing

Walmart U.S. comparable sales grew 2.6% in the second quarter. Excluding the tariff-refund benefit, U.S. operating income still grew roughly 10%.

CFO John David Rainey said Walmart has not produced that degree of profit growth relative to its U.S. comp in two decades. Nearly half of the profit growth came from membership, advertising and Marketplace, while Walmart U.S. eCommerce generated double-digit incremental margins in the first half.

That combination is the clearest evidence yet that Walmart’s digital investments are beginning to change the company’s profit mix faster than its revenue mix.

Pharmacy Is Hiding a Stable U.S. Comp

The reported 2.6% U.S. comp makes demand look softer than it is.

Walmart’s core merchandise categories have generally grown between 3% and 4% for the past two and a half years. Q2 comp sales excluding health and wellness were 3.4%. The gap came largely from pharmacy: Maximum Fair Price regulation, deflation and brand-to-generic transfers reduced the reported U.S. comp by roughly 125 basis points.

Health and wellness has created an unusually large swing in the comparison base. Walmart estimates that changes in GLP-1 contribution and pharmacy pricing together account for roughly a 200-basis-point year-to-date swing versus the trailing two-year pace.

The underlying retail business remains steadier. Transactions grew 1.5%, unit volumes increased, and Walmart continued gaining share across categories and income tiers.

Walmart is also leaning harder into price. Rollbacks increased from roughly 7,200 at the end of Q1 to more than 11,000 during Q2. Management says those investments are already producing unit growth and stronger food share, while price gaps to conventional grocers continue to widen.

The second-half sales outlook assumes those price investments translate into stronger transactions and sustained share gains.

Digital Is Finally Producing Incremental Margin

Walmart U.S. eCommerce grew 24% in Q2, extending a run of more than 20% growth to ten consecutive quarters. Store-fulfilled delivery grew more than 40%, average weekly customers increased 20%, and Marketplace sales rose more than 50%.

The newer development is profitability.

Walmart U.S. eCommerce produced double-digit incremental margins during the first half. Management attributed the improvement to advertising and membership revenue, denser delivery routes, paid fast delivery and automation. Fee-based fast delivery reached a record 37% of store-fulfilled deliveries, while more than half of eCommerce fulfillment volume now moves through automated facilities.

Those operating details help explain why the economics of a digital order are changing.

More volume moving through the same network improves asset utilization and route density. Walmart is also getting paid for speed: expedited delivery has become a meaningful revenue stream rather than simply another fulfillment cost. At the same time, advertising and membership add higher-margin revenue around the retail transaction.

Marketplace adds another layer. U.S. Marketplace sales grew 52%, and nearly half of Marketplace volume flowed through Walmart Fulfillment Services, up roughly 400 basis points from last year.

Selling another case of detergent through a supercenter still produces traditional retail economics. A customer acquired through Walmart’s digital ecosystem can also generate membership fees, advertising demand, Marketplace activity and fulfillment revenue.

That is why Rainey’s disclosure that nearly half of profit growth came from membership, advertising and Marketplace carries more weight than another quarter of 20%+ eCommerce growth.

Walmart’s Stores Are Becoming Profit Infrastructure

The store network sits underneath much of this improvement.

Stores now fulfill roughly 80% of Walmart U.S. eCommerce orders and every fast-delivery order. eCommerce represents more than 23% of Walmart U.S. sales, roughly double its mix five years ago, yet more unit volume is moving through the stores because they increasingly function as local fulfillment nodes.

Fast delivery grew 48% in Q2, and Walmart has expanded sub-30-minute delivery into 38 U.S. markets. Management says customers who use faster delivery shop more frequently and are more likely to become Walmart+ members.

The same physical footprint that once looked like a disadvantage versus asset-light eCommerce competitors is now serving multiple functions: store, inventory location, fulfillment node and customer-acquisition infrastructure.

Membership strengthens the economics further. Walmart+ posted double-digit growth, and members spend roughly four times more with Walmart than non-members.

Advertising grew 38% globally, Walmart Connect grew 43% excluding VIZIO, and Marketplace expanded assortment without requiring Walmart to own all of the inventory.

Chief Growth Officer Seth Dallaire has described these businesses as deliberately connected: stronger eCommerce supports membership, membership increases frequency and wallet share, Marketplace broadens assortment, and sellers create additional advertising demand.

That strategy has been visible for several years. Q2’s incremental-margin disclosure provides better evidence that the economics are beginning to follow the architecture.

Q3 Will Test Whether the Economics Hold

Q2 itself is a poor standalone margin benchmark.

Adjusted operating income grew 17.4% in constant currency, but roughly 750 basis points of that growth came from tariff refunds. Excluding the benefit, underlying operating-income growth landed at the top end of Walmart’s 7%–10% guidance.

Walmart has received substantially all of approximately $2.9 billion in eligible refunds and is reinvesting much of that money into price and customer experience.

That shifts some of the economics into Q3. Adjusted operating-income growth is expected to slow to 2%–4% as the full-quarter effect of those price investments comes through. Management estimates that Q2 and Q3 operating-income growth together would average roughly 10% per quarter.

Walmart is also absorbing more than $2 billion of incremental fuel costs this year and has raised expected capital expenditures from roughly 3.5% to 4% of sales. Even with those pressures, management raised full-year constant-currency sales guidance to 4%–5% and adjusted operating-income growth guidance to 7%–8.5%.

The cleanest proof point from here is Walmart U.S. eCommerce incremental margin.

If digital growth remains above 20% and incremental margins stay in the double digits after the tariff-refund benefit rolls through, Walmart will have stronger evidence that advertising, membership, Marketplace, automation and delivery density are creating a structurally better earnings model.

If those margins compress materially as fulfillment costs, capital spending and price investment rise, Q2 will look more transitional than structural.