Walmart sticks with second-half outlook after earnings beat expectations

The retailer's results surpassed analysts' expectations, but echoed its profit warning last month, when Walmart said inflation-pinched shoppers were buying less high-margin discretionary merchandise like apparel as they spent more on necessities.

Walmart expects those spending patterns to persist. It reiterated its forecast for the back half of the year, even as it sells through a glut of inventory. It expects same-store sales for Walmart U.S. to grow by about 3%, excluding fuel, for the second half of the year, or about 4% for the full year. It anticipates adjusted earnings per share will decline between 9% and 11% for the full year.

"We expect inflation to continue to influence the choices that families make and we're adjusting to that reality so we can help them more," CEO Doug McMillon told analysts on a conference call Tuesday.

Here's what Walmart reported for its second quarter ended July 31, compared with Refinitiv consensus estimates:

• Earnings per share: $1.77 adjusted vs. $1.62 expected
• Revenue: $152.86 billion reported vs. $150.81 billion expected

Walmart's net income for the quarter rose to $5.15 billion, or $1.88 per share, compared with $4.28 billion, or $1.52 per share a year earlier. 

Same-store sales for Walmart U.S. grew 6.5% in the second quarter, excluding fuel, compared with the year-ago period. That was higher than the 5.9% growth that analysts expected, according to StreetAccount.

E-commerce sales rose 12% compared with the year-ago period and 18% on a two-year basis.

Some of Walmart's sales gains came from inflation, which is driving up prices of food and other items. It also got a boost as families across income levels shopped at its stores and website.

Chief Financial Officer John David Rainey told CNBC the retailer's reputation as a discounter is attracting more middle- and high-income shoppers. About three-quarters of Walmart's market share gains in food came from customers with annual household incomes of $100,000 or more. 

He said Walmart is seeing signs of a budget-strapped consumer who is trading down "in terms of quality and quantity," too. For example, he said, shoppers are increasingly using credit more than debit, he said. They are opting for smaller packages of food and buying items like canned tuna and beans instead of deli meats and beef. 

"Clearly, they're stressed from higher gas prices, higher food prices and even housing," he said.

Walmart's own brands, which typically cost less, have also gained momentum. Sales of the private-label products are growing two times as fast as in the first quarter, Rainey said.

The company reported low double-digit comparable sales growth in grocery and high single-digit gains in health and wellness. Sales of general merchandise fell mid single digits, due to softness in electronics, apparel and home products, Walmart said.

Back-to-school sales are off to a strong start, as parents buy backpacks and other supplies, Rainey said.

Walmart's news sent shares of retail rival Target up nearly 5% on Tuesday. Target is set to report its latest quarterly results on Wednesday morning.

Walmart is offsetting profit pressure by chasing new ways to make money, too, like its subscription service Walmart+. It announced Monday that members who belong to the program will get access to Paramount+ for free starting in September.

Both Walmart and Target issued warnings in recent months that they needed to discount some items to try to get them off of shelves and out of store backrooms before the all-important holiday season, which would hit profits in the near term.

Apparel, for example, saw a sharp drop in the past six months at Walmart. McMillon told analysts on the conference call that its inventory position reflects strange comparisons, too, as it laps a year-ago period with unusually strong demand and higher out-of-stocks.

Walmart's inventory levels in the U.S. were up 25.6% in the second quarter compared with a year ago, which the company said was mainly due to inflation and higher levels of general merchandise.

Rainey told CNBC that 40% of the $11 billion of higher inventory reflects increased costs of goods from inflation. About $1.5 billion is the amount that Walmart would like to "wave a magic wand" to make disappear, he said.

Walmart is selling through that excess merchandise with markdowns and has "canceled billions of dollars in order to help align inventory levels with expected demand," Rainey said on an earnings call. He estimated that about 15% of the company's inventory growth is above the levels that it wants.

McMillon told analysts on the conference call that Walmart has found ways to cut costs, too. For example, he said Walmart reduced the number of shipping containers in its system by more than half from first-quarter levels to bring them much closer to historical averages, he said.

He said Walmart will have a cleaner inventory position by the time Halloween rolls around.

"I expect a strong finish to the back-to-school season and we will quickly transition to the holidays," he told analysts.

Walmart's membership-based warehouse club, Sam's Club, has also attracted new customers amid inflation. Membership hit an all-time high in the quarter. Same-store sales for the club grew 9.5%, excluding fuel, slightly below the 10.1% expected, according to StreetAccount.

As of Monday's close, Walmart shares are down about 8% so far this year. The stock closed Monday at $132.60, bringing the company's market value to $363.48 billion.

Read the company's earnings release here.

– CNBC's Lauren Thomas contributed to this report.

Correction: Walmart announced Monday that members who belong to Walmart+ will get access to Paramount+ for free starting in September. An earlier version misstated the day.