Adjusted EPS Up 19%, Guidance Raised — Yet the Stock Fell 9.6%. What Walmart's Tariff Refund Was Hiding
Overview
Walmart posted Q2 FY2027 revenue of $187.9B (+5.9%) and adjusted EPS of $0.81 (+19%), beating estimates and raising full-year guidance — yet the stock sank 9.6% on the day. U.S. comparable sales growth slowed from 4.1% to 2.6%, a six-year low, and much of the operating-income growth came from a $2.9B tariff refund. Rather than banking that money as profit, Walmart is pouring it into price cuts on more than 11,000 items.
On August 20, Walmart reported results for the second quarter of fiscal 2027 (May–July 2026, within a fiscal year running February 2026–January 2027). Revenue came in at $187.9B, above the $186.75B consensus (+5.9%), and adjusted EPS beat the $0.74 estimate at $0.81 (+19% from $0.68 a year earlier) — a beat on both lines. On the strength of that, the company raised its full-year FY2027 guidance across net sales, operating income and EPS. And yet the stock fell 9.6% on the day, closing at $103.32. Sales beat, EPS beat, guidance raised — so why did the market react this way?
The Quarter, by the Numbers
| Metric | Q2 (FY27, May–Jul '26) |
|---|---|
| Total revenue | $187.9B (+5.9%, +5.1% constant currency) |
| Adjusted EPS | $0.81 (beat $0.74 estimate, +19% YoY) |
| Adjusted operating income (constant currency) | +17.4% (includes ~750bp from tariff refunds) |
| Walmart U.S. comparable sales | +2.6% (ex-fuel; prior quarter 4.1%, consensus 3.8%) |
| Sam's Club U.S. comparable sales | +4.4% (ex-fuel) |
| International net sales | +7.9% (constant currency) |
| Global e-commerce | +23% (Walmart U.S. +24%, Sam's Club U.S. +26%, International +19%) |
| Global advertising | +38% (Walmart Connect, ex-VIZIO +43%) |
| Global membership fee income | +17% |
| Operating cash flow / free cash flow | $19.7B / $5.5B |
At 2.6%, U.S. comparable sales growth is 1.5 points below the prior quarter's 4.1% and 1.2 points below the 3.8% consensus — roughly a six-year low. Read as a headline, it looks like a demand-weakness signal. But there's a separate factor worth unpacking first.
The Core Insight — What "Six-Year Low" and "Tariff-Refund Surprise" Actually Weigh
Start with the comp slowdown. This quarter's U.S. pharmacy business absorbed roughly 125bp of revenue-recognition drag from a newly effective drug-pricing regulation ("Maximum Fair Price"). Strip that out and comparable sales growth comes to roughly 3.9% — essentially in line with the prior quarter's 4.1%, and slightly above the 3.8% consensus. In other words, a meaningful share of the "six-year low, missed consensus" headline is likely a regulatory accounting drag rather than an actual pullback in consumer demand — though this is a reconstruction from outside analysis, not a figure Walmart itself has officially disclosed as "3.9% ex-regulation," so it should be read with that caveat.
The second headline is what fueled the operating-income beat. The company expects to receive roughly $2.9B in refunds on tariffs it already paid on imported goods under the International Emergency Economic Powers Act (IEEPA), and that refund contributed roughly 750bp to this quarter's 17.4% constant-currency adjusted operating income growth. Strip that out and underlying growth comes to roughly 9.9% — near the top of the 7–10% constant-currency guidance range the company had set before this release. That means core operating performance held up well even without the refund — but it also means nearly half of this quarter's headline 17.4% growth was a one-off that won't repeat.
What the market actually reacted to most sharply, though, is something else. Walmart said it won't keep that $2.9B as profit — starting in Q3, it's funneling the money into price cuts on more than 11,000 items. As a result, Q3 adjusted EPS guidance came in at $0.62–0.64, below the roughly $0.68 the market expected. That's less a warning that results will come in worse than expected, and more management declaring, in effect, that it will sacrifice margin to sharpen its low-price positioning. It's a preemptive signal to rivals facing rising tariff-driven costs: "we can go lower." The problem is that the market — sitting on a mid-30s valuation multiple — read this choice as a margin-erosion signal rather than a defensive strategy, and that appears to be the real trigger behind the sell-off.
Business Impact — the Core Business Slows While Alternative Revenue Accelerates
Set the comp debate aside, and one thing about this quarter is unambiguous: Walmart's profit is increasingly being generated somewhere other than store gross margin. Global e-commerce grew 23%, advertising (Walmart Connect) grew 43% even excluding VIZIO, and membership fee income grew 17% — all multiples of the 2.6% U.S. comparable sales growth rate. Advertising in particular carries a structurally higher gross margin than retail itself, so it's playing a growing role in defending company-wide profitability even as the core business decelerates.
There's also a gap across regions and formats. Sam's Club U.S. comparable sales grew 4.4%, and International net sales grew 7.9% on a constant-currency basis — both notably faster than Walmart U.S. (+2.6%). That makes the core U.S. store channel the slowest-growing part of the company, and whether that trend persists next quarter is the real test of whether this is a temporary regulatory effect or genuine demand softness.
Practical Implications
- Finance/IR teams: Behind a "beat and raise" headline, check how much of the operating-income growth came from a one-time tariff refund, and whether a comp miss stems from a regulatory/accounting factor or actual demand weakness. When both forces are at work simultaneously, as in this Walmart release, the headline alone can point you the wrong direction
- Retail media/advertising teams: Walmart Connect's 43% growth shows that for large retailers, advertising and membership are no longer side income — they're now a core profit defense line. Worth benchmarking against how domestic hypermarkets and e-commerce players are scaling their own retail media businesses
- Vendors/exporters selling into the U.S. channel: Price cuts across 11,000+ items are likely to spread as broader price pressure across U.S. retail in Q3. Brands and vendors supplying Walmart should prepare for the possibility of margin-pressure requests
- Competitive benchmarking teams: How Costco, Target and Amazon respond to Walmart's price-cut push will be a signal for where U.S. retail margins trend next quarter
Conclusion
On the surface, Walmart's second quarter is a clean "earnings beat plus guidance raise." Underneath, two separate stories overlap: the comp slowdown may be substantially a one-off regulatory accounting effect, and nearly half of the operating-income beat came from a tariff refund that won't repeat. At the same time, Walmart chose not to bank that refund — it's deliberately reinvesting it into price cuts, which reads less like weakness and more like a preemptive bet to defend market share. The market read that choice as a margin-erosion signal and knocked the stock down 9.6%, but the real test of whether that bet pays off is whether U.S. comparable sales growth rebounds next quarter once the regulatory drag washes out.
The first thing worth checking in this release is whether the "six-year-low comparable sales" headline should be taken at face value. If the reconstruction that strips out the drug-pricing regulation effect is roughly right — comps essentially flat versus the prior quarter — then the market's 9.6% drop looks like something of an overreaction. It's a good reminder not to judge results by the headline number alone, and to separate out the one-off and regulatory factors mixed into it.
Second, I'd actually read the decision to reinvest the tariff refund into price cuts, rather than bank it as profit, as a positive. Signaling "we can go lower" right now, while rivals face rising tariff-driven costs, is about as solid a defense line as a retailer can build for protecting traffic in the next downturn. I expect investors will come to see next quarter's lower EPS not as weakness but as a calculated choice, once Q3 results confirm it.
Finally, what Korean retail should watch closely here is the growth rate of the advertising and membership businesses. That advertising can post 40%-plus growth and defend company-wide profitability even as the core store business slows to low single digits is a signal that domestic hypermarkets and department stores should stop treating retail media and paid membership as "add-on services" and start treating them as a core profit engine that offsets core-business deceleration.