Walmart Inc. (WMT) Earnings Call Transcript & Summary

Well, good morning, everybody. Thanks for joining us at our 44th Annual Institutional Investor Conference. For those that don't know me, I'm Bobby Griffin. I cover consumer hardlines/retail here at Raymond James. And this morning, we're pleased to be hosting a fireside chat with Walmart. With us from the company are EVP and CFO, John David; Senior Vice President of Investor Relations, Steph Wissink; and Senior Director of Investor Relations, Kary Brunner. First, all 3 of you guys, I appreciate the support, and thank you for being here. You guys have been long supporters of this conference. I'm pretty sure everybody in this room knows what Walmart is, but just quickly, if anybody doesn't, it's the world's largest retailer, over 10,000 stores, over $600 billion in revenue across really multiple countries in the world. 70% of the revenue comes from the U.S. between the Walmart U.S. concept and Sam's Club with about 30% from the international location. So with that, we'll kind of dive right in. John David, thanks again for being here, though.

It's good to be here. Thank you.

So clearly, a lot of cross currency in the environment right now, but Walmart delivered another solid fourth quarter. So maybe just to get us started, can you talk about some of the interesting takeaways on what you're seeing from your consumer and kind of where the consumer is today?

Sure. Well, clearly, the consumer is being discerning. Given some of the inflationary pressure, we see a shift from general merchandise to grocery. We've also seen a notable shift in terms of share gain for us in grocery. I think very importantly, we're seeing convenience really resonate in this environment as well. One of the things we talked about on the last conference call -- earnings call, was that our scores for consumer mind share around convenience are actually on par with price right now, which is a first for us, and so we're quite excited about that. But there's -- obviously, people are projecting each day like when and if we'll go into a recession, we're very cautious. We recognize that there's a lot of uncertainty in the environment right now. But I think importantly, we're a company that's positioned well in any type of environment. If the consumer is going to continue to be pressured with less disposable income, we think our value proposition resonates. On the other hand, if we get into a better economy that has more growth behind it, a lot of what we're doing really plays to that importantly around convenience and some of the things that we're doing in that area.

Okay. And then maybe diving a little bit more, you guys with the last quarter, released your fiscal 2024 guidance. Kind of what's inside that guidance, what's assumed from kind of some consumer behavior even inflation side of things? And then as a second part, all the retail investors remember that the inventory challenges that happened in calendar year 2023, so how is the team planning from an inventory standpoint this year?

Sure. Well, our guidance assumes that inflation -- or let me put it this way, the prices stay high. We're not necessarily suggesting that they continue to increase at the rate that they have, but the overall price levels will remain high. And so that puts us, given our categories with inflation, a little north of 3% for us for the year. And then it's very dependent upon category. Food is persistently high, particularly when you look at year on 2-year stacks. General merchandise has started to actually deflate in some categories, and then we're seeing some disinflation in other categories. But to your point on inventory, we feel like we're in a much, much better position with our inventory relative to where we were a quarter ago. But certainly relative to 9 months ago, our inventory level was flat at year-end and actually down 3% in the U.S. There are still some problem areas. I'd point out electronics, home, apparel continue to be ones where we're seeing the effect of discernment by the consumer, where they're being selective with some of those higher price point items, because more of their disposable income is being spent on food.

And then we're going to come in the last 2 quarters, I think in 4Q, roughly 50-ish percent or nearly 50-ish percent of grocery gains were higher income customers, maybe even a little higher in 3Q. Can you talk about what you're seeing from those customers? Are they shopping in the other side of the store? And then I think, more importantly, is what opportunities are there to retain those customers because some of them might be newer to Walmart?

Sure. Well, we have seen about 50% of the share gain was with high income consumers in the last quarter. In the prior 2 quarters, that was north of 70%. So really excited about our value proposition resonating with them. But to the point I mentioned earlier, Bobby, convenience really matters. And I'll give you an indication of one of the growth areas of our business, but it's delivery from the store. We talked about this a little bit on the earnings call. Delivery from a store has tripled in volume, almost tripled in volume over the last 2 years. And in the month of January, it was well over $1 billion for us. Now that tells you that consumers -- our value proposition is resonating with them. And again, that convenience is something that appeals to every income demographic. And so we're certainly leaning into this area with a lot of the investments that we're making, a lot of the changes in the business mix that we have, leaning more into e-commerce and things like that, that I think will hopefully enable us to retain that consumer over the long term.

And Walmart sells -- obviously, 60% of sales or so from grocery but a huge general merchandise business, too. There's many different categories in there. We've seen some pull-forward behavior in the pandemic, obviously. But when you look inside the categories, you're starting to see some of the durable goods maybe show some signs that we're getting through kind of what I would label as maybe the over-earning phase and starting to level out from a demand point.

Well, there's still pressure, as I noted, in certain categories of general merchandise. And if you look at the impact to our P&L last year, probably the 2 biggest or most pronounced areas were around markdowns and the mix change in our business from GM to grocery. That persists or continues into this year, not to the same magnitude on a year-over-year basis is what we experienced last year, but we're certainly expecting that to continue. And that's a hard thing for us to figure out because that's somewhat dependent upon consumer behavior and how they react to higher inflationary categories. But pulling up a little bit, I would say this is a big opportunity for us going forward. We are more dependent on our grocery sales today than GM, but one of the things that we're doing is with our expanding marketplace [ and ] growing that, that allows us to sell more third-party merchandise, to have more assortment, which tends to carry a higher margin, at least in the U.S. than grocery. And so again, this is another way that the composition of our P&L will change over time.

And then for -- and then I guess maybe let's switch gears with -- move on another very important topic, supply chain for Walmart. I guess maybe first, to start us kind of recap where we are in the supply chain today and costs coming down, container ship costs coming down. And we're getting back close to -- I don't want to use the word normal but somewhat close to normal again, and then we can kind of build off that.

Yes. The -- a lot of the supply chain pressures that we faced last year created some onetime costs that are somewhat tailwinds this year. Certainly, when you look at categories of supply chain, shipping, [indiscernible], whatever it is -- we've seen as much as a 50% decrease in some of those categories. So that will give us a benefit to our P&L, probably more pronounced in the first half of the year on a year-over-year basis than the second half of the year as things started to correct a little bit more. But I think supply chain is sort of a bigger area that we're investing in. And when we talk about supply chain for us, like the back of our stores is what we're doing in our e-commerce fulfillment centers, things like that. We're investing a lot to drive some of the benefits over the longer term.

And before we may move on to that, I mean, it seems like we have some puts and takes. Obviously, within 2024, you've got supply chain costs coming down. I think there's a LIFO headwind that we're going to be facing as well. Cautious consumer, anything else before we kind of move into some long-term initiatives that you'd like to maybe flag to keep in mind?

Yes. So we continue to invest in our associates. We announced another investment about 6 or 7 weeks ago. Certain of our associates within the U.S., that had some year-over-year pressure, but it's the appropriate thing to do for our business. You noted the tailwind of supply chain mix continues to be, I think, the biggest uncertainty for us because of its dependency on what happens with consumer behavior. But longer term, we're focused on what we can execute on and what we can control. As I noted, I think we're a company that stands to do really well in any type of economic environment. And I think some of that is obscured this year by some of the pressures in our business. But we really like what we're seeing in our business and what the next few years hold.

Yes. Maybe let's switch -- go back to the supply chain side of things and really kind of the future of it. From an automation standpoint, even when I think about it, I think about you got kind of the back end of the stores and you got kind of the DCs, the e-commerce fulfillment side of things. So maybe let's talk about each one and kind of what's changed and what excites you about the opportunity on each side of it.

Yes. Well, of all the things, first impressions coming to Walmart 8 or 9 months ago, this is one that stands out to me as quite notable. And specifically, what I'm referring to is how advanced we are in some of these areas. And these investments that we're making have considerable improvements for not only our cost but the way that our associates work. If you take some of our e-commerce FCs, like we take a 12-step process down to a 5-step process, this is better for our associates, less manual labor related to that. It's also more efficient. And the more that -- the more efficiency we get there, it actually improves the economics around our e-commerce channels, and so that's quite exciting. But for me, when I look at something, I'll give you an example like a perishable DC. And we make a certain investment around automation there, and we have projections around the improvements that, that will make in terms of throughput cases per hour. And what's exciting for me is since we put these in place, we're actually seeing that the throughput is significantly better, almost 50% better than what we had assumed in some cases. That directly translates to a higher IRR or ROI related to that. And so these are investments that benefit not only our associates but the investor as well as we see our -- the efficiency comes through our P&L. And they're ones that we actually frankly want to do more of, because there's a very high return on these things.

And then where kind of -- maybe to use a baseball analogy or not, but what inning are we adding for these investments in? One of the questions we get a lot, is it table stakes is to keep costs under control, or does it actually flow into the bottom line here kind of changes the algorithm maybe of the business?

Yes. We do think it's the latter that this has the opportunity to significantly improve over the coming years. We've made a lot of investment over the last several years. We'll continue to invest in these high-return areas that have a very clear payback. But I think we're in a different spot than we were 5 or 10 years ago, where we clearly had some gaps that we needed to address, whether it be in pricing or investments in our associates. And so as we sit here today, we'll continue to invest, but we're at this inflection point where we are beginning to see the benefits of these investments. And we hope that you will be able to as well in terms of operating income growth at a higher rate than sales or return on investment increasing. Again, I think the last year has obscured some of the progress here. Notably, I talked about the mix change in our business that affects that. But we're seeing good improvement this year. And quite excited about what next year and a few years after that [ goes. ]

And is there some cross learning, I guess, across the different geographies or as well as businesses, trying to do [ way to do ] things more efficient within Walmart U.S. that could translate into international, translating to Sam's Club, understanding that Sam's different business in terms of packaging size and stuff? But...

Yes, there's a lot of learnings from each of the businesses. I'll give you an example. With Sam's, they do a fantastic job with their scan and pay technology. Roughly 1 in 4 customers that shop at Sam's shop by scanning their items individually. That's a great digital penetration in that fiscal footprint, and I'd argue, probably as good as anyone that you see out there. So excited about those learnings. There's a lot of automation that Sam's is doing in stores or in clubs rather, where we're going -- we've got automated bots that are going down the aisle and basically checking whether things are in stock or out of stock, what needs to be replenished. And it just provides a better overall experience for the associates that are working there, whether or not they need to do some of that more mundane -- those mundane tasks but also drops to the bottom line as well. Internationally, we have a lot of synergies in the supply chain area, particularly what we're doing around purchasing as well. And so we're trying to leverage the best of all of these various segments to make this -- the whole ecosystem better.

I think there's a great segue in the kind of the profitability of Walmart and kind of where that could go in the future. So I mean, I guess, maybe first, let's take a step back, coming off a year of one of the lower Walmart U.S. margins. We've talked about some of the headwinds. But then I guess, what is the path to rebuild on some of those headwinds? And then we can dive into, I think, really the more exciting part of some of these alternate profit streams that you guys are developing.

Sure. Well, there's 2 big areas that I think if I were an investor, I'd be a big part of my thesis to invest here. One is the improvement in unit economics that we're making by some of the supply chain automation, which is appreciable, where we've got a lot of the fixed costs in place. But the other areas, what you alluded to, Bobby, with the business mix change of our company changing over time. Today, the vast majority of our overall profits are attributable to in-store brick-and-mortar in the U.S. If you fast forward 5 years, we are much less dependent upon that as an income stream than some of these other faster-growing parts of our business. So as we begin to grow marketplaces more, have more sellers come to our platform that are selling third-party merchandise, we have a fee for that. If we fulfill that, we also have a fee for that as well. The more we're doing that, the more advertisers want to spend advertising dollars on our platform, certainly that resonates with consumers right now. These are faster-growing, higher-margin parts of our business that just mathematically changed the composition of our P&L to where our operating margins want to go up over time.

And maybe, let's see, this one is a little bit more open-ended, but there is a lot of them. So maybe let's dive into a couple. You have the global ad business, fulfillment services, membership, there's a health care initiative as well. There's probably some payment opportunities too. So maybe which 1 or 2 excite you the most? And then I'm sure I'll have some follow-up questions on that.

Yes. So they all excite me, and they're actually hard to isolate because of the interdependencies in all of them. And the common thread through all of them is a greater digital engagement with our consumer. I think that's where we have not advanced as much as others perhaps in the past. We've built our business over 60 years, which has largely been a physical footprint. We've got 10,000 stores across the world, half of which approximately are in the U.S. But if you consider the future of retail being omni, and we certainly are big believers in that, that physical footprint is an enormous advantage where we have just taken the U.S. almost 5,000 stores that are within 10 miles and 90% of Americans. Going back to this first point around convenience, this really resonates with consumers, and it allows us to have these distribution points as consumers lean more into e-commerce over time. So they're all very interrelated. And if you take advertising, the more eyeballs that are coming to your digital platforms, the more advertisers want to spend money. Advertising margins typically range in the 70% to 80% range, I think, for a lot of companies. And so this, again, is a faster-growing part of our business with a higher margin, which changes the composition of our P&L over time.

I guess really 2 follow-ups. One, Walmart's always been intently focused on the customer, lowering prices, giving them the best value. So how do you scale these businesses with that in mind, where it works in that way? And then two, how do us investors kind of grade the progress of these businesses flowing into the P&L?

Sure, sure. Well, we're happy to talk a lot more about this at our upcoming Investor Day next month. And so we'll give you a glimpse into some of the progress here. But our value proposition has always been around saving money and living better. And I think very clearly, we've demonstrated the save money part, certainly over this current period that we're in as consumers are flocking the value. The living better means a lot of things, too. That gets into convenience and some of these other areas that we're focusing on that allow us to tap into a geographic that is maybe a little different than what people have historically thought as the one that skews towards Walmart. So we'll continue to monitor progress with numbers of sellers on our marketplaces, the number of SKUs. We've got over 400 million SKUs on our marketplace right now, which is quite exciting when you think about the growth that we've seen there over a period of time. The example that I gave earlier with perishable DCs and just -- I'm sorry, not perishable DCs, with scheduled delivery growing -- tripling in the last couple of years. These are data points that I hope give some indication of how our progress is going in these areas.

And then as you're starting to really scale as you're starting to see more outside companies come and want to partner with [indiscernible], you take the membership, for example, you saw Paramount come in. Are you starting to see -- I think Walmart, what is it, 230 million customers or week visits? So pretty big data set coming in there.

Yes. Well, in the battlefield that we're on, I think scale really matters. I think it really, really matters and -- both in terms of like distribution for consumers and things like that. But scale begets efficiency in this area when you think about some of the efficient -- or some of the investments that we're making. And you're right, our customer base covers a lot of America. And so people want to partner with us. And they understand some of the changes that we're making to appeal to a much broader customer demographic than we have historically. When we look at some of the advances we've made in Sam's here recently, that skews towards a more digitally inclined demographic, a younger demographic. And so we're quite excited about what we're seeing in these areas of our business.

And when you look at these businesses start to become a bigger piece of pie, do you think it sets up the enterprise to be able to kind of grow the EBIT faster than sales and a wider variety of economic environments than maybe historically?

Yes. So we've been public with this algorithm, for lack of a better term, of having 4% sales growth with operating income higher than that. We're not immune to the economic pressures. So it's tough to say that, yes, we can absolutely commit to doing that in any economic environment. I don't think any company can say that. What we're saying, though, is that we're positioned to succeed over a multiyear period with those types of numbers. I think, and we'll talk more about this at Investor Day, that the opportunity is far in excess of that, particularly on the operating income line when you look at the returns that we're seeing around some of these investments that we're making.

And I guess I wanted to follow up on one of your comments from the last call about growing the absolute dollars of free cash flow. And I guess, maybe put that in the context of capital spending, or are some of these capital investments starting to hit what I guess you would deem as an inflection point where the ROIs are really starting to accelerate?

That's true. And to me, that's like a really exciting thing as a CFO, because many times when you undertake a big capital investment, you're kind of holding your breath to see, is it going to have the returns that we had expected? And what we've done, we've already started some of these capital investments. And as I noted, like with the perishable DC example, we're seeing the returns that are actually better than what we expected, which give us conviction that we need to scale these things, and it will have the payback that we want. So quite excited about that.

All right. And then maybe we've got about 10 minutes left. So a couple of other topics. I want to -- also can't get out of here without talking about Sam's. Sam's has been putting in some pretty impressive performance, starting to grow units again. So maybe talk about what you're seeing there and kind of what the opportunity is to start growing clubs again.

Yes. So we are quite proud of what Sam's has done over the last 3 years. For 12 consecutive quarters, we've had that double-digit comps. And we just noted that we're expanding our stores again with 30 stores that we're adding over the next several years or 30 clubs, I should say. And look, when you've had 3 consecutive years of double-digit comps, I think that supports making a metered appropriate investment in this part of the business. We'll be disciplined here. We're not going to get out over our skis. This is a multiyear investment. But there are so many things that are going so well in -- at Sam's. I talked about the Scan and Pay technology. There's many other examples of that where we're just -- we're quite pleased with the progress that they're making. And I think it demonstrates that the value proposition around Sam's is really resonating with customers consistently. This is not just in a defined period over the last 12 months where we've seen higher inflation. This is consistent performance year after year after year.

Maybe let's talk about international for a little bit. And first, it seems like a lot of the heavy lifting on the national portfolios may be behind us. So we've exited a few markets. I don't know, one, do you kind of agree with that and see it the same way? And then, two, for the hyper-growth markets, how does the team approach balancing: a, the long-term opportunity that these markets could lead to with the China [ or India verse ]. The near-term pressure could be to invest in that market and kind of wait to adjusting those returns?

Well, first, I'll say just, broadly, on capital allocation, and this is not with necessarily with respect to international, but with the entirety of the Walmart ecosystem. We're always looking to maximize valuation and the return on the dollars. And so that includes divesting, as you've noted, that we've done some in the past and investing in some areas. And we will continue to be very disciplined with both those going forward to make sure that we have a portfolio of products and segments that maximize the valuation of the company. And so I think that's very important for us. You noted China and India, really excited about both those markets, excited about what's going on in our other markets as well. But those are 2 markets that certainly are faster growing. India, we have Flipkart and PhonePe. I was in India just last year right after a start at Walmart to meet with those teams and understand what they're doing, and both really exciting opportunities. Both have large portions of market share there. And I think the opportunity and what, I guess, I believe India is going to be the largest market in the world this year, surpassing China. It's a really promising opportunity in the future.

Then I think Sam's has really strong success in China. China is reopening. I think you're seeing kind of a shift in consumer spending there. Maybe towards consumables like we've seen here in the U.S. Can you maybe talk about a little bit of what you're seeing in the early stages of the China reopening?

Yes. So it has been really good. Our Sam's stores in China are 2 of our biggest and best stores in the entire club network, quite impressive with what's going on over there and huge opportunity. And that really appeals to the value proposition over there, slightly different than what it is here, appeals to a little different customer segment as well that resonates.

And then a time maybe for 1 or 2 more topics, but ESG focus from everybody, but I think one thing that does get lost is the actual amount of time Walmart does take in to focus on its associated stuff. So I guess maybe a 2-part question here is kind of what are some of the near- and medium-term initiatives? And what are 1 or 2 things that maybe we, as investors, are missing from the ESG front that Walmart's intently focused on?

Yes. Well, ESG encompasses a lot of different areas. But being the largest private employer in the world, certainly, I think the area that we're talking about and most notable is around our associates. And we've made a lot of investments there. And the focus has been on hourly wages, but we're quite proud of the complete suite of benefits and compensation that we provide our associates. And the way that we view this is we're providing careers, not just hourly jobs. We're a people-led business. We focus a lot on some of these supply chain automation investments and the technology that we're doing. But fundamentally, we are people led, and we believe that that's been a differentiator for us. And we will continue to invest appropriately in our associates to make sure that, that continues to be a differentiator for us.

Then maybe kind of where we are, labor environment, where it seems like every couple of months, we see a retailer announce some type of a wage increase. So where we are kind of in that kind of ongoing pressure more in 2023, maybe a little less than 2022, kind any comments around that?

Yes, 6 or 7 weeks ago, Bobby, we made an announcement about some investments that we were making in our associates within our U.S. stores and certain geographies to make sure that they're being paid appropriately for the work that they have. And this is going to be an ongoing focus of ours. We'll have wage investments virtually every year to make sure that our people are compensated appropriately, and this is a cost of doing business. I think fortunately for us, because we're balancing that with these other investments in our business, we can still do that while seeing dollars fall to the bottom line and margins grow.

Okay. And then maybe in the closing here, we've got 2 or 3 minutes left, but you're relatively new here to Walmart, you joined from an outside firm. Just kind of what excites you most about the enterprise strategy? And I guess I'll put it in 2 parts. Most analysts always like these 2-part questions. But let's talk about what excites you got over the next 12 to 18 and then maybe the long term as well.

Well, 12 to 18 months, look, there's a lot of uncertainty. And I don't think anybody's got a very clear picture of what's going to happen. I think that we're positioned really well because, as I noted, we're going to benefit in virtually any environment. And so I feel like we're safe and secure in that sense, and the downside is pretty limited. But longer term -- and look, this has a lot to do with why I came to Walmart, I've got a ton of conviction in the path that we have. I'm a believer that retail is going to be omni, even more so in the future. And when you think about the set of assets that are required to be successful as an omni retailer, having that physical footprint but also a strong e-commerce presence and, very importantly, having scale, I think, is a differentiator for us. And I like the assets that we have, and the cards' in our hand, and we're looking forward to playing them.

Very good. Well, I appreciate the time. Thank you again for your support, and we look forward to watching the progress.

All right. Thanks, Bobby.