Walmart is stronger, but not cheap
- Q1 FY27 total revenue rose 7.3%, helped by strong U.S. stores, international growth, and eCommerce.
- The bull case is that higher-margin ads and memberships are changing how Walmart makes profit.
- Advertising and membership profit streams represented about one-third of operating income in Q1 FY27.
- The bear case is that operating expenses are growing too fast, even when gross margin improves.
- The stock already gets credit for quality, so valuation is the hard part of the story.
Scale works, costs bite
Walmart's core idea still works. It uses huge scale to buy low, price low, and keep shoppers coming back. In Q1 FY27, total revenue grew 7.3%, and consolidated gross profit rate improved 6 basis points. A basis point is one-hundredth of a percentage point, so this is small, but it matters in a business this large.
The strongest part of the bull case is mix. Walmart U.S. got help from general merchandise and higher-margin businesses like advertising. Management also said advertising and membership profit streams represented about one-third of operating income in Q1 FY27. That means Walmart is no longer only a low-margin store story.
The problem is that better gross margin did not fully drop to the bottom line. Operating expenses rose 33 basis points as a share of net sales. The drivers were higher depreciation from capital projects, higher associate healthcare costs, and $0.2 billion of business reorganization charges.
Finn's view is balanced. Walmart is a better business than it used to be, but the stock price appears to expect a lot. The next proof point is simple: can sales keep growing while operating expenses grow more slowly?
Low prices, more profit pools
Walmart makes most of its money by selling groceries, health products, household goods, general merchandise, fuel, and other items through stores, clubs, and online channels. Its Everyday Low Price strategy depends on buying power. Suppliers want access to Walmart's huge customer base, and Walmart uses that scale to push for low costs.
The newer profit pools are important because classic retail has thin margins. Walmart Connect sells ads to brands that want to reach shoppers near the moment they buy. Walmart+ and Sam's Club memberships add fee income. In Q1 FY27, enterprise membership fee revenue grew 17.4%, and advertising grew more than 30% in each segment, according to management.
The model breaks if costs rise faster than sales for too long. Recent capital spending is adding depreciation, and healthcare inflation is adding labor-related cost. Walmart can be right on strategy and still disappoint investors if operating income does not grow faster than revenue.
What Walmart sells
Grocery and consumables
These products bring frequent trips and help defend Walmart's price image. They are steady, but they usually carry lower margins than many general merchandise items.
Health and wellness
Pharmacy, health products, and wellness categories add repeat demand. They help Walmart stay relevant to families managing routine needs.
General merchandise
This includes many discretionary items. In Q1 FY27, general merchandise improved enough to help Walmart U.S. gross margin after a long weak stretch.
eCommerce and store-fulfilled delivery
Online sales are powered by stores that also act like local delivery hubs. Walmart U.S. eCommerce added about 5.2% to comparable sales in Q1 FY27.
Sam's Club memberships
Sam's Club sells warehouse shopping access through memberships. Membership and other income grew 11.0% in Q1 FY27, and fee increases started May 1, 2026.
Walmart Connect advertising
Brands pay Walmart to place ads across its shopping and media channels. This is a higher-margin business and a key reason the profit mix is improving.
VIZIO and connected TV ads
VIZIO gives Walmart more connected TV and ad technology. It could strengthen Walmart Connect, but it also brings data privacy duties tied to an FTC order that runs until 2037.
Three big engines
Segment mix is based on Q1 FY27 net sales for the three months ended April 30, 2026. Walmart U.S. is still the main driver, with about two-thirds of segment net sales.
What could go wrong
Operating costs outrun sales
High impact · Medium oddsQ1 FY27 showed the main risk clearly. Gross margin improved, but operating expenses grew faster than net sales. Higher depreciation, healthcare costs, and $0.2 billion of reorganization charges made profit conversion harder.
Capital spending weighs on returns
Medium impact · Medium oddsWalmart is investing heavily in supply chain, technology, stores, clubs, and eCommerce. Q1 FY27 capital expenditures were $6.684 billion, up from $4.986 billion a year earlier. These investments can help growth, but they also raise depreciation and pressure free cash flow.
Fuel, tariffs, and supply chain pressure
Medium impact · High oddsWalmart flagged uncertainty from tariffs, inflation, fuel prices, and supply chain pressure. Management also identified about $175 million of unexpected fuel costs in Q1 FY27. If these costs keep rising, Walmart may have to accept lower margins or raise prices.
Lower-income shopper stress
Medium impact · Medium oddsWalmart serves many budget-focused households. That can help in weak times, but it also means pressure on low-income consumers can change basket size and mix. If shoppers trade down too far, higher-margin categories may lose momentum.
Data and driver platform legal risk
Medium impact · Medium oddsThe VIZIO deal brought an FTC consent order tied to consumer data collection and use that remains in effect until 2037. Walmart also faces CFPB litigation over payment practices for independent contractor drivers on the Spark platform. These issues could add costs, limits, or reputational damage.
Sam's Club delivery margin drag
Low impact · Medium oddsSam's Club grew comparable sales 5.9% in Q1 FY27, including a 2.1% fuel benefit. But its gross profit rate fell 26 basis points because eCommerce fulfillment costs rose. Delivery growth is useful only if the unit economics improve.
In one breath
How does Walmart make money?
Walmart mainly makes money by selling goods through stores, clubs, and online channels. It also earns higher-margin income from advertising, Walmart+, Sam's Club memberships, and other services.
Why is Walmart's advertising business important?
Advertising can carry much higher margins than selling groceries or household goods. In Q1 FY27, advertising and membership profit streams together represented about one-third of operating income.
What is the biggest concern for Walmart stock?
The biggest concern is profit leverage. Walmart is growing sales and improving gross margin, but operating expenses rose faster than sales in Q1 FY27.
Is Walmart mostly a U.S. business?
Yes. In Q1 FY27, Walmart U.S. made up about 67% of segment net sales. International and Sam's Club are still meaningful, but the U.S. segment drives the company.