Walmart Inc. (WMT) Earnings Call Transcript & Summary

Good morning, everyone. Thank you again for joining us today at the Goldman Sachs Global Retailing Conference. It's my pleasure today to introduce Brett Biggs, Chief Financial Officer of Walmart, and he's here to have a fireside chat with us. Walmart reported a solid comp with Walmart U.S. comps at plus 9.3% last quarter. Our positive thesis on Walmart is based on the defensiveness of the business benefiting from a long-tail food-at-home trend, new customer acquisition, market share opportunity due to consolidation, newer initiatives like Walmart+ and the company's proven ability to generate EBIT dollar growth in a steady-state environment. As I mentioned, we're here with Brett Biggs. Prior to his current role, he held the roles of Chief Financial Officer for Walmart International, Walmart U.S. and Sam's Club. Before we get started, I just have to point to the safe harbor slide that you'll see on the webcast. And with that, I think we can get started. Brett, thank you for joining us today.

Yes. Thanks, Kate. Appreciate it.

I thought we could start off with just talking about the current environment since it has been so unusual and unprecedented. And just given Walmart's size and the complexities, we wondered if you could talk a little bit about how you navigated the past 6 months for your business, what some of the bigger challenges may have been and maybe what you might do differently in hindsight.

Yes. It's been amazing 6.5 months. I was thinking back even this morning to our Analyst Day in New York in mid-February. And at that time, I was looking through our script and we mentioned coronavirus one time in that script. And to think about where we've come since then has been pretty incredible. And what our associates have done is the first thing I would mention, going from fairly normal-type store environment to multiples of volume over a period of weeks and months, particularly in March, April, May, with food volume and watching them respond. And the caring that they showed customers, they showed each other, it's not surprising, but it's always still amazing to see when I've been here 20 years with the company. So what they've done and our ability then to give back in bonuses and other things has been something -- those were fairly easy decisions to do that for associates, and that's certainly something we would do all over again if we went through this again. I -- the thing, I think, that is -- looking at it again is just how quickly this company moves. A lot of times, you think about it as a big company and it's slow to move and that's not what this company is. The ability to ramp up like we did in food in the stores and in the clubs and distribution centers. And then with stimulus that came in the U.S. in mid-April, all of a sudden, we became a big GM business. We've got a really big GM business, but even a bigger GM business and watching the stores and clubs go through that and producing really good results at the same time through all of this. There's -- how you look back and there are so many things that you could look back and say we could have done differently. We came in from a really lean inventory position into this. Who would have known you're going to enter into a pandemic where probably having a little more inventory would have been helpful, and we've been playing catch-up a little bit through the second quarter and some into the third quarter. But I like how we were running inventory prior to that. I think we were in a really good position from -- for a normal-type environment, which certainly this wasn't. But we scaled up very quickly with the number of stores. And we could ship from store. That was a big one. We went from just 2 handfuls of ship-from-stores to thousands within a period of weeks. And some of those, now we'll make permanent. That will be a permanent part of what we do going forward is shipping from stores in certain locations. So I'm so pleased with how the business responded, the work that we did. Kate, you were in the -- in the middle 5 years ago, when we said we've got to invest in wages, we've got to invest in e-commerce, we've got to invest in technology. That all worked and it was a big part of how we were able to serve customers over the last several months.

So on that same note then, in terms of just the period of investment you just went through and how it kind of almost prepared you for what was to come, do you think these last 6 months has had any impact on your longer-term plans?

Yes. There's nothing that these last 6 months won't impact in some way, learnings that we have or how we've seen the customer evolve. What it has done really is just strengthen our belief in our current strategy. And the omnichannel strategy in building this ecosystem for a longer-term view of what the company is going to be, it's strengthened that. I mean there are certain things we're going to tweak coming out of this, but being an omnichannel retailer is the right strategy. And it's really paid off during this time. It's allowed us to serve customers in all different kinds of ways that maybe we wouldn't have been able to as well 3, 4, 5 years ago. So I don't see any major shifts in strategy coming out of this, but I see us doubling down in some areas that we knew were the right direction, but that the last few months have accelerated trends -- over a period of months have taken trends that would have taken years to get there.

And speaking of that, just going -- looking into Q2, there were a number of factors that helped drive really strong sales not only in Q2, but Q1 as well. But when it comes to the sales deceleration that you mentioned you saw in July and August, I wondered if you could walk us through some of the factors. I know you flagged stimulus, but do you think that's one of the bigger drivers? Or did in-stocks become more or less of an issue as we got closer to July and August?

Yes. Some of both. Stimulus, I think there's several things going on. Stimulus was a big impact starting in mid-April, May, June. A lot of dollars flowing through the economy. So I think we were honest with ourselves and honest with investors that, that certainly was something that benefited us in the second quarter. We also had dollars freed up from people who were typically taking vacations and doing -- spending money in other ways during the summer that I think found its way into general merchandise categories, bicycles, camping, home improvement, all of that dollars that might have gotten somewhere else came into those categories. You saw that with results of other retailers as well, not just Walmart. Inventory, there were categories where in some of the supply chain, some of it was our ability just to get inventory in quick enough. You couldn't find bicycles in the middle of summer, not just Walmart, in a lot of places, things like that. Who could have expected the type of impact you'd see on the category like bicycles? And then as we talked about, back-to-school was a little slow to start. And schools were going back later, some weren't starting at all, some students were going back remote. And so that really made the back-to-school season choppy. It's going to take longer to work its way through than we typically would see. So it's all of those things that kind of got us back into a little more of a norm -- what I'd call a normalized comp range. Food is -- food and consumables have remained consistent really throughout the period. They were huge, obviously, in March, April, first part of May. But food has been just a solid, steady business throughout the entire time, really good foundation for us.

That's great. I know Doug has said in the past that if he had to thank his predecessors for anything, it was sticking with food.

For sure.

And that's certainly the case more recently, too. But probably where we're getting the most questions right now when it comes to Walmart's business is on grocery. So when we get the questions, investors are trying to understand the puts and takes of the second quarter and the environment we're in. So when you think about the grocery performance versus your peers, how do you think your positioning in grocery may be helped or hurt, particularly during Q2?

Yes. I mean, obviously, market share and measurements like that are things that we watch all the time and are very, very focused on. It's really noisy right now and there's a number of things. And I don't want things coming across as excuses, but there are reasons we think why it looks so noisy. One would be, we've kept prices down during this period of time. And typically, you see a lot of promotions in the summer from competitors and you didn't see that as much and actually, you saw prices going back up a little bit. And so from a dollar market share perspective, that has a fairly, fairly good impact. We took operating hours down more quickly than some competitors and actually took longer to take them back up. We've just recently gone back to 10:00 closing. In our supercenters, we've gone to 8:30. There's a lot of business that gets done between 8:30 and 10:00 at night. And so bringing operating hours back to, not to 24 hours, but back to something that's a little more normal we think will have a positive impact on our business. There's a lot of things like that, that I think makes reading market share really difficult right now. We're still trying to. We know we took share in some general merchandise categories. We benefited some from some retailers that were closed and we know that. But over time, I still feel so good about our food and consumables business. I mean if you look at even the second quarter, we grew the food business by $3 billion, amazing amount of growth. In-stocks were impactful. We ran -- as we talked about, we ran pretty lean coming in. And so I think we got hit harder earlier by customers knowing they could find everything they wanted inside a Walmart store. And so I think we got hit harder earlier, and it was tougher for us to catch back up, starting to catch back up now. So overall, I just feel really good about the business. And I think we'll continue to grow share over time. But it's a noisy read and probably will be for a while.

And could you maybe give us your view on how you're thinking about food-at-home trends for the longer term? That's a big question that we get, too, is just as things open up, how much can food-at-home continue to outpace maybe the average of what we've seen in the last couple of years?

Yes. I think it will depend on area. You're seeing -- I mean you're seeing more people -- for instance, here in Arkansas, you're seeing more people go out to eat certainly than they were a month ago. And we want to see those restaurants and small businesses reopen. It's good for the economy, it's good for employment, good for those communities. We're glad to see that happening. There'll be some areas, maybe it's in New York, that are going to be a little slower because of how impactful the virus was in an area like that. So we benefited from that trend. And likely, that trend will stay for quite a while. There'll be some folks that won't feel comfortable going back out to restaurants maybe for quite a while. So we'll benefit from that, certainly, but I think not to the level probably we would have seen over the last 4 to 6 months as people get a little more comfortable going out.

Okay. And you mentioned, again, just in terms of where there might have been a difference in performance is that you continue to invest in price throughout the first half and maybe some of your competitors didn't. So moving into the second half, and it's just something that we saw in one of our presentations this morning is that we're hearing and seeing maybe grocers are stepping up back their price investments from where they were. So how do you think about price gaps now going forward? And can we expect maybe even more price investment? Or are you comfortable with the price gap narrowing a little bit, again, based on this current environment?

Yes. We've been really aggressive, and we held -- as you said, we held pretty steady in the first half of the year. Specifically talking about food and consumables, we -- price gaps have widened for sure. And we have a pretty good idea where we want price gaps and it's geography-based and it's competitor-based. And so it's not just a broad peanut butter spread. We know where we want those to be. And so there's -- I think there's plenty of room for us to do what's right for the customer or what we want to do long term for the customer and still do -- conduct business in a way that's shareholder-friendly. And that's the balance that we want to try to strike, obviously, starting with the customer. As we look forward, we'll still invest in price. That's what we do. It's -- I think for us, just having a steady kind of constant downward pressure on prices is what we want. We'll be investing a little more in general merchandise than we have in the past. We talked about for the last few years, we've spent almost all of the price investment on food and consumables and we'll be more thoughtful on general merchandise. But we're always going to be the price leader. I think there's -- if you look at the last few months, there's probably a little bit of an argument that can be made that people got a little less price-conscious, which is somewhat counterintuitive. But with all the stimulus dollars that were going through the economy, I think they got a little less price-conscious, maybe a little more convenience focused. And we have that convenience factor. Price is going to matter forever as far as I believe. And so I feel good about our position.

Okay. If maybe we can pivot now to your e-commerce strategy and there are many questions that we can ask here. But I think starting with the general merchandise business on -- with e-commerce. So a big focus has been growing breadth and depths of your SKUs to push into higher-margin categories like apparel and home. But the way you're pursuing these goals looks like maybe it's changing a little. We've seen some brand divestitures over the past year and a few partnership announcements that complement the Marketplace. So could you maybe just contextualize -- first of all, is that the right way to think about it, you're still pursuing the same strategy but maybe in a slightly different way? And talk to us about where you are currently and how you're thinking about it.

Yes. Great question. The framework of what we're doing, the framework of the strategy hasn't changed. We're -- we want to get more brands on to the side. And that could be first party, it could be third party. And you've seen some things that were -- as you mentioned, we're doing through Marketplace. We have divested some things that we acquired over the last few years and in some cases, maybe something that felt like a better fit 3 years ago than it felt today. But in certain cases, we've gotten the value we want out of those brands and feel like maybe there's just a better owner this period of time. So as the Shoes.com be -- we had a -- we wanted to get more traction in shoes and -- shoe brands onto our site. And we've developed that. And we've developed that in our -- online and in stores and that helped that shoe category tremendously. So the other thing I think you're seeing with us, Kate, is we're just going to make decisions more quickly. If something fit the strategy 2 or 3 years ago and now it just doesn't fit quite as well and we want to reallocate resources, we do that way more quickly than we used to, much more agile with that. So the framework of the strategy has not changed at all. We want to get more brands on site. We want to have a longer tail. We're focused on growth and profitability of that e-commerce business and you're seeing us take steps in both of those directions.

Okay. That's helpful. And I know, again, pushing towards the more -- the higher-margin categories and general merchandise will help with the overall profitability. In Q2, you mentioned that e-com losses were significantly lower. And we were just wondering, what is driving that significantly lower e-commerce losses? Is it the sales, just the strength in sales? Or is there some cost control within that, too, that's helping?

Yes. There's a little bit of everything. And we were -- we feel good about the direction of the profitability on e-commerce for several quarters now. We said coming into the year, we thought losses would be lower. So we felt good about what we were seeing. And it's in several categories. One is just top line. We basically doubled the size of the business in the second quarter. That helps a lot of things when you get sales growth like that. The fixed cost expense. So we not only delevered the fixed costs, but the fixed costs, the rate of fixed costs are declining some the rate of growth. And that's what you would expect as the business matures a little bit. The variable cost to fulfill has been getting better every quarter, every year. The big one is contribution profit margin. So what are we making on every product that we sell? And that has gotten better as we've gotten bigger in areas like home and apparel, which have higher-margin structures. So as that number -- as that margin gets better, the more you sell, the better it is, which is obviously what you want. And what we were able to see in the second quarter, which was really encouraging, is all the things we've been working on, we saw in the first quarter as well. But the second quarter, all the things we've been working on and how that business model works, we saw it. You could really see it over the last couple of quarters. And no, it doesn't take a 97% growth for that business to work. But we saw all those elements really play out together and it was really encouraging to see, exciting.

In the same vein, we've seen some changes with regards to how you're thinking about getting your product to customers. So I think you mentioned it in one of your earlier questions that -- or one of your earlier answers in response to my questions that you're looking towards the store, you're shipping from the store more than you have before. And this again seems like a change from the DC strategy, which seemed more prevalent. So can you talk a little bit about the decision to leverage the stores more, how it's working? And is it necessitated? Was this always something you were thinking you would go to? Is this one of these examples of being nimble? Or is it more a result of what has happened in the last 6 months?

Yes. Some of both. It's hard to differentiate anymore almost what caused what. Some of it was necessity in 6 months of just getting product to customer more quickly. And so there was some necessity to that. But we've always talked about these stores and how there could be many fulfillment centers, and we always thought that could be part of what we do longer term. There's a few hundred stores that we're going to make that permanent that it worked really well. And the ability to get items to customers in a hurry, express delivery, those are done out of the stores. So I think it will be a big part of our strategy going forward. Fulfillment centers are always going to be a big part of that strategy, the distribution centers that we've always had. So you'll see us continue to expand supply chain and fulfillment centers, distribution centers. But that store is a really unique asset, and it's something that our competitors don't have, for the most part, our big competitors.

And is there something unique about the stores that you have selected to do more fulfillment from? Are they located in more denser populated areas? Or is it kind of the opposite? It's where a store maybe could have used or benefited from leveraging the capacity that was available?

Yes. It would be some of both.

Okay. And then going to pickup versus delivery. We're hearing and seeing from all of our retailers, now curbside pickup, which, of course, you guys have had, well, drive up, for a long time. But I -- the thing that's so exciting about pickup or curbside, of course, is that it is less of a headwind I think to your costs. So how do you balance all of the different things that you're testing from a delivery standpoint, a digital fulfillment standpoint with the economics of pickup versus delivery? How do you balance that?

Yes. I mean outside of membership, which we -- remember, Walmart+, we've just done. I mean deliveries had a fee attached to it, so that helps offset that cost. So it really makes it somewhat agnostic to someone picking it up in store. The things differentiated us picking up in-store or curbside is ours is free. Most of our competitors are not free. And that's a big differentiator for our service, we believe. And it's a way to continue to get people into our ecosystem, customers into our ecosystem, which is what we want longer term. But we -- the idea is to be there in every occasion that customer wants to shop, deliver to home, pick it up. We were testing going into people's refrigerators. I still think that will be something that we do longer term. But we want to be there. And then for the management team, we spend a lot of time making decisions and ensuring that we can do it in a way that's attractive to our shareholders and that we can keep growing operating profit. And that's what I spend a lot of my time on is thinking through the various pieces and how they come together. And the moves you were talking about earlier, finding things that we just don't want to focus on anymore and just taking those off the table, we're a lot quicker to do that.

Okay. That's helpful. When it comes to pickup versus delivery, I would imagine the customer characteristics are different. Is there a way to leverage that information to make yourselves more efficient I guess in either way, either capacity?