Walmart’s second-quarter results are showing that United States consumers across the spectrum are still flocking to the retailer’s stores despite economic headwinds, but its shares have dipped as the company’s margins ebbed and inventory costs rose.

The world’s largest retailer has scooped up market share from rivals as wealthier consumers frequent the store more often, worried about the effects of tariffs on prices, the company’s results on Thursday showed.

That has fueled an 85 percent surge in the stock over the last year-and-a-half that some analysts say has made its valuation too lofty.

Shares were down 4 percent in midday trading in New York, as its second-quarter profit was lower than expected, registering Walmart’s first earnings miss in more than three years.

Investors also focused on Walmart’s gross margins for the quarter, which fell short of their expectations, even though the company raised its fiscal year sales and profit forecasts.

Overall gross margins were about flat at 24.5 percent versus 24.4 percent last quarter, missing consensus estimates of 24.9 percent, according to brokerage DA Davidson.

“Expectations were high for a margin beat and we didn’t get that, so we’re getting a little bit of a pullback on the stock,” said Steven Shemesh, RBC Capital Markets analyst.

Still, the Bentonville, Arkansas-based chain’s results showed it has continued to benefit from growing price sensitivity among Americans, earning revenue of $177.4bn in the second quarter. Analysts on average were expecting $176.16bn, according to LSEG data. Adjusted earnings per share of 68 cents in the second quarter fell short of analyst expectations of 74 cents.

Consumer sentiment has weakened due to fears of tariffs fueling higher inflation, hitting the bottom lines of some retail chains, but Walmart’s sales have remained resilient. Companies have been able to withstand paying those import levies through front-running of inventories, but as those products are sold, the next shipments are pricier, Walmart CEO Doug McMillon said.

“As we replenish inventory at post-tariff price levels, we’ve continued to see our cost increase each week,” he said on a call with analysts, noting those costs will continue rising in the second half of the year. The effects of tariffs have so been gradual enough for consumer habits to change only modestly.

Walmart had warned it would increase prices this summer to offset tariff-related costs on certain goods imported to the US, a move that drew criticism from President Donald Trump. Consumer-level inflation is increasing modestly, while wholesale inflation spiked in July to its fastest rate in more than three years.

According to an S&P Global survey released on Thursday, input prices paid by businesses hit a three-month high in July, with companies citing tariffs as the key driver. Prices charged by businesses for goods and services hit a three-year high, as companies passed along costs to consumers. A day earlier, rival Target warned of tariff-induced cost pressures.

Walmart got a boost from a sharper online strategy as more customers relied on home deliveries. Its global e-commerce sales jumped 25 percent during the second quarter, and Walmart said one-third of deliveries from stores took three hours or less.

Shoppers adjust to higher prices

McMillon expects current shopping habits to persist through the third and fourth quarters. He noted middle- and lower-income households are making noticeable adjustments in response to rising prices, either by reducing the number of items in their baskets or by opting for private-label brands. This shift has not been seen among higher-income households, which Walmart defines as those earning over $100,000 annually.

Walmart expects annual sales to grow in the range of 3.75 percent to 4.75 percent, compared to its prior forecast of a 3 percent to 4 percent increase. Adjusted earnings per share are expected in the range of $2.52 to $2.62, compared to its previous range of $2.50 to $2.60.

Chief Financial Officer John David Rainey said the company is looking at more possible financial outcomes than before because of trade policy talks, uncertain demand, and the need to stay flexible for future growth. Based on what it saw in the second quarter, Walmart expects the impact on margins and earnings from the higher cost of goods to be smaller in the current quarter than it previously thought, Rainey said.

“Broad consumer and macro trends remain favourable to Walmart, especially in the shape of consumers wanting to maximise bang for their buck,” said Neil Saunders, managing director of retail consultancy GlobalData.

Walmart’s total US comparable sales rose 4.6 percent, beating analysts’ estimates of a 3.8 percent increase. The company noted strong customer response to over 7,400 “rollbacks,” its term for discounted prices, with 30 percent more rollbacks on grocery items.

Average spending at the till rose 3.1 percent from an increase of 0.6 percent last year, but growth in customer visits fell to 1.5 percent from 3.6 percent in the year-earlier period. Walmart logged 40 percent growth in marketplace sales, including electronics, automotive, toys, and media and gaming.

Two-thirds of what Walmart sells in the US is domestically sourced, executives had said last quarter, which gave it some insulation from tariffs compared to competitors.