This was the quarter the market firmly expected from the world's largest retailer, Walmart (WMT) .
WMT reported strength across the board, save for the company's U.K. Asda unit, which continued to struggle amid a hyper-competitive retail landscape. Even Sam's Club -- which I have been highly critical of for never living up to its potential -- managed to instill a dose of confidence that Walmart CEO Doug McMillon now has everyone singing from the proper hymn sheet.
I am fresh off a media call with Walmart's CFO and head of U.S. stores, and came away incrementally more upbeat that this giant ship is headed in the right direction. While I continue to have reservations on the long-term outlook for Walmart -- due to rising wage pressures globally and the structural shift to online shopping -- for the time being, the company looks well positioned for the key back-to-school and holiday shopping seasons.
In addition, Walmart's quarter really made Target (TGT) look like a retailer in a state of disarray. Perhaps that is a bit too dramatic, as Target's team is very impressive and the stores look vastly better than two years ago. But, it's clear Target will be playing from behind Walmart this holiday season, as it tries to get its share of the spending from the cautious U.S. consumer. I expect Target to begin aggressive price promotions of its own in food, which will come at the expense of near-term margins.
Here are the areas that Walmart impressed me the most. And yes, the stock's rise today is justified.
Inventory fell by 6.5% on a comparable-store basis in the U.S., while sales rose 1.6%. Walmart has been on a two-year journey of improving its inventory management, from how it orders goods to how and when they are stocked on shelves. So to finally see inventory decline and sales rise is a huge deal for the company. And it could be a lucrative one, too: Gross profit margins rose nicely in the U.S. business -- in large part due to better inventory management.
This may seem small potatoes, but Walmart U.S. now has notched seven straight quarters of traffic gains. That is very impressive to see, in light of all retailers, outside Dollar Tree (DLTR) , Kroger (KR) and Dollar General (DG) , experiencing prolonged traffic declines that are causing mass store closures.
Consistent traffic gains like Walmart is seeing is the surest sign yet that the retailer is doing a number of things right when it comes to the consumer. And this provides confidence in the sales potential for the all-important holiday selling season.
Over the next few days, we will likely see several stories of how Walmart's online business accelerated in the second quarter compared to the first quarter. More importantly, sales in the U.S. were stronger than internationally, pointed out McMillon. The gains were spurred by the continued expansion of the number of items Walmart is selling online (through its marketplace initiative) and the company's silent rollout of online grocery ordering. Although Walmart's online sales growth is not in the same league as Growth Seeker holding Amazon's (AMZN) , at least there has finally been a little bit of improvement in what has been a steady slowdown in recent quarters.