The news: Walmart is counting on high-margin revenue streams, including its advertising and marketplace sales, to keep prices low and offset rising fuel costs.

The company absorbed “virtually the entirety” of higher fuel prices in its fiscal Q1 ended April 30, costing it an additional $175 million, and expects the impact to be the same or higher in the current quarter.

Strong growth in advertising (up 36% YoY), marketplace sales (up almost 50%), and Walmart+ signups helped the retailer deliver profits in line with expectations.

By the numbers: Those revenue drivers enabled Walmart to grow net sales by 7.3% in Q1 to $177.75 billion, ahead of the $174.89 billion consensus estimate.

• Earnings per share (EPS) came in at 66 cents, with fuel costs delivering a 250 basis point hit to operating income growth.
• Comparable sales increased 4.1% YoY, in line with expectations but the slowest growth rate in two years.
• Excluding fuel, transactions rose 3%, while average ticket increased 1.1%.

Zoom out: Holding prices steady will allow Walmart to widen its competitive moat as consumers grow more value-focused.

The company currently has 7,200 rollbacks across its assortment, up 20% YoY, as it uses low prices to attract and retain shoppers. Low-income consumers are “more budget-conscious, trying to navigate certain financial distress,” CFO John David Rainey said on the earnings call.

One worrying indicator: The number of gallons customers put into their cars fell below 10 at Walmart fuel stations for the first time since 2022, suggesting they are limiting fuel buys amid pressure from higher prices.

Higher tax returns helped cushion the impact of rising fuel prices in Q1, but the retailer expects consumers to be under more strain, potentially affecting sales in the current quarter. Walmart also warned that it cannot offset higher fuel costs indefinitely. If the energy shock persists, the retailer expects retail inflation to accelerate in Q2 and remain higher for the rest of the year.

Walmart’s growth driver: While low prices are central to Walmart’s model, ecommerce has emerged as a key profit driver. It is helping boost order frequency, attract wealthier shoppers, and make Walmart’s services stickier. Those revenues rose 26% YoY, driven in large part by faster delivery speeds and its growing marketplace.

• Walmart can now reach roughly 60% of the US population in 30 minutes or less, while its under 1 hour and under 30-minute delivery solutions are experiencing the fastest growth, Rainey said on the company’s earnings call.
• Walmart+ sign-ups hit record levels in Q1, with members spending on average four times more than nonmembers and visiting the retailer’s ecommerce channels seven times as often.
• Faster delivery and a larger ecommerce assortment are fueling gains with higher-income households, whose resilient spending is enabling the retailer to expand share across grocery and general merchandise.

Implications for retailers: Walmart’s earnings clearly show how the K-shaped economy and rising fuel prices are affecting consumer spending. The retailer is relying on more affluent consumers for growth as lower-income cohorts show greater stress. At the same time, consumer spending patterns are changing as higher pump prices eat up a larger share of household budgets.