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Walmart (WMT -4%) is heading lower after reporting Q2 (Jul) results this morning. In a surprise, the retail giant missed on EPS for the first time in three years as it grapples with tariff-related cost increases. Revenue rose 4.8% yr/yr (+5.6% CC) to $177.4 bln, which was better than guidance of +3.5-3.5% CC. After not providing next quarter guidance last time, it was good to see WMT resume guidance, including upside EPS guidance for Q3 (Oct). In another positive, WMT raised full year revenue guidance to +3.75-4.75% CC from +3-4% CC. WMT also raised its FY26 EPS outlook a bit.

• Its Walmart US segment performed well with comps (ex fuel) up +4.6%, roughly similar to recent comps of +4.5% in Q1 and +4.6% in Q4. Strong sales growth reflects share gains across key categories. When WMT reported last quarter, it flagged the potential for a higher level of markups on Walmart US inventory. WMT ultimately realized lower markups than anticipated and wound up using more Rollback pricing.
• Sam's Club US comps (ex fuel) were even more impressive, at +5.9%, however, that was down from +6.7% in Q1 and +6.8% in Q4. Sales were led by grocery and health & wellness with continued growth in general merchandise. Comps momentum was driven by higher units and continued strength in transactions. eCommerce sales were up 26% while membership income grew 7.6% with steady growth in member counts, renewal rates, and Plus members.
• WMT does not provide comps for its Walmart International segment, but sales jumped 5.5% (+10.5% CC) to $31.2 bln. Growth was led by China, Walmex, and Flipkart with transaction counts & unit volumes up across markets.
• Not surprisingly, tariffs were a big topic on the call. WMT said the impact of tariffs has been gradual enough that any behavioral adjustments by the customer have been somewhat muted. However, as WMT replenishes inventory at post-tariff price levels, WMT has seen its costs increase each week, which it expects will continue into Q3-Q4. WMT is seeing more adjustments in middle and lower income households than higher income households.
• Nevertheless, WMT increased its Rollback pricing to 7,400 items from 5,400 last quarter. Its Rollback count in grocery was up 30% yr/yr. Customers are responding as WMT leans into value with more rollbacks. WMT says it's playing offense to keep prices as low as it can. Also, growth in higher margin businesses is allowing WMT to aggressively pursue share gains in the near term. Finally, back-to-school is usually an indicator of how the holidays will go, and WMT feels good about how it went.

We think the stock is mostly reacting to the surprise EPS miss. In fairness, Q2 was a rare time when WMT did not offer guidance and it was a weird quarter given the uncertainty and changes around tariff rates. So we think analysts were a bit in the dark. Another factor here is that Target (TGT) reported good operational results yesterday with a notable increase in traffic, so that raised expectations and made this miss even more surprising. Furthermore, it sounds like WMT is leaning into even more Rollback pricing in order to gain market share. There may be some concern this could impact margins in future quarters, but the guidance was pretty solid.