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Walmart beats on Q2 earnings, inventory concerns continue

Yahoo Finance Live anchors discuss second-quarter earnings for Walmart.

Video transcript

BRIAN SOZZI: All right, here are three things you need to know right now.

Shares of Walmart are rising after beating on earnings for the second quarter, as the retail giant increased revenue by 8% year-over-year. CFO-- new CFO, I should say, John Rainey tells "Yahoo Finance Live," the retailer is off to a solid start to this back-to-school shopping season. And guys, that, I think, is why you're seeing the stock react the way that it is.

So on the slide deck Walmart put out, in Walmart US, they note a solid-- they noted a solid start to the back-to-school shopping season. We'll get to the quarter in a second.

But I asked Rainey about this. He's telling us that solid means solid. He would characterize it as encouraging. Not a strong start but still the pullback in gas prices has people out there shopping for school supplies perhaps a little bit better than the market expected, at least for Walmart.

BRAD SMITH: Yeah, one of the things that I took away from this in looking through the quarter, the average tick was actually up at Walmart but down at Sam's. And so even though you did see growth, they were spending more to get some of that growth at Sam's, particularly there. That pressed on the margins specifically for that line of business.

But then when you look at the operating income across the board and even within Walmart US-- international was one of the kind of bright spots there. But Walmart US and Sam's, particularly on that operating income, seeing some of those slight declines there. I think that's most noteworthy here in this most recent quarter because it spells out some of the pressures that consumers were facing, and that Walmart was facing as well in having to spend more and still having to account for some of the inventory on their balance sheets right now, too.

JULIE HYMAN: You know, it seems to me we're still looking just at a less bad situation than a super robust situation, right? The company for the year is now still expecting its earnings per share to fall. But it's a smaller fall than it had said before, a nine--

BRIAN SOZZI: More than July.

JULIE HYMAN: Right. Right. So 9% to 11% drop versus an 11% to 13% decline that they were previously expecting. You know, so that's a little bit less bad, right?

And the company also said on the conference call, Doug McMillon, the CEO, said that they're seeing more middle and upper income shoppers come to the stores. And that they're gaining some market share in groceries. So it seems like that they're benefiting, to some extent, from a trade down effect from other grocers, perhaps, that are now checking out Walmart.

BRIAN SOZZI: Well speaking of trade down, Rainey also told me that-- and again, some of the comments I just made on back to school, I'm just trying to understand or explain why the stock is moving here. Those are encouraging comments from Walmart on back to school. Any time you get that from the world's largest retailer, first one out of the shoot here for back-to-school reporting season, the stock's likely to move higher.

But Rainey telling us that he still sees consumers trading down from deli meats to canned tuna, and chicken, and even beans. So that consumer, even with gas prices down, is still out there watching their budgets very closely. Also noting that the inventory levels that we've been talking about-- inventory was up 25% in Walmart US in the most recent quarter. Part of that reflects just higher prices from vendors.

But a lot of unsold units notably in general merchandise, like the electronics category. That inventory issue will likely continue to just be a problem until the fourth quarter or the holiday shopping season.

BRAD SMITH: Two other parts of the business as well that perhaps don't get a ton of attention, but it's going to be one-- especially when you do see margins really get a ton of attention from the Street, especially in a time like this where companies are trying to navigate where they are pushing through inventory concerns, where they are even pushing through price to consumers.

It's the advertising business as well that Walmart's gonna continue to lean into. Of course, they just had this big partnership that they struck with Paramount+. And I would argue that even with a partnership like that on the advertising business side for Walmart, this helps them look at the best margin areas of the business, because if you have more subscribers that go into a Walmart, that's-- just initially on the onset of a sign-up for Walmart+, that's where you're starting to get that customer lifetime value baked in.

You tend to get even more of a higher ticket from those members, from those subscribers. So higher margins perhaps there. But then additionally, that digital advertising business, that grew 30%, particularly led by Walmart Connect.

And then just lastly here on the e-commerce front, too, because we had talked about this yesterday, I think for e-commerce sales, we've also seen that start to-- at least in the growth, start to pull back a little bit here. It was only about 12%-- 18% on a two-year stack. And that used to be about 39%, 40%. And so that pulling back a little bit, I think that is something to keep a close eye on here as well.

JULIE HYMAN: Does Walmart disclose how many-- what is its plan called, Walmart+ or Walmart--

BRIAN SOZZI: Walmart+.

JULIE HYMAN: Does it disclose how many subs that they have?

BRIAN SOZZI: They don't disclose the number.

JULIE HYMAN: But obviously, they're trying to juice it here with this Paramount deal, right? Just because Amazon obviously has had that much more well-rounded offering from its Amazon Prime because of streaming. Amazon now is offering the DoorDash-- whatever the DoorDash name for its premium offering is, that you get that as part of Amazon Prime. And there are a lot of other perks. So Walmart now trying to round out its own offering as well.

BRIAN SOZZI: Yeah, Rainey didn't want to put any specifics or any numbers around how much it's paying, I would imagine, Paramount for this deal. But it looks to be a win. I mean, this gives them, to your point, a credible attack against what Amazon is doing.

BRAD SMITH: Yeah.

JULIE HYMAN: Maybe.

BRIAN SOZZI: Maybe.

JULIE HYMAN: We'll see if they actually get more subs as a result or if we even know if they-- I mean, we won't know. That's the--

BRIAN SOZZI: Well, if I find out, you're the first one I'm telling.

JULIE HYMAN: Unless we see a big increase, I guess, in those e-commerce numbers again.