Walmart Flags Higher Fuel Costs Eroding Retailer’s Earnings

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2:01Listen on demand wherever you get your podcasts or watch us live on YouTube. Walmart coming out with its latest earnings report. Jen Bartaschus is our senior analyst who covers retail staples and packaged food. And Jen, I'm really interested in the interplay between oil prices and Walmart's sales. In particular, we know that fuel costs are definitely squeezing Walmart's consumers. yet Walmart says that it has managed to absorb almost all the fuel increase. Yeah, it's an interesting dynamic when you look at it. Walmart has really done a good job of shifting their business mix, which really gives them a little bit more flexibility in how they can offset unexpected high costs like we're seeing right now with fuel.

2:44The consumer for Walmart, certainly anybody in the lower end of the consumer spectrum is under some pressure. That does get amplified when gas prices are higher. And so we see that. But at the same time, what it does is it does reinforce value focused shopping, which is really Walmart's wheelhouse. And so it's almost an odd situation where the more stressed the consumer is, the more likely Walmart is to be able to serve those customers. Not that you want that to be a never ending cycle, but but it is something that is that is out there. You know, Walmart is actually, they do sell fuel as well.

3:24And so, you know, obviously higher fuel prices does feed their top line to a degree, especially for Sam's Club. But it is a dynamic that we're going to have to watch closely over the next couple of months. Talk to us about their e-commerce business. Every quarter, I see this revenue growth from digital, and I guess this quarter is up 20 some odd percent. It is extraordinary. How are they doing that? Yeah, their e-commerce business is really flourishing. And to your point, Paul, it's been multiple. I mean, it's just on a string of double digit, high 20%, mid 20 % growth every quarter. And really what's happening is you're seeing a big expansion of their marketplace.

4:05So you've got more sellers coming into the marketplace, more shoppers buying on the marketplace. And that's then feeding ad revenue. It's feeding other types of revenue for the company. And so it's become this virtuous cycle where the more they're putting into it, the more people are responding and the healthier that business becomes. You know, Walmart has already said that their e-commerce business is now profitable, which is really great and is also fuel to that growth where they can reinvest more easily because they are finding it to be a profitable business now. And you can't discount things like Walmart Plus, which is their membership program.

4:48Their membership fee income growth was astounding this quarter. They said they had a record number of new net ads for Walmart Plus this quarter. And a lot of Walmart Plus benefits are centered around e-commerce. And so whether you're placing orders for delivery to your house, whether it's for shipped to your home, all of that is contributing to that e-commerce success. Yeah. Their Walmart Plus has a partnership with American Express Platinum. And I think that has – well, I signed up for the Amex Platinum card. And I'm very well-versed on all the different benefits. And this is one of the benefits to steal market share away from Amazon.

5:27Do we have any sense of how well that effort is going, Walmart Plus versus Amazon? Obviously, Walmart does not disclose anything about Walmart Plus. But when we do our analysis, we see millions and millions of households have now joined Walmart Plus. And the frequency of shop is really increasing. For a long time, Walmart had a hard time displacing Amazon because people's first inclination when they wanted to look for something was to go to Amazon.com. And that mentality is slowly shifting. And in part, it's due to these types of memberships like Walmart Plus. So when we estimate the number of households, it's continuing to grow.

6:10The revenue generated from that is just changing the entire profit mix for Walmart. And most importantly, this is what helps keep higher income households in particular sticky with Walmart as the economy starts to improve. Because once you're in that ecosystem and you get used to the quick delivery and the ease of ordering online, especially for things that you order with frequency, that makes you very sticky within Walmart. And that really bodes well for just their ability to keep those customers long term. Stay with us. More from Bloomberg Intelligence coming up after this. If your finance team spends more time finding data than using it, if there's one entity here and one here and one here and one here, if scaling your business feels like starting over, you need the Intuit ERP.

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7:38IBM. Support for the show comes from Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game. Public is positioned differently. It's an investing platform for people who are serious about building their wealth. On Public, you can build a portfolio of stocks, options, bonds, crypto without all the bugs or the confetti. Retirement accounts, yep. High yield cash, yes again. They even have direct indexing. Public has modern design, powerful tools, and customer support that actually helps.

8:14Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market.

8:33All investing involves risk of loss. See complete disclosures at public.com slash disclosures. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. You mentioned NVIDIA down. NVIDIA was the big earnings report that we were waiting for, Paul. And I think everyone's just gotten so used to this chipmaker blowing out expectations and, you know, coming in with these great statements of demand, limitless demand seemingly.

9:10And the market's reaction is like, eh, whatever. Yeah, the beaten race. And they've been so good for so long, surpassing expectations of the street. But it's if nothing else, it's a law of large numbers, maybe a little bit of competition as well. All right. Angelo Zeno is our senior vice president and equity analyst at CFR. a research. He joins us now through Zoom. Angelo, we're looking at NVIDIA shares now lower by almost 2%. Is there anything objectionable in the set of results? No, I mean, you know, I thought it was overall fairly clean type of number. You know, maybe the only thing that, you know, maybe wasn't as clean was the fact that they did, you know, shift their business segments around a little bit.

9:50But I think that was too, was too be expected. I mean, it was one of those situations where When you kind of looked at everything outside of data centers, it was just such a small part of their revenue, whether we talk about autos at about 1 % of sales or kind of whatever else, even gaming, which was once their largest business was only mid-single-digit percentage of their sales. So kind of changing the way they kind of segmented and broke their revenue down, I think, makes a lot of sense. But when you kind of look at overall from the results here, I mean, it was a solid beat and raised quarter, as NVIDIA has done here over the last couple of quarters.

10:24You're getting a little bit of a sell the news, which is typically what you've seen here from NVIDIA stock, which is now a stock trading about 18 times our expectations for 2027. And when investors really want to hear and see long term, I mean, what the answer to is the sustainability of this stuff. Right. And NVIDIA can be as optimistic as they want looking out through the end of the decade. But investors are going to continue to be somewhat cautious in that outlook. Talk to us about customers, Angelo. So, you know, they talked about maybe governments and other entities becoming big, big customers.

11:00Talk to us about that and the development of that part of the business. Yeah, I mean, so in kind of breaking down this revenue, essentially, within data centers, which is what, 92 percent of the revenue at this point in time, you're looking at about half of that or essentially exactly half of it coming from the hyperscalers. And we know what the hyperscalers are all doing. We're looking at near doubling in terms of hyperscaler capex spend here this year. And it's one of those situations where, you know, of course, those growth rates are going to decelerate over time. So I think it was smart for NVIDIA at this point in time to show now that breakdown in terms of what else is out there in terms of, to your point, the sovereign AI opportunities, potentially what the neoclads have to offer, which is also, you know, in that other half of the bucket there where you could potentially see, let's call it stronger capex spend at least on a relative basis here longer term because there's a bigger or a larger number of participants in that basket right so um you've got the potential for that to be a bigger percentage of their total revenue here as we kind of look at two to three years from now i think that's at least their expectation and i think if you start seeing that i think investors will reward that so again it's one of those situations stock trading about 18 times in their peers' earnings.

12:17But if we see maybe a more favorable mix outside of hyperscalers, I think that could be a good thing, especially since when you think about who really plays and sells these AI-based servers outside of the hyperscalers, it really is largely Intel. I'm sorry, NVIDIA. Gotcha. Angela, before we let you go, I got to ask about the return of cash because the CFO says they plan to return 50 % of their free cash flow this year. They announced an$80 billion stock buyback plan, boosted their quarterly dividend to 25 cents a share. Does this attract a new crowd of investors, a new group of investors, or is this largely built into expectations?

12:54I think it's a little bit built in, but I think it's a good thing to see. I mean, we're looking at them probably going to, they're probably going to return at least 100 billion, we think, back to shareholders here over the next 12 months. And the only other company that is anywhere near that is Apple at this point in time. Especially when you start looking at all the hyperscalers out there, essentially all of them have kind of refrained at this point from buying back shares, right? And increasing dividends significantly because of what they're devoting towards the CapEx spend. So that's all that money now is going into Nvidia.

13:26They can return that cash to shareholders. And I think that is somewhat enticing to investors at this point in time. So we like the move. And we think, especially as growth rates start to decelerate here over the next two to three years, I think that's going to probably become a bigger part of the conversation for investors. Stay with us. More from Bloomberg Intelligence coming up after this. Support for the show comes from Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game.

13:59Public is positioned differently. It's an investing platform for people who are serious about building their wealth. On Public, you can build a portfolio of stocks, options, bonds, crypto without all the bugs or the confetti. Retirement accounts, yep. High yield cash, yes again. They even have direct indexing. Public has modern design, powerful tools, and customer support that actually helps. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market.

14:41All investing involves risk of loss. See complete disclosures at public.com slash disclosures. If you follow markets, you know the value of long-term thinking. You plan, you diversify, you prepare for volatility. But in life, even the best strategies can't prevent every bad day. A fire, a loss, a disruption that demands immediate attention. When that happens, what matters isn't just what you planned, it's who shows up. That's where Cincinnati Insurance comes in. For more than 75 years, they've helped individuals and businesses navigate life's toughest moments with care, expertise, and personal attention.

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16:37It's a real grab bag towards the end of earnings season. You've got retailers. You've got farm machinery makers. NVIDIA. NVIDIA. Yeah, I know. NVIDIA is just kind of out of sync with the rest of the MAG7 names. But Deere shares are slumping down about 8 % right now. Let's bring in Chris Cialino. He is our senior U.S. machinery analyst to recap what we learned here from the tractor maker. And I guess it comes down to the farm economy is struggling. And so, therefore, we're seeing that reflected in Deere's results? Yeah, I mean, that's part of it. The headline coming out of the quarter was that they had a big beat.

17:10But really, if you unpack that, a lot of that was driven by this IEPA tariff refund that they got. If you kind of peel back the onion here, their construction business actually continues to perform quite well. Really good top line and margin performance there. And the orders continue to progress nicely. and small ag and turf was good as well. But the weakness on the large ag side continues to be a problem for them and really doesn't really kind of show any signs of abating. As we look through the balance of this year, you have the higher input costs, weak farm fundamentals. So still a very challenging setup as we look here in the near term.

17:50Chris, just by my recognition, Deere's the first company that I can think of that calls out this tariff rebate. Can you explain a little bit? So what's the company disclosing about this? How long did it take to get this rebate? Was it everything they were looking for? What are they doing with this rebate? Yeah, so interestingly enough, I think they're the second or third company, at least in my universe, that has actually called out this refund claim. It was roughly$272 million here in the quarter. So we think it contributed roughly 75 cents in the quarter. If you look at their gross tariff impact for the year, so they were anticipating about$1.2 billion impact for fiscal 2026.

18:35That gross number really hasn't changed. Once you take away some of the IEPA and you add back some of the Section 122s and some of the other incremental tariff costs, net-net that hasn't changed. Now you have this refund. So when you look on a net basis, it's somewhere going to shake out in the$900 million range. This is relatively new for the machinery guys. I would anticipate we may hear similar from other companies next quarter. But Deere being, you know, a little bit of off cycle during their fiscal quarter, I would anticipate we'll begin to hear more of these moving forward. OK, well, I mean, either way, it's going to take a while for this to all get resolved.

19:16What we've seen with other heavy machinery makers, including Caterpillar, is that the boom in AI has benefited them as well. Does deer fit into that category too? It's a stretch. So it does help on the construction business, particularly during the early phases of any construction, whether it's excavation, anything with moving dirt. Deer has a strong and really growing position in construction equipment. And I think that's one of the big takeaways from this quarter is that construction results were very strong. The orders, again, very strong. There seems to be increasing visibility in terms of projects as we move into next year.

19:58So I think that has helped support the weakness that we're seeing on the ag side. They've introduced a whole new excavator lineup, a lot of new technology and innovations coming through on the construction side. So if we look at machinery earnings overall this season, I'd say construction continues to be one of the biggest bright spots. How's the U.S. farmer doing out there, Chris? You know, it's tough, continues to be tough. I sound like a little bit of a broken record. This seems to be a recurring theme here over the past two years. Listen, I do think that 2026 will still mark the trough of the cycle.

20:35And I do think that's important. The debate really now becomes around what the trajectory of recovery looks like. Our sense is that it's going to be a much more measured recovery as we look into 27. And really, you know, a lot kind of hinges on what happens here in the Middle East. How soon do maybe some of these fertilizer and input costs begin to come down? Yes, we've seen a little bit of pickup in crop prices, so that helps to a degree. But we need clarity in terms of some of the input costs, again, particularly on the fertilizer side, as well as what's going to happen in terms of export markets and some of these trade relationships and to see how those materialize.

21:14So we have a much more cautious view in terms of a cyclical recovery as we look into 27.

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22:22See complete disclosures at public.com slash disclosures. If you follow markets, you know the value of long-term thinking. You plan, you diversify, you prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention, and independent agents who focus on relationships, not transactions. The Cincinnati Insurance Companies. Let them make your bad day better. Find an agent at c-i-n-f-i-n dot com. Sending a file is easy. Making sure your clients understand the file is the hard part.

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23:48Man, it is good to be an equity capital markets reporter these days. Lots going on out there. Scarlett Foo and Paul Sweeney live here in our Bloomberg Interactive Broker Studio streaming live on YouTube as well. Anthony Hughes is that equity markets capital reporter for Bloomberg News, joining us here in studio. Anthony, the SpaceX S1 was filed yesterday or dropped, as the kids would say. Tom Keene had the notable, very keen observation. There's a lot of pictures, a lot of photographs in this prospectus. You don't typically see that. Did you take note of that? Yeah, there was definitely a few interesting pictures.

24:24I think the first four or five pages were rockets flying into the air, which is quite an evocative thing for an IPO. And perhaps people who don't want to read the whole document will just have a look at those pictures and get excited. So that's one possibility. But there's also a rendering, I think, of life on Mars, which I thought was quite interesting as well. Yep. So there's a lot there. And then you get to the nitty gritty. I noticed, first of all, risk factors section, a solid 38 pages. So, I mean, that takes you, I mean, I used to pop out prospectuses that were 38 pages. Now I got a risk factors here.

25:00What was your takeaway from this filing here? Well, I think that there's already been so much written about this and a lot of hype. But to actually read some of the statements in print about how many projects that SpaceX has that could provide the growth for the future, I mean, it's quite phenomenal. And people obviously really have to believe in those to get excited about this story. But there's one section there which is just about the growth strategies of the company. and it lists what they're doing in the space launch business, which has about growing the payload capacity of the rockets and they've got the rocket launch today of Starship.

25:42There's in the Starlink business, which is the one that's doing the best in many ways, they're looking to build out a mobile phone network there. Very cool. But the really interesting one is on the AI side, they're obviously looking to substantially expand the amount of compute there and obviously put data centers in space. And then some of those projects in space, the really long-term stuff is quite amazing around, you know, putting, as I mentioned, civilization on Mars, but also building a lunar economy and asteroid mining was one. I think they also talked about space tourism and what they call point-to-point terrestrial flights as well, which is like basically a spaceship replacing an airline and getting you across the world much quicker, which is kind of an interesting, is an interesting concept.