Walmart Inc. (WMT) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining us today. It's my pleasure to introduce Walmart. Today, we have with us Dave Guggina, President and CEO of Walmart U.S. Dave was appointed to his current role this past February and has been at Walmart since 2018. Dave, thanks so much for joining us today.

Pleasure to be here, Kate, and nice to be with everyone. Good to see you.

We wanted to start off with getting a lay of the land with the state of the consumer. How do you view the health of the consumer today across income cohorts? And what are your expectations for the consumer trends for the rest of the year?

I would say right now, the U.S. consumer is resilient. They're being very intentional with their dollars, and they're also looking for value. And that's why the Walmart value proposition is resonating today. We focus on low prices and we focus on convenience. And you can see the results of that focus just this past quarter, if you look at our share gains, I was reviewing them with the team just last week. And we saw gains really across the board. We saw gains in food, consumables, general merchandise. We saw gains across health and wellness. And as we look towards the back half of the year, we expect to see a similar outcome across income cohorts. We expect to see share gains and unit gains.

Great. Walmart received about $2.9 billion in tariff refunds in the second quarter, which the company said is prioritizing for price investments. Can you maybe talk us through how you're approaching investing in price, whether that's the lowering the price of goods or serving as an offset to fuel headwinds? And what unit elasticity response have you seen?

So we did receive essentially all of the $2.9 billion in refunds in Q2. There's a small residual that will come in over the rest of the year. But we did exactly what we said we were going to do. We took those funds and we reinvested in price and experience. And with regards to price, Kate, there's really 2 ways that we utilize the funds. One is with rollbacks. So we had 11,200 rollbacks within the U.S. business. And another way is not taking price increases when we see the cost of goods come up, things like transportation and fuel costs, which have escalated. And we did both of those things. And again, I would reference back to the share gains that I just mentioned. We saw some of the strongest share gains across the business that we've seen in years. And that's driven by the price investments that we made. So customers are absolutely responding to it.

Great. And as an EDLP retailer, how do you manage those price gaps? Or how do you view those price gaps and how they're positioned today?

Yes. So we compete with essentially everyone, we have 4,600 stores across the U.S. We compete with regional players, national players. So we keep a close eye on our price gaps. And right now, we feel really good about our price gaps. They are strong, and it is driven by the investments that we made. And now it's really our job to work with our suppliers and take those rollbacks that we're working and turn them into the everyday low price for our customers so that they can experience them moving into the back half of the year.

And can you maybe talk about how you manage this with inflation? Maybe can you discuss the level of inflation currently in your business and what your expectations are for the remainder of the year?

So if you look at inflation for the front half of the year, we were at roughly 1.4%. Food was closer to 1% and then general merchandise was closer to 2%. As we moved into Q3 and you saw the impact of the price investments, we saw that rate come down below 1%. But again, as we look forward, we anticipate the back half to look very similar to what we saw in the front half of the year. With regards to inflation.

We wanted to make sure we asked about health and wellness and Maximum Fair Pricing. So your health and wellness sales have been impacted this year by the new regulation related to pharmacy inflation or Maximum Fair Pricing. How should investors think about this headwind in the back half of the year and also into next year with another subset of drugs being impacted?

I think I want to start by just saying we have a fantastic health and wellness business, and it is very strong. It makes up about 10% of the U.S. business, and the majority of that is our pharmaceuticals business. Now MFP or Maximum Fair Pricing was applied to about 10 high-volume drugs. About 8 of those drugs either went generic or offered their prices beyond Medicaid to essentially all consumers. And that is a top line headwind. But again, the core is strong. We saw script growth grow year-over-year in Q2. We are seeing our profitability in this sector, double-digit improvements year-over-year. And this customer is incredibly important to our business. So I just want to unpack that just a little bit. If you think about the average Walmart customer and the Walmart customer that also engages in health and wellness, the health and wellness customer spends about 3x more than the average Walmart customer. If they use Rx delivery, so we have lit up the same delivery capabilities that we have for general merchandise and for food for pharmaceuticals. So we can deliver to 96% of the U.S. population in 3 hours or less, 60% of the U.S. population in 30 minutes or less. So if you look at the Rx delivery customer, they spend almost 6x more than the average customer. We have seen this year same-day deliveries for pharmacies jump over 2x year-over-year. And for folks that are using pharmaceutical deliveries, we're seeing a 10x repeat rate, 10x improvement in repeat rate year-over-year. So this is an important part of our business. When folks lean into it, they engage with more of the Walmart ecosystem and spend more with Walmart. So we're excited about health and wellness. We have a headwind, as you mentioned, that headwind will continue into next year as they have announced 15 additional drugs that will go on MFP, but the core business here is very strong.

Moving on to just omni sales growth. The U.S. e-commerce business continues to show strong momentum. Can you talk about the fundamental drivers of that strength and the sustainability of the growth?

Absolutely. We're proud of our e-commerce growth. We saw 24% growth this past quarter. That was our 10th consecutive quarter of 20%-plus growth. And if you think about the fundamentals that drive e-commerce, it's actually not all that different from the store side, too. There's 3 things we focus on. That's assortment, price and experience. From an assortment standpoint, customers want a broad selection of goods that they need, want and love. And an example of how we're bringing that to life in our e-commerce business is marketplace. But they also want goods and services. We have our pharmaceuticals business. We have our vision business. We have our auto care business. All of these have digital capabilities as well. We have our new service that we launched or announced earlier this year with quick service restaurant delivery, and we launched some additional partnerships just last week and this week. So we're enhancing assortment. When it comes to price, it's just part of our DNA. We focus on operating at everyday low cost so that we can drive everyday low prices. And we're leaning into new capabilities like automation, physical AI to make our network more efficient so that we can reinvest into price and reinvest into experience, which is the third point that I was making. We are improving the digital experience on our website, on the app. One way we're doing that is with our new Agentic agent, Sparky, which I'm sure we'll talk about Sparky here in a little bit. But we're also taking that broad assortment, and we're making it available to customers faster. We see about 70% of the deliveries that we bring to customers' homes delivered same day or faster. In our expedited delivery, express delivery, we saw a doubling in 30-minute or less delivery year-over-year. So all of these things are driving that core e-commerce business. Other things I would note with e-com, is as the business grows, we become more efficient. We densify our first mile, our mid-mile, our last mile. We densify the volume moving through our stores, moving through our fulfillment centers that lowers our cost to operate. And then we have these 3 magical businesses that are helping reshape the P&L within e-commerce. That's our membership, which is incredibly important. That's our marketplace, which I've already mentioned, and that is our advertising business. And all 3 of those saw double-digit comps this past quarter and have a lot of momentum.

Great. You mentioned Sparky. So let's go to Agentic Commerce next, if that's okay. Obviously, Walmart has been investing in Agentic Commerce, including in its AI shopping assistant, which is called Sparky and through partnering with companies such as OpenAI and Google. Can you maybe map out the customer journey using these agents today? And how is Walmart positioning itself to capture more market share in Agentic Commerce?

Absolutely. There's really 2 things that I would highlight here, Kate. One is Sparky and we'll talk about Sparky a little bit. But then the second is AEO, Agentic Engine Optimization. So this room, I'm sure you all are very familiar with SEO, Search Engine Optimization. We've been doing that for decades. But we're entering into a new world, and I want to talk about that as well. So let's start with Sparky. Sparky is our Agentic agent. I don't have my phone on me, but if I did, I'd pull it up. If you go to the app, it's at the very bottom, and Sparky is smiling at you. And I would recommend take some time and engage with Sparky. Sparky is becoming more and more capable as we move forward in time. Sparky can now help you check out. Sparky can help you take care of customer service. Sparky has tens of thousands of recipes. So if you need to build a meal, Sparky can help you build a meal. We launched a new capability with visual shopping with Sparky. So you can now take a photo and Sparky will help you shop depending on what your mission is with that photo. When customers utilize visualized visual shopping, we see the conversion rate jump by 57% versus text-based shopping. One of my coworkers had this great example that he did recently and shared with me. He went out to his backyard, and I guess he doesn't do a great job taking care of his grass. So he takes a photo of his lawn and says, "I need some help." And Sparky, just with that context, was able to recommend seeds, lawn growth, fertilizer and help him solve that mission, build a basket of unique items that he may not even thought of to help solve that mission. And as a result of these enhancements, customers are responding. We've seen just quarter-over-quarter, weekly engagement with Sparky grow over 60%. And when customers engage with Sparky, their average order value jumps 40%. And that's because of what I just spoke to. Maybe you are having friends over to grill for the summer. And you just say Sparky. I've got 8 folks coming over. I want to grill beef, I want potatoes and I want other things. I need food for 8 people. Well, Sparky can build that meal out for you. And then it can also ask, "Hey, do you need wood chips? Or did you know that Walmart recently added Traeger Grills to our marketplace assortment and our 1P assortment, right? And these are the types of additional context you get -- we get when customers engage with Sparky. And we're seeing that result in really positive results and how customers are responding. And then on Agentic Engine Optimization. So we partner with the frontier models. And what we see here, we're really happy with. They are most often choosing to deep link out to us, meaning they send customers our way when they see applicable context. And when they do that, we're seeing fantastic conversion rates. So customers that are coming to us from OpenAI, from Gemini are converting at very high rates. And then what we're also seeing is that many of these customers are new to Walmart or returning to Walmart, which is fantastic. And then maybe most importantly, those new and returning customers have a very high organic repeat rate with Walmart. So we're very excited about what we're doing with our agent and the capabilities that Sparky has and how it's reinventing shopping. But we're also excited about Agentic engine optimization. It's early in this space, but we're leaning in.

Great. I know a key tenet, obviously, that we just talked about before was value, but another key tenant is fulfillment and delivery speed. A key competitive advantage for you is the speed, which has been a driver of your consumer engagement along with membership and marketplace growth. So can you provide an overview of where you are in the build-out of the fulfillment business in the U.S. and what you'd want the next phase of growth to look like?

Absolutely. I felt like the last time we talked, I used this analogy, but I don't know if anyone plays baseball, I do not. But I'm going to use the baseball analogy. So I would say we're in the top of the fourth inning. We continue to make progress on reshaping our network. And how are we reshaping the network? Well, we're investing in a few things. One, we're investing in advanced robotics that we put across our supply chain, which is our fulfillment network engine. We're also investing in modernized software to make our supply chain more nimble, to make it more time definite, right item, right quantity, right location, right time. When we do that well, customers have better experiences. So we'll continue that build-out, and we've got a ways to go as we're in the top of the fourth, but we're seeing real results and real impact to the business. I think one way you see that coming to life is the point you made, our customer value proposition, specifically experience and speed. As we build out our distribution capabilities and our fulfillment center capabilities, we can hold millions of items in our DC, release the right amount of units to our FCs. So you reduce your units per SKU, so you can have more SKUs, more unique assortment in FCs. That makes more items available for 2-day delivery, next-day delivery, same-day delivery and sub-same-day delivery. And then you mentioned the stores. We continue to invest in our stores, and they're interconnected to that supply chain. About 80% of our e-commerce deliveries flow through our stores, either generated directly from the forward deployed inventory or our parcels that are injected into the stores and then injected into our Spark last-mile delivery network or our van delivery network. And that is resulting in that stat I shared earlier of 70% of our orders being delivered same day or faster. We have almost 40% of all deliveries now today from our stores delivering fast, meaning delivered in hours or delivered in minutes. I had a friend who called me last week and said, I just ordered braces wax for my daughter and toothpaste. It came in 8 minutes. They were just blown away, and I looked at the order and how that happens is we have a Spark shopper, and this is in Dallas. There was a Spark shopper in the store. Customer places the order, it's 2 units. So it doesn't take very long to pick. They're able to pick it, and they spent most of the trip driving, and they were able to deliver in 8 minutes. So when we communicate that we can reach 60% of the U.S. households in 30 minutes or less, what we're saying is about a pick time of 15 minutes and a drive time of 15 minutes. So if you shrink that pick time because it's a smaller order where we make it more efficient to pick in our stores with digital shelf labels, then you can deliver faster or you could deliver further at the same speed, and that's coming to life.

And I do think you have been messaging this to the consumer. You've had your Who Knew campaign. The speed of delivery has been a big focus, too. How are you balancing the marketing dollars today between conveying Walmart's value and assortment versus speed?

Good question, Kate. I would say, for a long time, Walmart has been known for value. And how people have defined value is price. But the truth is more and more customers are not only coming to us for low prices, they're coming to us to save money and time. I think we're redefining value. And you see that coming to life in our marketing. It's not really -- I wouldn't say it's one or the other. We try to show folks that they can have both. Low prices and convenience doesn't have to be an either/or choice. And you see a lot of competitors to get convenience, you have to pay fees, all kinds of fees. I don't even know the names of all the fees because there are different that are added. We don't have those. We offer the same great prices in-store online, and we offer incredible scheduled delivery and express delivery options to our customers.