Walmart Inc. (WMT) Earnings Call Transcript & Summary

I believe we're live. If so, well, hello, and welcome to DbAccess Global Consumer conference. It's day 1 of day 4 of a 4-day event, and I really hope everyone has a great set of meetings this week, and certainly, the least amount of tech issues. I'm still, certainly, myself, trying to get my video sensor. I'm Paul Trussell, the DB U.S. retail analyst. And to kick things off, I'm really delighted to be hosting Judith McKenna, the President and CEO of Walmart International. Thank you, Judith, for being with us today. For those that don't know, Judith as well, she's a Walmart veteran, today, responsible for all of Walmart's footprint outside of the U.S., which spans, I believe, 23 countries. Prior to leading Walmart International, she served as EVP and COO of Walmart U.S., where she played a major role in that -- in the company's online grocery strategy, leveraging her insights and experience from numerous leadership roles for Asda in the U.K. Judith is also on the Board of Flipkart and PhonePe in India, which we will certainly dig into as well during this conversation. And in terms of format, I will host Q&A with Judith, and we will work as much as we can into about a 30-minute session, all right? So a little bit truncated, but we'll get through as much as we can. And certainly, I'll keep an eye out on the Q&A. Feel free to put into the chat questions just so we know that we're hitting the priorities. With that, we're going to go ahead and get started, and we're going to put up a slide quickly as Walmart has provided forward-looking statements on this slide for you to take a view. And let's jump right in. Judith, how are you?

I'm very well, Paul. And it is a pleasure to be with you here today albeit virtually. I do wish it would be in person, but not to be. It's just some time. But -- and a warm welcome to everybody who tuned in as well.

Absolutely. So Judith, let's maybe start a little bit bigger picture. One of the more notable changes over the past few years is just the speed in which Walmart has been moving. Really playing a lot of offense as opposed to maybe a more defensive stance. Just discuss some of these key changes that you and the management team have been taken action on. And what allows you to be as nimble of an organization as you are, just given your size? And also with that, how do you think about making investments versus really showcasing to shareholders improvements in profitability?

Yes. I think nimble is a really good word for it, actually, and probably not what people expect from a business of our scale. And we've been working hard, not only to make sure that the foundations of the business are strong but, as you've said, really becoming much more innovative and totally customer-centric in the way we think end-to-end from a business perspective. But from the company's DNA, you know as well, Paul, and going back to the days of Sam Walton, he was ultimately an innovator, I would say, [ the classic ], whether it be supercenters, retail links, satellite communications, they've always been things that Walmart has done and done well. And not everything we've done has been successful, mind you, but actually, the whole ability to test, and try, and learn, and innovate, and be prepared to invest in those to be able to do that is huge. If I look and I think about the journey for the U.S., and I think about the journey for all of our international markets, there's probably 3 things that stand out to me that are the recipe, if you like, the ingredients to be able to be successful in the innovation space. The first is you've got to be customer-centric. And I think the events of the last 14, 15 months have made us more customer-centric than we've ever been before. We're using data to understand more, we're using better insights to really stay on the front foot. The second one that I'd say is you've got to be inquisitive and open about new technology, and use disparate technology and figure out what problems that is you're trying to solve rather than how can I use this to do something. And I think we've got way better at that over the years as well. And then finally, the environment that I think that Doug and the entire leadership team are creating is a place where the right talent with the right capabilities really wants to come and work. So if you look at some of the folks that we have now in our leadership team, you've got Suresh Kumar, who's our Chief Development and Technology Officer, is a phenomenal add to the organization that brings a breadth of knowledge in a tech space that we wouldn't have had before. And as we think about those investments, you asked me about sort of shareholder versus the business and what do you think about it. The two are mutually exclusive. And if you think about one of the areas we're probably becoming well known for, and it's been fascinating to watch this journey, which is automation. Yes, it takes investment to get automation into the business. But ultimately, it pays massive dividends. It improves your customer service because you can pick more efficiency, your accuracy. In fact, equally is there's a productivity benefit for you as well. So I don't see this kind of move to innovation as being an either/or between investment and shareholders. And I'm sure we'll talk about it, but there's lots of levers that we can pull that our scale allows us to do. And as we connect the businesses together more, the flywheel you hear us talk about all the time, that really helps benefit how we can pull those additional levers so that in some places we're investing, in some places, we're reaping the rewards with those investments. And you try to get it into this virtuous circle and it benefits everybody.

Absolutely. Thank you for that. So let's talk about the evolution of the international business. I mean, you have had a number of transactions recently, Judith, and we love to hear more about your thought process around the sale of Argentina and U.K. and Japan. Help us understand the rationale, and how that's going to impact the P&L going forward? And any other just help around how you think about where you want to be doing business and overall footprint?

Yes. So I came into this job 3.5 years ago. I did originally a stint in international. I've been out there for 17 years to the stint in international as Head of Strategy. And at the time, and since we started come up with this very clear strategy frame, which was we need to be in strong local businesses that are powered by Walmart, which means that each business needs to be strong, have long-term sustainable growth in the market in which we operate but we'll use our scale and capabilities to make that happen and to join the [ dots ] of people around the world, best practice sharing, tech, whatever that looks like. The other element of that, that became clear is if you'd asked me 5, 10 years ago, I have said that we were -- we always wanted to be in control of businesses. We wanted to own businesses and operate them. And I think we flexed that over time. So we became much more nimble against -- to use your word from earlier, about the way that we think we can operate, and we were way less worried about being 100% owner of some thing. Join those two things together, and whilst international has been a phenomenal business, we went through different phases of its history, and it's been cash-generative for the company overall. What was clear was some of those markets, and maybe I'll use the U.K. as the prime example of that, it's very customer [ hard ], as you well know, which is we knew that business would need increased capital investment, it would need a different way of doing things and a different way of working. And if you look at the business of Walmart overall and set the investment we need to make into Walmart U.S., in Mexico, in India, we can't do as we say. So we figured that we'd made some smart choices about changing our ownership structures and going into minority. So we did Brazil 2 little bit years ago. We've since done Argentina, Japan and now we've done Asda as well. And what I would tell you, in the midst of that, from a thought process perspective, is that I think we still have a lot to gain from the way we structured those transactions. And that's twofold. If you think about Japan, Seiyu in Japan is probably a good one. That's now a combination of KKR. So you've got the major -- some private equity thinking into the business. Rakuten, one of the most forward-thinking digital businesses in Asia, and Walmart and our experience, particularly in grocery home shopping. Combine those together and actually, we start to learn a lot from the way that is operating. We've got a broad fleet there. So I don't think, when you think about this, we should think about is we've just walked away from markets. We're actually setting the structure up where we can learn more effectively. But there's no doubt today that we operate actually in markets with good growth opportunities. If you think about India, which I know we're going to talk about as well because I never get to do one of these without talking about India and its cultures, right? But also Mexico, which is it's a phenomenal business with huge growth potential still and really strong returns for it, too. So I think excited about where we do operate, anxious of the team to get the learnings from the divestments. And -- but there is one other thing that it's letting us do, Paul, which is we are providing global sourcing services to Brazil, Argentina, even though we sold 100% stake. Japan and the U.K. That is allowing and we start to commercialize our global sourcing platform, and we will learn from that because now we have external parties that are buying from that. So when I think about the changes that we've made, it's easy to say we've got smaller, and we have. There's a $35 billion top line impact from the divestments this year, which we disclosed in Q1 that we can also see ways to grow in future, too. And I think some of those services may allow us to have additional footprint internationally in the future.

So you really just hit on this, right? You obviously are pressing forward in a number of markets that have a lot of growth potential. Maybe just let's follow up and dig a little bit deeper as you think about these big markets, Walmex, Canada, China, India, how do you think about capital allocation between those markets? And also, where do you see the largest opportunities for growth as well, not just on the top line, though, but also profitability upside?

Yes. So everything we do is measured by the how do we create these strong local businesses, which are powered by Walmart. And I will keep saying it because it's such a good way to sum up what we do and the way that we think in international, which means that no difference to what you've heard us talk about for the U.S. in our Q1 results. We'll continue to invest where it matters, and where we can invest in the customer, creating some productivity and invest in new profit areas and new profit pools for the future as well. It might be easier and simpler for me to give you a quick thumbnail on each of those markets that you've mentioned because sometimes we think about international as being a hole. When in fact, that strong local business is a series of individual market strategies, which add up into the hole. As we think about capital allocation, I also think a bit like investors. There's no pure science to this. It's a bit of art, as well as you think about what you need to invest in and where. But China, clearly, our Sam's Club business there is incredibly strong. Double-digit growth has been reported for the last number of quarters. And we're looking to accelerate that business. Hypermarket, more like the supercenters in the U.S., we are going through a transformation process for them. They were impacted by COVID in footfall to them. And I think figuring out for them what the right format is for the future, particularly strengthening our general merchandise offers. And the reason that's important is that kind of the third element, I think, as for China, which is O2O, online to offline. Probably the most advanced market in the world for this. We've learned a stack from them about how to deliver fast, what you need to do, with both the Sam's and for the hypermarket business, the capability to do online to offline, those formats, those physical formats give us the anchor to be able to do that. So that's for China. For Canada, this is one of our strongest returning businesses. Great business, really strong. Omnichannel really is the way to go for that and a core remodel program to help support that as well. And Mexico and India, I could talk about all day, but I promise not to. There's 2 things that are common for Mexico and India is that they offer access and they offer value to people right across the country in which they operate. Mexico, of all of the international markets, is probably the one that's most customer-centric in the way that it's thinking about an end-to-end transformation of its business to be way more connected. It's just launched something called BAIT, which is the Bodega Aurrera Internet and Telephony, but in Spanish, which my Spanish is terrible so I'll say it in English, which is a way to give Internet access to people and data access to people that wouldn't normally be able to afford it. So that helps drive that flywheel. And when you look at the new assets flywheel and you look at Mexico's flywheel, while they're at different stages of development, they're actually quite similar in the way that they're all building on each other and putting the customer at the middle of it. And then, of course, we've got India. So Flipkart and PhonePe businesses, both really strong, both doing well. I'm really pleased with what they've done since we acquired them. We've said that clearly a number of times. And you asked me about profitability and what that looks like, too. And what I would tell you is that we want all of our businesses ultimately to be profitable. Clearly, that's one of the reasons we're in business. But we also recognize that everybody is on a other different curve and we will invest where it matters to make sure that, particularly in the developing market, we're getting in the right place in that curve and that we're meeting customers where they need us to be, so that we're winning them into the ecosystem. Sometimes that does need some investment and might make that curve a little longer because once we've got it in place, we can really double down on things like ad tech and financial services to people, which are these profit streams that can flow into.

So let's stay with India and Flipkart. How -- where is Flipkart on that profitability curve that should just both to -- especially relative to when you made the acquisition, what should we know regarding the impact to the business from some of what's happened over the past few months with lockdowns and other aspects? And what also can you tell us, if anything, around a potential IPO for Flipkart?

Yes. I think that's my #1 asked question, on the IPO for Flipkart. I'm going to tell you that my -- the answer that I give to everybody, which is that we always made it clear from the day we made the acquisition or the investment that we would be open to an IPO. So we've also been really clear we'll do it at a time that's right for the business. It's not an outpost. It's not a target for us to do that. But if we build a strong business and we continue to do the things that we need to do to ensure this long term and sustainable growth, that is a possible route that we would consider in the future, but certainly no specific time line on that. And profitability-wise, I think we talked about that. One of the interests in for Flipkart and we're learning a lot about is whilst their core business, they're changing their mix there to be -- to double down on the higher-margin areas, just fashion, for example, which really helps their margin mix and their contribution margin. They're also doing a really nice job of building out our ad tech business there, too. And I think what we've seen now is strong growth and the connectivity that, that gives them. One of the investment areas, though, that we're making against that is in the wholesale business, which is serving the small-, medium-sized businesses. Some of them -- people may know them as kiranas in India and providing services to them on a business-to-business basis. But then also, you have a nascent grocery business there. Grocery penetration in India is massively low, accelerated through COVID. We're just expanding our offers there, and it's one of the few areas where Walmart can really help and support in terms of the learning for working with that. So overall, meeting our expectations and sometimes exceeding them about where we hope that business would be. So lots of positive things going on to Flipkart. So PhonePe is of course the other business there as well. For those that don't know, it's a payment platform. It is less than 5 years old. And we said in Q1 that it's just got through some -- just over 200 million users. It just crossed the 300 million user platform, user mark on that, which is remarkable in a 5-year period. They're a transaction platform. So whilst they're anchored in payments, what they're looking to do is to see ways to be able to be more inclusive to customers everywhere across India. So they're going into new financial services areas. These are gold. Gold is huge in India for those people who know the Indian market. And then also into insurance, mutual funds and different areas, which are all strengthening to the P&L ultimately when those businesses come off. So confident and happy with the progress the businesses are making. You asked more about COVID. Just we were talking earlier, such a challenging and harrowing situation in India. And our hearts go out to everybody who have been impacted in some way by that, and we're doing all we can as a business to help support that. And there has undoubtedly been an impact. We talked last year about the closures that we had due to nonessential items being delivered. There are local closures in place at the moment that, that will have a short-term impact. But the offset to that, that I'm seeing is an increase in digital penetration overall in India. And the Indian government said many -- several years ago that we wanted to digitize India to become a digital India and it's done a lot of things to enable that, such as the UPI, the United Payments Interface -- Unified Payments Interface. A lot of the platforms they put in place. And I think you will now see this shift into those areas. If there's one area that I think we will see a greater acceleration in, it is grocery for India. So that's why we're really thinking about that as well.

Great. Thank you for that detail, Judith. Speaking of digital, that's obviously a key focus across every geography. Maybe help us understand what digital penetration does look like in some of the key international markets? And what are maybe some key capabilities from a technology standpoint that are really worth flagging and calling out that may be different than what we are used to seeing and dealing with here in the U.S.?

Yes. This digital journey has been extraordinary, hasn't it? When I started out in the U.K., we launched online grocery. There wasn't a business in online in those kind of businesses. When you look at the U.K. today, there's an active penetration that's there and that has happened to degree around the world. In Q1, we told you that our digital percentage of sales was 16%, with contribution to sales. So you can get a feel for that about the increasing importance that is happening for us. Obviously, the weighting of Flipkart in our portfolio does have a big weight on that. And I can't see that penetration slipping back quite honestly. I think there's some work by McKinsey recently that said, people who shopped online the very first time over the last 12 months are more likely than not to continue to shop to some extent. But the good news is they'll still come back to stores as well. So hopefully for Walmart, we get the best of both worlds there, which is exactly what we want to do. And technology, we think of innovation and best practice sharing has just been technology, but it's not just that. We learn from each other in so many different ways, and we share talent and we share capability. But in reality, the U.S. has been kind of the source of a lot of knowledge because frankly, they can make the largest investments in some of these areas, and we've been able to export that around the world. I think Mexico and Canada, in particular, are really benefiting from the kind of digital transformation that the U.S. is undergoing, whether that be for last mile delivery, whether that be picking capabilities, whatever those areas look like. But we also see around the world, we are creating pockets of innovation. So Canada, for example, is using blockchain in its supply chain to look at how it's invoicing and receiving. That's a really important test for the rest of the world, and the U.S. will take a look at that as well. I've talked about payments in India and PhonePe's innovative approach, the way they connect, the way that they think about attracting customers and what they do, we'll bring that onboard. And then in Flipkart, they've got some really good, very cool stuff around voice and around local language as well. And voice -- and we just introduced voice for shopping on grocery in India and it's twice as fast to shop in English on voice but 3x as fast to shop in Hindi. So just really interesting ways that we're learning about how the customer connects with us and how we bring more people into that ecosystem. So the other way -- I mean, I already talked about this very much, is that we do something which we call parallel learning. And so it takes something like the market fulfillment centers that you've heard us talk about for the U.S. So these are these automated boxes that sit on the side of a store and take the majority of picking out. You need the denser team to be able to do it, but it gives you huge productivity, speed, and the customer experience is much stronger as well. In the U.S., we actually tried one of these just a few years ago back in the U.K., one of our things that didn't work. But in the U.S., we've talked about this for some time. But Canada is also testing more, but we're going to test 2 different technologies. So the same output to test 2 different technologies so that we get parallel learnings rather than one market does it, spreads it to some other markets. So you get as much better flexibility and speed to iterate.

That's great color and exciting things going on around the world. Judith, maybe to close out, you mentioned flywheel earlier, and maybe we can just circle back to that as you think about where you are currently in managing this international business. Talk about the flywheel effect and what you're able to drive in terms of efficiencies and productivity improvement? How that's may be able to lead to leverage across the cost structure? Would love to hear a little bit whether that's a bigger picture or maybe some market-by-market examples and how that maybe parallels as well to the U.S. business?

Yes. I guess on that, the work that's been done on the flywheel and the articulation of that to give the clarity of the connectivity of the business, I think, has been fantastic in the U.S., in particular. I think that the thing about flywheels is that you keep putting the little parts in place of them and ultimately, it starts to get traction of its own and each piece interconnects and speeds into the next one. It's the entire dictionary definition of what a flywheel does, it generates its own energy and momentum over time, but you've got to be patient putting those pieces together. If you think about the top of the flywheel, that is the customers coming in, it's winning the primary shop, be that in our stores or be that online. You think about the 3:00 of the flywheel core, it's all about building loyalty and deepening our relationships with our customers. If you think about the -- we sell them things, but we get to them how they want it. We then connect with them in different ways, financial services. Health and wellness in the U.S. is a huge example of that, and bring them back into the flywheel. You then come into the 6:00 area of that flywheel and you're thinking about productivity. So that scale that you can get and the automation that it brings and what you can do as well as the connectivity that allows you to have new profit streams. Ultimately, you invest all of that back into the business again and your customer value proposition. And I go through that every time I talk about the flywheel because it's helpful to remember how it works and what those pieces are. The U.S. is doing some amazing work there. Their ad tech, in particular, I was impressed with Walmart Connect. And in fact, we've taken the idea of Walmart Connect and we now have Walmart Connect in Mexico and in Canada. The Mexico store, 100% increase in advertisers on that platform in Q1, which is remarkable growth for it. So that flywheel applies everywhere. Slightly different in India because we don't have physical stores, but the concept of it is still true, bring people into the platform, deepen your relationship with them, create efficiencies and alternative profit streams as a resource of having those people and then invest it back into value and access for customers. Mexico is probably the one where I'm seeing it come to life the most. And I think the twist that they have is they think about this financial services capability, providing tech services to the unbanked, to people that really need it, creating this Internet connectivity into people is an extra part of that flywheel at the 3:00 level, if you like, where they can see the opportunities that exist. And that came from -- so why aren't customers interacting on walmart.com in Mexico? And one of the answers was that is it the offer? Is it -- the short answer was they can't get on it. There isn't any access to it. They need data, they need Internet to be able to do it. So the team developed these 2 things. First of all, they developed this offer, BAIT. But second is they put kiosks in some of the stores. And I've tried to put in kiosks in stores before. They've been a complete disaster. Nobody uses them. Nobody wants to. In our bodega stores in Mexico, they're fantastic because that is the way to access full range for customers. So the flywheel is applicable everywhere. The U.S. is doing a great job against it. But my job with majority of the teams around the world is to tailor it for each market and be very careful that rarely does one solution fits all for the international business, and that's really the approach that we've taken. It comes back to the strong local businesses powered by Walmart, not powered by Walmart creating strong local businesses, and that is important to remember.

Indeed, it is. Well, Judith, I want to thank you again for participating in the Global Consumer Conference, and we hope to see you in Paris next year.

Thank you, Paul, and thank you to everybody for your interest in us.

All right. This will conclude our fireside chat. Take care.