Walmart Inc. (WMT) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Steph Wissink, a Senior Research Analyst and Managing Director on the consumer team at Jefferies. Thank you for joining us for our virtual Nantucket conference. I wish we were on the island, but not this year. Hopefully, next year, we will be back. It is a real pleasure this afternoon to be sharing the screen with Kath McLay. Kath is the CEO of Sam's Club, which is part of the Walmart organization. And she's been with the company for several years, and she'll talk a little bit about that. But I think this is a really important time for us to focus on one of the key segments of Walmart's broader business, and actually, one of the segments that tends to be an area of innovation, technology leadership and ultimately, pretty substantial influence on the overall business size and profitability. So Kath, thank you for joining me today. It's a pleasure to have you.

Talk a little bit about your background. You joined Walmart, I think, in 2015, but just to help people get to know you a little bit better, share a little bit about your background.

Yes. Sure. Thank you. And it's a great chance to talk to everyone today. I joined Walmart in 2015 after spending about 15 years in grocery retail in Australia. So I worked for a retailer over there called Woolworths. And before that, I started my career in [indiscernible] at Deloitte, and then worked for the national airline, Qantas, and then went to retail. And thoroughly enjoyed working for Woolworths. And then in 2015, made the bold change of changing countries and companies and joined Walmart originally in strategy and finance and then moving into supply chain. And then I led the neighborhood market operations for a while, and then just before the pandemic, about 18 months ago, joined Sam's Club.

You have impeccable market timing. So we're going to talk a little bit about that, joining Sam's Club 18 months ago. But just to help frame up the size of Sam's Club because I think, clearly, people are familiar with Walmart. But talk a little bit about the size of Sam's, the revenue base, the number of clubs, associates, et cetera.

Yes. It's interesting. Sam's does about $64 billion in sales. It's interesting. I worked for a retailer in Australia that was about $16 billion in sales. And we used to talk about we're so big, how do we fight against bureaucracy. And then I moved to Sam's, and we're $64 billion, and we talked about -- we're so nimble. We're so small compared to Walmart. But really, we're not small. Any $64 billion company in its own right is a sizable company. We had about 100,000 associates, just under 600 clubs. And I think this last year has been extraordinary in just kind of seeing how the role that we could play in our members' lives. So it's been a really interesting year, Stephanie.

Now let's talk about those members because you have a pretty distinct target customer. How do you think that differs broadly from the Walmart customer, even some of your other club peers?

Yes. I mean, we talk about that kind of large family, 3 -- 2 to 3 kids, about $75,000 to $125,000 in income. They may have a small business. And we talk about them also being kind of happy hosts. So quite often, this target customer that we look at is the family on the street that entertains. They're the PTA mom. They're the person who brings the snacks to the baseball game. And so we do really see like that characteristic is the group that really responds well to the club channel. They like to buy in bulk, and they also love the quality and the treasure hunt of the offering that we've got. So I think over the years, it's helped us to get really crystal clear on who that target kind of member is, and they're really responding to the assortment that we have in the club.

That's great. I want to talk a little bit about the channel broadly and then some of the company-specific initiatives that you've been undertaking. So one of the things is just really around unit-level efficiency. And we've heard this from a lot of retailers, frankly, but certainly, you have talked about it. So you recently closed about 60 clubs, so on a base of 600, about 10%. Talk about what you've done to improve the member per club, share any results that you have that might signal just the health and quality of the membership base per unit versus just broadly.

Yes. So I think just going back a number of years, we've closed the 60 clubs. I think it really helped us try to just get on to strategy to really look after how do we get great items at disruptive prices? And how do we make sure that we're delivering special experience to our members? And what we've seen over the last year is an extraordinary growth in our membership. We reported that at the end of last year, and then we're happy to also report it at the end of Q1. It's not just the absolute number of members that have grown, but it's also the renewal rate. It's also the plus penetration. So what we're seeing is that the members are getting into a more stickier, loyal relationship with us. And a lot of that is coming through some of the products and tech that we've delivered, which is, I think, it's truly living up on that kind of creating special experiences for members. And so we're very scientific at how we look at membership. We break it down to what are the attributes that drive renewal. And then we make sure we're focusing and attending to those and that we're walking with members into a far more loyal relationship so that it's not just up to like -- you're not just hoping that you get the renewal rate that you can actually structure your way into it.

Yes. Let's come back to renewals in a little bit, but I want to just give you a little bit more space to talk about general merchandise because it's something we've certainly heard from Doug and the team as a Walmart and Walmart.com strategy, but talk about how that extends to Sam's. And how you think about balancing high-frequency categories, like food and consumables, with maybe more limited time scope and limited selection SKUs in certain classifications, but really driving that treasure hunt. And so it's more about frequency of visit versus velocity of category.

Yes. So look, I mean, I came from a grocery retailer that was about 30,000 SKUs. Then I was at Walmart, it's like 120,000 SKUs. And here we are in this channel and format where it's like 4,500 to 6,000 SKUs. So it's a really, really tight, Stephanie. And it means that our merchants need to be super disciplined in making sure every single item earns its place in the club. And so I think that absolute attention to detail means that, first of all, that they have to meet a quality threshold that ensures that those items really earn their place, but they also have to meet a disruptive value threshold as well. What we saw last year was that combination really drove sales in our food and consumables area. Like if you look back to our results, you can see there was significant traffic and growth in that space. What we saw in Q1 this year was actually a really resurgence in general merchandise. And so I think some of that is like the flip on last year, but it's also, I think, a little bit about some of the stimulus money that was available, and it was also consumer mindset. So we saw that the consumer was becoming more optimistic, more wanting to engage outdoors. So we saw outdoor, seasonal toys and items that more indicated that people wanted to get back together into groups. And so certainly, in Q1, we saw that balance come more towards the GM side than what we've seen kind of more into last year. But we're also -- we're still enjoying the growth of the food business from last year that's also transitioned over into the first quarter.

That's great. Let's talk a little bit about pricing because I know you have a pretty competitive pricing model relative to your peers on your membership. So how often do you go out and look at pure-based pricing and syncing up your pricing and thinking about that value accretion from a membership level?

Yes. I think we think about pricing from 2 kind of different ways. So I think the first one is like people pay to shop with us. So what's the price of membership? And I think we are always looking at how do you continue to give value and pull value into that equation so that the member feels like they are getting extraordinarily great value for the money they spend with us. I think we're actually the cheapest from a membership cost in the warehouse channel. Like it's $45 per our entry, which is club, and then Plus is $100. And over the last few years, we've been adding richness into the class, which is, I think, why we're seeing the migration of our members into that. We launched free shipping. We launched curbside this last year. Like all of these elements are making plus more stickier. And we're seeing that come through both in our growth and upgrade into plus, but also in the renewals. So I think that's one thing we're constantly evaluating to make sure we're giving great value and that we're giving great value comparative to our peers. The other thing that we're also looking at is how do we make sure we've got disruptive prices? If I'm going to pay to shop with someone, I want to know that I'm actually getting a great deal. And so our merchants have done a fabulous job over the last kind of year just going back and working with our suppliers. In a supply-constrained world, how do we make sure that we're getting access to inventory, and at the same time, we're making sure we're still keeping our costs low and making sure we're passing that value on to the consumer? And I think it's a testament to the deep relationships they've had with the supplier base that they've been able to do all of that in this kind of -- over this kind of last 18 months.

You mentioned the premiumization and the renewals. So I wanted to spend a little bit of time talking about that. In the last quarter, I think you talked about the next increment and step up to your premium membership level. But also, I think one of the misconceptions that we're seeing in the broader market is that you have this limited visibility into renewals, which I think if you're a member of a club like I am, I got my renewal notice 8 to 10 weeks before my renewal date. And so I was able to opt in many weeks before the expiration. So maybe talk a little bit about that visibility track. I mean, we're in the middle of June now. If we roll out 8 to 10 weeks, you have visibility out that far into renewals. And kind of what you're seeing in terms of that engagement level at that upper tier and then the renewal intentions as you look out several weeks.

Yes, I think you can be very data led in the way that you look at renewal. Like there is -- there's definitely something about the member value proposition, which has some art to it and having great quality items. But if you just look at data around renewal rates, we know like what are those kind of triggers that will tell us that we have a high statistical likelihood to get a great renewal outcome. And so we look at how many members are on auto renewal? How many members have our credit card and are using it? How many members are using Scan & Go? How many members have an e-commerce account with us and are purchasing online? And you actually like -- we've got the data that tells us by increment, I know if Stephanie uses Scan & Go, but she doesn't have -- she's not buying online. The likelihood to renew is x. And so we constantly look at, okay, how do we encourage Stephanie along that loyalty path so that we can get to like a high renewal? And we've seen that kind of really -- kind of bear great fruit for us over this last year. And we're really proud of the improvement we've had in renewal and the improvement in the Plus penetration as well.

All right. That's great. Let's look over a little bit to -- you mentioned the expenses and inflation in certain areas. So how are you managing higher wages? And then maybe give us some sense about what you're seeing in terms of inflation across categories. How do you mitigate that impact? Or how should we think about potentially seeing a little bit of price creep on the part of the consumer basket?

Yes. So if I take wages first, and I think those 2 elements are like part of the fun and the challenge of these roles like -- because you're kind of trying to work that whole like equation, right? So if I just look at wages, I think Sam's Club has been on this journey for a number of years. So they've been looking at how do we increasingly invest into wages so that we have great jobs and great careers? So we want -- there are destination roles. So I am a meat cutter. I am a cake decorator. I am a forklift driver. Those ones, we believe, are destination roles. So we want to pay them at a rate that it's a great take-home wage. Then there are other ones which have career roles where people come in as an entry level and work their way up through the club. And we've been on this journey over a number of years building out these great jobs, great careers. What -- we are now in a position where everybody is in a work group. And within a work group, what you -- first of all, you're part of a team. But secondly, you get cross-trained across the other roles. And we're finding people's productivity goes up because, one, they know who their leader is. They know how their teammates are. They get to do different jobs throughout the day or throughout the week. And that increases, I guess, the enjoyment of their jobs. And so we've been investing into wages and building out great jobs and great careers over this time line so that we're in a place now where we're really happy with the progress that we've made. And we've been able to do it in a way that we've been able to balance out the P&L as well, too. And so you're constantly looking at, okay, this is a destination job. Have we got it at the right amount in the market? What's our turnover? If we added a little bit more, we would be able to reduce the turnover. So you're constantly balancing out that equation. And then the other part that we've been doing is, okay, now we want to lean into omni. I need to stand up a fulfillment team. This week last year, we stood up curbside across the nation. And we managed to do that last year, Stephanie, without increasing our absolute headcount across the clubs. So we stood up these fulfillment teams because we had deployed automation throughout the club. We had been able to use Scan & Go, and people were using it more last year, and that enabled us to free up resources to put into that fulfillment team. So there's this constant equation that you're balancing to, am I paying the right amount in the market to make sure I'm recruiting the talent that's going to stay with us and build careers with us? Am I balancing our automation so that I can continue to shift around my resources and lean into further channels like omni and continue to be -- offer value to members? And let me do that all in a way that is my price is right and gives a return to the shareholders. So that's been a multiyear exercise to get to where we are today. Your second question was around inflation. And I think there's been a lot in the press around inflation. There's a lot around increases in resin and aluminum and et cetera. I think our merchants have been working very closely back with their suppliers. And we have had a number of requests for cost increases. And so the merchants work back on, okay, let's look at the portfolio and let's have a look at what items we're getting from that supplier. Let's work with them to see, are there cost savings we can put into place across our business with that particular supplier? Is there a way we can mitigate? I think that's the best thing that you can do if you have the opportunity to mitigate that grade. And then in those places where you can't mitigate, okay, how do we -- like where are we going to pass it on? And where are we going to hold it? And how do you do that so that you keep disruptive prices but still manage your P&L to get a return? And I think that's the equation that the merchants have been working very carefully through and be very deliberate and precise about how we manage that. We don't want to penalize our suppliers. We want a good business relationship with them that continues on. But we also don't want to just accept prices and pass them through to the members as well, too. So it takes a little bit of negotiating and hard work and still creative work to be able to find cost savings to be able to manage through all of that.

That's really helpful. Let's talk a little bit about private label because it's not something we've explored a lot with general merchandise stepping up. Just remind us what percentage of the business is private label today, how those margins compare to national brands. And then any categories where you expect to lean a little bit more strongly into private label?

Yes. So I think private label sales is about 30% of our sales. And I would have to say, I am really proud of the work that the team has done, increasing the quality of our Member's Mark products. So again, this is an area where you look at art and science. So there is certainly an art to finding great items and developing great items, but there is actually a science as well, too. And so the team have come up with ways of using data to ensure that the quality is at a level that we're proud of. So I just spent some time with the team this morning, and they were showcasing to me the dashboard that they now have that pulls all of the quality ratings off the website. And it's all of the member complaints per million units. And it's also looking at social media feeds and what people are saying. And then it's looking at who do we believe has the best item in retail across the world? And how do we benchmark against that? And where are we leading? And so all of those attributes, you pull them all together, and we've deranged a number of items over the last 12 months where we said that didn't meet the quality rating that we believe that our members should expect. And so we're being very, very disciplined about making sure that the quality of our members mark is a quality that our members would feel proud of and that it's something that kind of justifies it, having a space in the club.

That's great. I want to just jump over to technology and innovation. I actually had a chance to meet with one of your team members at an industry event over virtual here several months ago and talking about some of the tech deployments that you've done. And you mentioned Scan & Go is one of those areas where you're incubating a new experience within the Walmart ecosystem. So talk a little bit about, as a leader and leaning more into tech advancements, what are some of the successes and maybe share a little bit about some of those that you've tested that haven't worked. But just I think what we're trying to study here is just how experimental you are. And then ultimately, when you do arrive at a success, how quickly can that be deployed across the Sam's system and then potentially even the Walmart ecosystem?

Yes. So Sam's is an incubator. I think we're great at software development. So if you take, for example, Scan & Go, I mean, you're a member so I hope you use Scan & Go. But I think for me, it's one of the most delightful things about Sam's Club because it surely does put control into the members' hands. So people get a little confused in making Scan & Go a self-checkout. It is not. It is the closest you can get to an online purchase in the club. So you're basically putting things in your physical cart and scanning them on your phone and then swiping for payment as you leave. And it allows members to totally bypass the front end. And I keep saying to the team, it felt like it was a product that we created which was waiting for a moment like a pandemic because people just absolutely flock to contactless payment, and there it was ready to go. So I think if you look at Scan & Go, we've got Ask Sam. We've got [ on our ] inventory. We've got a fresh app that really looks at how do we make sure that our production plan is right, our specs are right, the quality is good. So we've got all of these wonderful kind of capabilities and apps which have great machine learning and AI sitting behind them that has enabled us to be highly productive in the club. And a lot of those are being kind of transferred across to Walmart as well, too. I think the guys are constantly playing and innovating to find what is the new thing that we are looking at. And then there are things that I think are on the cusp of launching to scale, and there are other things where it's like that's still in incubator. So we've been playing with like how do I use computer vision at the exit. So one of the things about Scan & Go is at the exit, we'll scan 1 and now we've increased it to 3 items. But what if I didn't need to scan it because computer vision enable me to be able to identify each of the items in the cart? And so there's things like that we're playing with. And I think actually even for the member, they'll no longer have to scan the bar code on the product because their phone can just recognize, well, that's a packet of Doritos. So it's how do I take friction out for the member? And then how do I make sure that I'm making my associates' jobs easier and more productive? So we've got a lot of things that we've been playing with. One of the ones that the team we're talking about today, and we've been working on this over the last kind of 6 to 12 months, is how do I make my associate in the club a connected associate? So how do I give them what their very next best step is? Now if you look back in retail, like over the last 20 years, there was a lot of like managers in the backroom looking at screens. And you're trying to work out what's the next most important thing I need to do. The truck's coming. I need to organize with my supplier that's doing a delivery. I'm out of stock of this. I've got to pull this down from this deal and put it on the floor. They're constantly trying to work out what's that next thing I need to do? Well, they don't need to sit behind the screen to do that anymore. You can actually liberate them and have them on the floor and the technology can actually work out what the next best thing is, and it can be delivered to a handheld or to an earpiece. And so we've been playing with that. And we've found -- like we've got the software part of it organized. The hardware part of it, not so much. And so it's just kind of like looking and refining and partnering. And then when we crack that, then how do we roll it out to like other parts in the Walmart kind of enterprise as well, too? So I think the Sam's Club team is highly innovative. They have worked out how to use AI machine learning to really supplement and augment the associate on the floor. And I think it's part of the secret sauce of how we're leading into kind of omni as well, too.

Yes, it's a great lead into my next question, which is really about omnichannel. So as you're sitting in the CEO seat, what does your dashboard on omnichannel look like? What are the key metrics that you're tracking as it relates to the different executions, direct-to-home, club pickup, contactless, et cetera? How do you think about those key measures?

Yes. I think we are obviously always looking at NPS. We're always looking at kind of repeat rates and repeat usage. When we launched curbside last year, we designed it around NPS. So we didn't design it around a comp goal or like an order growth that was like let's target this Net Promoter Score because if we delight the member, we know we'll get the repeat usage. And that's what we saw, and we saw it as -- like our NPS target was over 75. And as we've got over 75, that repeat usage just really grew, and that's really part of the strength of what our e-com result was coming through the back half of last year and into Q1. So I think there are some really important metrics. But we also look at things like how do we use personalization as well? So in Scan & Go, we started playing with like how do I suggest to the member that every other time they shop with us, they bought bananas and they didn't buy it today, so before you leave the club, can I remind you? And we're finding even just with that personalization, that we're seeing a far greater uptick in people doubling back and buying the bananas than what you would get in a traditional online suggested order. So I think you've got to understand the member, and you've got to understand what the member problem is and then how do you use tech and data to solve those problems to encourage them to grow sales. So the other thing, I think, that we saw last year was like as we lean into omni, we're trying to do it in a way that delights the member that is -- that grows our membership but also kind of is fiscally responsible in the way we manage our P&L as well. And so I think one thing was around how do you stand up a fulfillment team and be kind of cost neutral from a -- how do I use automation? But then there are other things that we also kind of looked at, how do I get my omni shipping and use the club as a fulfillment point? So we're using ship from club instead of just those traditionally shipping from the fulfillment centers. So I think last year, we learned a lot more about operating efficiently and effectively as an omni retailer. And I think there's still a lot of opportunity to kind of grow in that space.

That's awesome. So we have just about 5 minutes to go, so I want to make sure we maximize this. And I want to think forward over the medium to long term. How do you think about the growth algorithm between members, spend per member, margin progression, if you see opportunity there, even just thematically not in terms of specific numerics? But do you feel like you're at a point where this business could grow faster and be more profitable? And then the second related question is if we're sitting here 5 years from today and the business is 15%, 20% larger, what do you think would have been the key drivers of that growth? And are there any risks to some of those drivers that you anticipate?

Yes. I think we don't typically talk about what is our long-term growth algorithm or give guidance. But I think what I would say is, we're very clear on what our strategy is, great items, disruptive prices and special experience for members. And we're seeing that those 3 are growing membership, they're growing higher renewal rates, and they're growing deeper relationship with our members, which gives us a lot of hope for the future. I think as you unpack that special experiences, the area where we really wanted to differentiate was omni. And so how do I provide that convenience to my members? And how do I use innovative tech to really kind of help make that experience really delightful and frictionless for the member, but also make us super-efficient and productive in the way that we go about serving those members? I think the thing I am proud of is if you look at Sam's Club, all of the tech, all of the software is our software and our tech, and all of the fulfillment associates are our associates. And so I think this is a real advantage point for us to continue to grow on and lean into to build out the productivity, to ensure that we continue to grow in that space and to really own that member experience. So I think this is going to be an area you're going to see us continue to lean in and grow from. But I think this last year has kind of given us a little bit of a hint of what we can do in this space. And I'm excited about exploring it even further.

Yes, I really would compliment you because I think, to your point, you've seen a bit of a sneak peek of what a fully integrated omni broad channel commerce business can look like over the course of the last 12 months. And at least based on what we can see, it seems like the consumer is increasingly engaging in club as a true destination channel across commerce platforms. So encouraging to see for sure.

Absolutely. Thank you.

Yes. I think we're going to leave it there. We're just bumping right up on time. If you did not have a chance to see Walmart today at the conference, just let us know. We'll try to get to you in touch with Dan and the IR team. And thank you, Kath, for the time today. It's always a treat to get into the business more closely if we can. So really appreciate the time.

No worries. Thanks for the questions.

Yes. Thank you, everyone, and have a wonderful afternoon.