Walmart's Expense Deleverage Raises Concerns Despite Sales Growth

Walmart Inc. WMT posted solid sales growth in the first quarter of fiscal 2027, but operating expenses rose faster in its U.S. business. The resulting expense deleverage reflected higher depreciation and healthcare costs, even as labor productivity provided a partial offset.

Walmart U.S. net sales increased 4.5% year over year to $117.2 billion. Operating expenses rose 7% to $27.6 billion, while the operating expense rate jumped 56 basis points to 23.5%. The expense pressure primarily reflected higher depreciation tied to capital expenditures and higher healthcare costs from increased associate enrollment and medical cost inflation.

Business reorganization expenses also created an 11-basis-point headwind to the operating expense rate. Higher labor productivity helped offset some pressure, but overall expenses still grew faster than sales during the quarter. The expense dynamic was also visible at the consolidated level, where adjusted operating expenses as a percentage of net sales increased 23 basis points to 21.1%.

Walmart U.S. operating income jumped 3.5% to $5.9 billion compared with the 4.5% increase in net sales. The reported operating income rate declined 5 basis points to 5%. On an adjusted basis, operating income rose 5.7% to $6 billion, and the adjusted operating income rate improved 6 basis points to 5.1%.

The first-quarter figures show that Walmart U.S. generated sales growth while absorbing higher depreciation and healthcare expenses. The 56-basis-point increase in the operating expense rate captures the core issue, with cost growth outpacing revenue growth despite productivity-related relief.

How Kroger and Costco Compare on Expense Leverage

The Kroger Co. KR also faced expense pressure in the first quarter of 2026. KR’s operating, general and administrative rate, excluding fuel and adjustment items, increased 16 basis points year over year, mainly due to planned investments in associate wages, additional store hours, training and new uniforms, partly offset by lower multi-employer pension contributions and productivity initiatives. Kroger’s total sales increased to $46.1 billion from $45.1 billion.

Costco Wholesale Corporation COST showed a comparatively better expense trend in third-quarter fiscal 2026. The company’s SG&A rate improved 20 basis points to 8.96% from 9.16%. Excluding gas inflation, COST’s SG&A rate improved 2 basis points, with productivity improvements partly offset by higher healthcare costs. Costco’s net sales increased 11.6% to $69.15 billion, while operating income rose to $2.82 billion from $2.53 billion.

WMT Stock Price Performance, Valuation & Estimates

Shares of Walmart have risen 7.6% over the past year compared with the industry’s growth of 5.6%.

WMT Price Performance Versus Industry

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From a valuation standpoint, WMT trades at a forward price-to-earnings ratio of 36.27, higher than the industry’s average of 33.08.

WMT Valuation Compared to Industry

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The Zacks Consensus Estimate for WMT’s current and next fiscal year earnings per share implies year-over-year growth of 9.5% and 13.1%, respectively.

Walmart currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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