Walmart gets unexpected boost from stubborn inflation

For merchants, inflation is often bad news. Walmart (WMT) may be an exception, according to Deutsche Bank.

Analyst Krisztina Katai upgraded Walmart to Buy from Hold and raised her price target to $136 from $113, arguing that stubborn inflation should make Walmart’s value proposition more appealing and help it gain market share faster in 2027. The new target implies a 17% upside from the stock level at the time the call was published.

Investing.com reported that Katai expects Walmart’s pricing advantage, e-commerce growth, marketplace business, advertising operation, and membership income to reinforce one another as customers become more price-conscious.

For investors and customers alike, time is crucial.

The Bureau of Labor Statistics reports that while gas prices increased 9.1% in just one month, U.S. consumer prices increased 3.7% in September compared to the same month last year. Despite Walmart’s own increased transportation expenses, household budgets are still under pressure due to persistent inflation.

This creates the unique investment case for Deutsche Bank’s call: Walmart’s customers may become more dependent on the retailer as a result of the same inflation that is squeezing them.

Deutsche Bank says Walmart’s price advantage can get stronger

Meetings with Walmart’s investor relations team and Chief Financial Officer John David Rainey preceded Katai’s elevation.

Management described some of its strongest recent food-market-share gains and continued momentum across e-commerce, marketplace, advertising, and membership, according to Investing.com. Katai also said consumer trends had become stable to somewhat better than they were three months earlier.

The inflation argument is rather simple.

Customers are more motivated to compare costs when household finances are tight. Due to its massive buying power, Walmart is able to maintain lower pricing than many of its smaller rivals while still selling significant amounts of general items, home goods, and food.

That benefit seems quantifiable.

A recent Goldman Sachs grocery survey cited by TheStreet found Walmart’s prices were 15.7% below the average of a group that included Kroger, Albertsons, Sprouts Farmers Market, Whole Foods, and Dollar General. Walmart had been 13.7% below the group average only a month earlier, meaning the price gap had widened.

“We see pricing tailwinds building,” Katai said, according to Investing.com.

Because Walmart is drawing more customers than those with lower incomes, it is particularly crucial.

In its fiscal second quarter, Walmart said it continued gaining share across income groups, led by upper-income households. Walmart U.S. e-commerce sales rose 24%, marketplace sales increased 52%, and Walmart Connect advertising revenue grew 43%.

Walmart continues to use low prices to entice customers, but a growing portion of its expansion comes from companies that may make more money than just selling goods.

Walmart’s faster-growing businesses could change the profit story

Walmart generated $187.9 billion in second-quarter revenue, up 5.9% from the prior year.

Global e-commerce sales increased 23%, advertising grew 38%, and membership-fee revenue rose 17%. Adjusted operating income increased 17.4% on a constant-currency basis.

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Those newer businesses are key because Walmart’s core retail operation runs on thin margins.

Compared to putting another item on a shelf, advertising revenue, marketplace fees, and membership income can be far more alluring financially. As those companies outgrow traditional retail, Deutsche Bank anticipates that mix shift and automation will help incremental margins improve.

There is also an artificial intelligence component.

Walmart has been building its own shopping assistant, Sparky, and management told Deutsche Bank that early users were producing baskets roughly 40% larger than traditional shopping journeys, according to Investing.com.

Software that can locate and buy goods for a customer is known as agentic commerce, and Walmart sees it more as an opportunity than a threat.

That may represent a crucial differentiator.

AI shopping solutions have the potential to greatly simplify price comparison. If software begins selecting things on behalf of customers, retailers that are already price competitive, have vast stocks, and can fulfill orders swiftly could profit.

Walmart fulfills all three requirements.

Instead of depending solely on item margins, the retail giant has a marketplace that is growing quickly, can leverage thousands of retailers as fulfillment hubs, and can profit from sales via membership and advertising.

Because of this, Deutsche Bank’s optimistic thesis extends beyond claiming that Walmart consumers shop there due to inflation.

The actual argument is that Walmart can use those consumers to support a much more lucrative business strategy than it did 10 years ago.

Inflation is also creating a new problem for Walmart

The irony is that increased costs aren’t always advantageous.

Fuel costs are critical, since Walmart is one of the biggest shippers of tangible products in the nation.

After meeting with management, Deutsche Bank estimated that elevated diesel costs could add roughly 50 to 100 basis points of inflation in 2027 if current prices persist. Those costs could effectively erase the benefit Walmart expected from about $2.9 billion of tariff refunds, according to Business Insider.

In its most recent reports, Walmart had identified rising gasoline prices as a pressure point.

Tariff refunds and a stronger business mix helped gross margins during the second quarter, according to the retailer, but price increases and increasing gasoline prices somewhat offset those benefits.

The situation necessitates a delicate balance. Walmart aims to maintain the price differential that draws customers, while avoiding a level of inflation that would negatively impact its profit margins.

Although the company is large enough to bargain with suppliers and distribute transportation costs across massive sales volumes, fuel inflation still affects it. Some more expensive items may eventually end up on shelves.

This is where Deutsche Bank’s argument becomes more intriguing.

Walmart does not have to completely stop price hikes if all retailers are doing so. All it has to do is remain less expensive than the alternatives.

Even if the actual cost of food, clothing, or home items increases, a growing relative price advantage might still gain market share.

A traditional inflation-beneficiary tale is significantly different from that.

Walmart loses because inflation is favorable. And because inflation is higher for many of its rivals and clients, it could prevail.

Walmart’s $136 target depends on more than cheap groceries

Investors should nevertheless exercise caution when making optimistic calls.

Walmart‘s U.S. comparable sales grew only 2.6% in the latest quarter, down from 4.6% a year earlier. Pharmacy pricing changes created a meaningful headwind, while the company continues spending heavily on price, automation, and fulfillment.

At the same time, management raised its fiscal 2027 outlook.

Walmart now expects net sales to grow 4% to 5% in constant currency, adjusted operating income to increase 7% to 8.5%, and adjusted earnings per share of $2.80 to $2.87.

The stock becomes less reliant on only adding stores or increasing grocery sales if Walmart is able to increase earnings more quickly than revenue due to the growth of advertising, e-commerce, membership, and marketplace.

I find it noteworthy that Deutsche Bank is handling inflation as a stress test that Walmart may be able to pass more easily than competitors.

Customers are pressured by higher pricing.

Walmart is under pressure due to rising fuel prices.

However, Walmart may acquire enough volume and market share to counteract some of that pressure if customers react by concentrating more of their purchases at the store with the best pricing perception.

That is the bet behind the $136 target.

The bullish case is not that inflation disappears. It is that Walmart becomes more valuable to shoppers if it does not.

Related: Walmart is selling a $230 lightweight duvet for $36