WMT — Q2 2026 Financial Report Analysis

A $2.9 billion tariff refund lifts operating profit 28.8% — and a $3.9 billion swing on investments still drags EPS down 9%

Walmart's quarter ended July 31, 2026 pushed three headline numbers in three different directions: revenue up 5.9%, operating income up 28.8%, and reported earnings per share down 9.1%. Almost none of that spread reflects how the stores actually traded. Two items — one sitting above the operating line, one below it — explain most of it, and neither is repeatable.

(A note on the calendar: Walmart's fiscal year ends January 31, so this quarter is the company's own fiscal 2027 second quarter. It is the most recent period Walmart has filed, covering May, June and July 2026.)

The quarter in figures

"bps" = basis points; one basis point is one hundredth of a percentage point, so 96 bps is 0.96 of a percentage point. Comparable sales ("comps") measure only stores and clubs that have been open long enough to have a year-ago figure to compare against, so the number strips out the effect of simply opening more stores.

The tariff refund is larger than the entire increase in operating profit

The single most important line in this filing is not in the income statement. It is in the contingencies note: during the quarter Walmart "received approximately $2.9 billion in tariff refunds," obtained through the U.S. Customs and Border Protection process for duties the company had paid as importer of record under the International Emergency Economic Powers Act. The filing states these refunds were "recorded as a reduction to cost of sales" and "represent substantially all of the refunds requested by the Company."

Cost of sales is what Walmart pays for the goods it sells. Cutting it raises gross profit dollar-for-dollar. Now compare: operating income — the profit from running the retail business, before interest, investment results and tax — rose $2,097 million, from $7,286m to $9,383m. The refund on its own is larger than the entire year-over-year increase in operating profit.

That is not a clean subtraction, because Walmart immediately spent part of it. Management states that "a significant portion of these refunds was invested into customer-focused initiatives during the current quarter, primarily through price investment," which means cutting shelf prices — a move that reduces sales and gross margin and therefore offsets part of the refund. So the refund's net contribution is less than the full $2.9 billion. But the direction is unambiguous: the reported 28.8% operating income growth is not a measure of how much better Walmart traded.

Management's own adjusted figure is +17.4% on a constant-currency basis, and it is worth being precise about what that number does and does not remove. It lifts the prior-year comparison base from $7,286m to $7,876m (stripping out $440m of legal charges and $150m of reorganization charges booked in Q2 FY26), and it removes a $135m currency benefit from this quarter. It does not remove the tariff refund. The refund's net effect is still sitting inside that 17.4%. Walmart's own gloss is that "setting aside this net impact, underlying operating income growth was at the top end of our guidance" — i.e. close to the 4% upper bound of the growth it had guided to for the quarter, not 28.8% and not 17.4%.

You can see where the money landed by segment. Walmart U.S., which the filing says received the refunds "primarily," posted a 158 bps gross margin improvement against the company's 96 bps — and its operating income rose $1.4 billion, less than half the refund. Sam's Club U.S. gross margin rose 45 bps, also attributed first to tariff refunds. Walmart International, which does not import into the U.S. on the same basis, saw its gross margin fall 15 bps.

The EPS decline has nothing to do with retail either

Below the operating line, "other (gains) and losses" swung from a $2,708m gain a year ago to a $1,200m loss this year — a $3,908 million reversal. The filing attributes it to "changes in fair value of our equity and other investments driven by changes in their underlying stock prices," and the fair-value note quantifies it: those holdings fell $1.1 billion in value this quarter after rising $2.0 billion in the same quarter last year. This is a mark-to-market accounting movement on a portfolio of shareholdings. It tells you nothing about how many groceries Walmart sold.

Two further below-the-line items moved together and largely cancelled out:

• Interest expense on debt collapsed from $651m to $137m. This is not deleveraging. It is an interest benefit tied to the resolution of a tax position; the earnings release is explicit that "excluding the interest impact of this matter, adjusted interest, net was $0.6 billion" against the $0.2 billion reported.
• The effective tax rate fell to 18.5% from 23.3%, which the filing attributes to "changes in unrecognized tax benefits" — the same matter. Adjusted for it, the rate was 24.8%, i.e. higher than last year's reported rate.

Walmart's own reconciliation puts numbers on the two: the investment loss cost $0.12 per share and the tax matter added $0.11 per share. They nearly offset, which is why reported EPS of $0.80 and adjusted EPS of $0.81 are almost identical this quarter. Last year's $0.88 reported, by contrast, contained a $0.26 per-share investment gain — which is the whole reason the year-over-year comparison looks bad. On the adjusted basis, EPS went from $0.68 to $0.81, up 19.1%.

Takeaway: Both of this quarter's dramatic numbers — 28.8% operating income growth and a 9% EPS decline — are artefacts. A one-time $2.9 billion customs refund exceeds the entire rise in operating profit, and a $3.9 billion year-over-year swing in investment marks drove the EPS fall. What actually happened underneath is far duller and more useful: high-single-digit adjusted profit growth on 5.9% revenue growth, with the genuine margin improvement coming from advertising (+38%) and membership fees (+17%), not from selling merchandise better.

Walmart U.S.: the comp is entirely eCommerce

Walmart U.S. net sales rose 3.5% to $125.2 billion on comparable sales of 3.3%. The composition is the interesting part. The filing states that "the Walmart U.S. segment's eCommerce net sales positively contributed approximately 4.9%" to that 3.3% comp — which means everything other than eCommerce subtracted roughly 1.6 percentage points. Online, which includes orders placed digitally and fulfilled from a store, reached approximately $29.4 billion of segment sales, up from $23.7 billion, and is now about 23% of Walmart U.S.

Merchandise category detail shows where the drag sits:

Health and wellness — mostly the pharmacy — fell in absolute dollars, and the filing gives a specific regulatory cause: "the impact from maximum fair price regulation on certain prescription drugs, which went into effect in January 2026." The earnings release sizes it at an 80 bps headwind to the U.S. comp. This is a price cap, not a demand problem, and it will keep depressing the growth rate until it laps in January 2027. General merchandise was close to flat, which matters because it is a higher-margin category than food. "Other categories," up 41%, is the bucket that carries marketplace, fulfillment services and certain advertising arrangements — small in dollars, fast-growing, and disproportionately profitable.

One reconciliation worth noting for anyone comparing this to press coverage: the 10-Q reports a 3.3% U.S. comp on Walmart's fiscal calendar, while the earnings release reports 2.6% on the retail 4-5-4 calendar excluding fuel. Both are Walmart's own figures for the same quarter; the filing explicitly flags that the two calendars produce different numbers.

International: nearly 40% of the reported growth is currency

Walmart International net sales rose 12.8% to $35.2 billion — the fastest-growing segment on paper. But the filing discloses that "currency exchange rate fluctuations positively contributed $1.5 billion" in the quarter. On a $31.2 billion year-ago base, that is roughly 4.8 percentage points of the 12.8%, leaving underlying growth near 8%. Still good; not 12.8%. A stronger dollar would reverse this line item mechanically without anything changing in the business.

By market, China was the standout at $7,416m from $5,786m (+28.2%), followed by Mexico and Central America at $14,331m from $12,546m (+14.2%) and Canada at $6,379m from $6,114m (+4.3%). International eCommerce reached roughly $9.9 billion from $8.3 billion.

Segment profitability improved only slightly, and not through gross margin: the gross margin rate fell 15 bps on "price investments and ongoing format mix shifts" plus "a discrete sales-related reserve," while operating expenses as a share of sales fell 29 bps on cost control. Operating income of $1,439m against $1,234m lifted the segment margin from 4.0% to 4.1%.

Sam's Club: half the comparable-sales number is fuel

Sam's Club U.S. reported comparable sales up 8.6% including fuel — the best headline number in the filing. The filing then discloses that "higher fuel sales, driven by higher fuel prices and volumes, positively impacted comparable sales by 4.2%." Excluding fuel, segment net sales rose 4.5%, not 8.8%. Fuel is a low-margin, price-driven category, and its contribution here is a function of pump prices rather than membership demand.

Profit is the better signal. Excluding fuel, segment operating income rose to $485m from $314m, a faster percentage gain than the all-in figure ($678m from $470m) — so fuel is inflating the sales optics while doing comparatively little for earnings. Gross margin improved 45 bps, attributed to the tariff refunds and partly offset by "increased eCommerce shipping and fulfillment costs, driven by club-fulfilled delivery." Membership and other income rose 6.0%; Sam's Club raised its annual membership fee effective May 1, 2026, and because fees are "deferred and recognized ratably over the one-year membership term," only about a quarter of that increase has flowed through so far. That one builds through the rest of the year.

What is actually improving the margin

Underneath the refund, two income streams are changing Walmart's profit mix in a way that does repeat:

• Advertising grew 38% globally, with Walmart U.S. advertising also up 38%. Retail media — selling ad placements to the brands whose products Walmart already stocks — carries far higher margins than selling the products themselves. The filing notes advertising is "recorded in either net sales or as a reduction to cost of sales, depending on the nature of the advertising arrangement," so it flatters both the revenue and the gross margin line.
• Membership fee revenue grew 17% globally, with Walmart U.S. membership and other income up 15.6% on "double-digit percentage growth in membership fee revenue from Walmart+." Membership fees are near-pure margin once the program exists.

Both were called out in the filing as contributors to the gross margin rate "from continued growth in higher margin businesses."

Working against them, the expense side deteriorated: operating expenses rose 11 bps as a share of sales, driven by "higher self-insured general liability claims expense influenced by rising costs to resolve claims across retail and related industries," higher depreciation from the current capital spending programme, and "higher associate healthcare benefit costs related to increased enrollment and medical cost inflation." All three are structural cost pressures rather than timing items. The increase would have been larger but for lapping $0.4 billion of legal charges booked a year ago.

Cash: operating cash flow up, free cash flow down

For the six months, cash from operations rose $1.4 billion to $19.7 billion. Free cash flow — operating cash flow minus capital spending — went the other way, falling $1.4 billion to $5.5 billion, because investing outflows jumped to $14.3 billion from $11.2 billion on "increased payments for property and equipment." Walmart is spending its improved operating cash on automation, supply chain and stores, and the depreciation from that spending is already visible as an expense headwind (above) and as a drag on return on assets, which slipped to 8.0% from 8.3% on a trailing-twelve-month basis. Return on investment, which excludes the investment marks, rose to 15.4% from 15.1%.

Inventory of $61.6 billion was up 6.7% (6.0% excluding currency), slightly ahead of sales growth, attributed to "strategic initiatives and inflation." Walmart repurchased 42.3 million shares for $5.1 billion in the half, down from 67.4 million shares a year earlier, with $25.1 billion left under the $30 billion authorization approved in February 2026. The annual dividend was declared at $0.99 per share for fiscal 2027, up from $0.94.

Guidance — and why the third quarter is the honest test

Walmart raised its full-year outlook alongside these results. All growth rates are constant-currency and on an adjusted basis:

The third-quarter guide is the number to watch. After adjusted operating income grew 19.1% in this quarter, Walmart is guiding to 2.0%–4.0% next quarter. CFO John David Rainey gives the reason directly: "Our operating income outlook reflects the continued prioritization of tariff refunds received in Q2 into customer experience and price investments in the second half. For this reason, I encourage you to consider Q2 and Q3 performance together to assess the underlying growth of the business." In other words, the refund landed in one quarter and is being spent across two. He also flags "a headwind of over 100bps" to third-quarter sales growth from a timing shift of Flipkart's Big Billion Days sales event between Q3 and Q4 — a shift between quarters, not lost demand.

Run the full-year guidance against what has already been delivered and the implied second half is modest. Adjusted EPS was $1.46 in the first half; the $2.80–$2.87 full-year range implies $1.34–$1.41 in the second half, against $1.35 in the same half last year (full-year FY26 adjusted EPS of $2.64 less first-half $1.29). That is roughly flat to +4% adjusted EPS growth in the back half, after +13% in the first half. Walmart is guiding to a deceleration, and saying why.

Our read on trajectory. The durable part of this quarter is the mix shift: advertising up 38% and membership fees up 17% are changing what a dollar of Walmart revenue is worth, and they are doing it while the company holds or cuts shelf prices. That combination — take share on price, make the margin back on ads and fees — is the actual strategy, and this quarter shows it working. What it does not yet do is fully cover the cost side. Self-insurance claims inflation, employee healthcare costs and the depreciation from a heavy capital spending cycle are all rising faster than sales, and free cash flow has already fallen despite better operating cash flow. The pharmacy price-cap headwind persists until it laps in January 2027. The two tailwinds currently flattering the reported numbers — the customs refund and a weaker dollar helping International by 4.8 points — are, respectively, non-repeating and reversible.

The practical implication for anyone reading the next set of results: treat the third quarter and this one as a pair, as management asked. If the combined six months land near the guided full-year trajectory, the refund was genuinely recycled into price and share rather than banked as a one-off beat. If the third quarter undershoots even the modest 2.0%–4.0% operating income guide, then the price investments bought less volume than Walmart expected, and the underlying margin story is weaker than the advertising and membership growth rates suggest.