Walmart Q2 2024 Earnings Call Transcript

Thank you. Welcome, everyone. We appreciate you joining us and your interest in Walmart. Joining me today from our home office in Bentonville are Walmart CEO, Doug McMillon; and CFO, John David Rainey. Doug and John David will first share their views on the quarter, and then we'll open up the line for your questions. During the question-and-answer portion, we will be joined by our segment CEOs, John Furner from Walmart U.S.; Kath McLay from Walmart International; and Chris Nicholas from Sam's Club.

For additional detail on our results, including highlights by segment, please see our earnings release and accompanying presentation on our website. We will make every effort to answer as many of your questions as we can in the hour we have scheduled for this call. [Operator Instructions]

Today's call is being recorded, and management may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Please review our press release and accompanying slide presentation for a cautionary statement regarding forward-looking statements, as well as our entire safe harbor statement and non-GAAP reconciliations on our website at stock.walmart.com.

Doug, that concludes my intro. We're ready to begin.

Thanks, Doug. I want to start with thanking our team for delivering on a good quarter. We're pleased with our results and the continued progress we're making executing our strategy. Since we shared our financial outlook at our Investor Day in April of last year; on average, we've increased our quarterly sales by more than 5%, and our quarterly operating income by 9%. These financial results reflect that our value proposition extends beyond great prices into convenience. Our combination of price, trust, assortment, and experience has made us more relevant with our customers and members than ever before.

Q2 sales, operating income, and EPS all exceeded the top end of our guided ranges. Second quarter total net sales growth was 4.9% on a constant currency basis, with all three operating segments outperforming our expectations, aided by strong global eCommerce growth of 21%. In Walmart U.S., comp sales growth of 4.2% was driven primarily by strong traffic and unit growth across both stores and digital channels. Customers continue to be discerning and choiceful, looking for value to maximize their budgets while leaning into seasonal celebrations. The pace of sales was largely consistent by month during the quarter. Across categories, we're providing low prices and winning customer consideration, including in general merchandise, with Walmart U.S. comp sales growth in hardlines, home and fashion.

We're also seeing higher engagement across income cohorts, with upper-income households continuing to account for the majority of gains even while we grow sales and share among middle- and lower-income households. We're seeing private brand penetration continue to increase. And we're highly encouraged by customer uptake of our new food brand, bettergoods, and the early excitement surrounding the relaunch of our young adult fashion brand, No Boundaries.

ECommerce sales in Walmart U.S. were up 22%, and weekly active customers increased 20%. In addition to the great progress we're making in our fulfillment centers, the close proximity of our stores to customers has also unlocked new capabilities and enabled faster delivery times. Store-fulfilled delivery was up about 50% in Q2, with customers increasingly choosing and paying for delivery of their eCommerce orders in under one hour or under three hours.

Our International business delivered constant currency sales growth of 8.3%, reflecting strength in Walmex, China, and Flipkart. Across markets, sales were strongest in food and consumables categories, and we're encouraged that general merchandise growth has improved year over year. Our private brand penetration increased in multiple markets as customers continue to focus on value. In our Bodega and Walmart formats in Mexico, nearly half of customer orders included a private brand item in Q2.

ECommerce sales in our international markets were up 18%. Customers are responding favorably to the increased convenience as we scale pickup and delivery capabilities. In China, we increased eCommerce orders delivered within one hour by 28% to 59 million orders. And in India, Flipkart grocery grew over 50%, while providing next-day delivery in over 200 cities. And in Canada, our Delivery Pass members drove more than 40% of grocery delivery sales, with order frequency significantly higher than that of nonmembers.

Sam's Club U.S. comp sales ex-fuel increased 5.2%, including eCommerce growth of 22%. Digital engagement remains strong, with Scan & Go penetration surpassing 30%. And with our increased convenience of our Just Go technology now operational in 325 clubs, over 50% of our members can exit without a check, improving member NPS by more than 800 basis points compared to the clubs without this technology. The Member's Mark private brand continues to drive excitement as sales and digital penetration increased during the quarter. Sam's is also growing membership across all income levels and with younger demographics, with Gen Z and millennials constituting about half of new members in Q2, a positive signal about the future growth of the business.

From a margin standpoint, consolidated gross margins expanded 43 basis points, led by Walmart U.S. and International segments. We're focused on providing everyday low prices for our customers and members, and we're managing U.S. pricing aligned to competitive price gaps. Customers and members are responding to our value proposition. We're seeing continued sales growth, share gains and higher gross margins. We're demonstrating that we're able to grow our business on a sustained basis in the absence of price inflation. Global eCommerce losses continue to narrow, most notably in our Walmart U.S. and Flipkart businesses. While improved business mix is helping, we're also encouraged by the progress in core eCommerce margins due largely to another quarter of nearly 40% reduction in U.S. net delivery costs per order. Flipkart's contribution margin also expanded significantly in the quarter. Scale and delivery density are key. As more customers are shopping with us more often across more categories, we're improving delivery density and transaction-level margins.

With improving business mix, we're continuing to reshape our profit composition as we scale growth drivers such as advertising, membership, marketplace and fulfillment, and data analytics and insights. Our advertising businesses around the world continue to scale, with global advertising up 26%. This was driven by another strong quarter from Walmart Connect in the U.S., which grew 30%.

We're also pleased with the trends in our membership programs. In the U.S., Walmart Plus membership income grew double-digits again this quarter, and Sam's Club U.S. reached another record-high level for member counts and Plus member penetration, resulting in 14.4% membership income growth. Within International, membership income in China from our Sam's Club business grew 26% as member count continues to increase. And in May, we opened our 48th club in China, and we welcomed around 50,000 people on opening day.

For Marketplace and Walmart Fulfillment Services; in the U.S., we've now seen more than 30% growth in each of the past four quarters as we continue to increase seller counts on the platform by double-digits. Growth from sellers using our marketplace fulfillment services increased 800 basis points in Q2, surpassing 40% penetration. Sales in fashion, toys, hardlines, and home all grew more than 20%. Outside the U.S., we're seeing similar trends as we enhance our capabilities and product assortment. For example, Flipkart delivered double-digit top-line growth and more than double the number of units they delivered same-day. In Mexico, we grew marketplace items and sellers by around 60%. And in Chile, we launched cross-border trade, adding sellers from China and the U.S. to our local marketplace offering.

Within data analytics and insights, Walmart Data Ventures continues to see strong results as clients value the insights we provide, bringing together consumer behavior with omnichannel sales and inventory trends across our platform.

Our client base has increased nearly 200% versus last year as we launch new tools and enter new markets, including the expansion of our Walmart Luminate product in Mexico in May.

We're also optimizing our business model to deliver greater efficiency. I've been encouraged by how our teams have renewed our long-standing, everyday low cost operating mindset. Ideas are being implemented across the organization and they're beginning to yield tangible results. By leveraging our scale as a global enterprise, we're finding savings in supplies, transportation, storage, third-party service contracts and various other expense categories. In other areas, we're maximizing the utilization of our assets and using tech to streamline our operational processes. Together, these efforts translate into meaningful savings.

We're also making good progress on our supply chain transformation, and we're seeing the direct benefits to customer experience. In Walmart U.S., more than 45% of our eCommerce fulfillment center volume is now automated, and we have about 1,800 stores receiving some level of freight from 15 of our regional distribution centers that are in varying stages of automation implementation. And as a result, our supply chain teams are processing more units through our DCs and FCs. And while we're spending more on capex than we have historically, we're pleased with the returns from these investments, particularly the automation of our supply chain. We expect these investments to yield returns that will allow us to increase our return on invested capital each year.

Importantly, our evolving business model, with more diversified and durable sources of profit, has provided the ability to fund investments and prices for our customers, wages and benefits for our associates, and leading-edge technologies to power our growth, all while delivering on our financial framework of operating income growing faster than sales.

Wrapping up Q2 results, consolidated adjusted operating income grew 7.4% in constant currency, reflecting strong growth in sales, gross margins and membership income, partially offset by expense deleverage across segments largely related to increased marketing and higher variable pay expenses tied to our above-plan performance. Operating income also benefited from reduced eCommerce losses during the quarter. Adjusted EPS of $0.67 per share was above the upper end of our guidance of $0.62 to $0.65.

Turning to guidance. For the first half of the year, we reported net sales growth of more than 5%, and adjusted operating income growth of almost 10%. We are raising our full year guidance to reflect strong first half results. Looking at the second half of the year, we expect the business to achieve sales growth in line with our financial framework and for sustained structural improvements in incremental margins. This should result in operating income growing slightly faster than sales when looking at the second half in total. We now expect full year FY '25 sales growth of 3.75% to 4.75%, and operating income growth of 6.5% to 8% versus our prior guidance of growth of 3% to 4% and 4% to 6%, respectively. Adjusted EPS is expected to be $2.35 to $2.43 versus prior guidance of $2.23 to $2.37.

We're focused on executing on the things that we can control, focused on our business and serving our customers and members. But the economic and geopolitical backdrop that we operate in is perhaps more uncertain than normal, and we're not completely immune from the volatility that can result from this. And while we have not seen any additional fraying of consumer health in our business, other economic data out there, as well as the state of affairs globally, would suggest that it's prudent to remain appropriately cautious with our outlook.

Reflecting these considerations, our guidance is for growth in Q3 sales of 3.25% to 4.25%, and operating income of 3% to 4.5%, with EPS expected to be $0.51 to $0.52. There are two primary factors influencing Q3 operating income growth. First, as is the case in most years, the timing of festive events in our International segment has a bearing on sales and profits by quarter and can affect year-over-year comparability in growth rates. And second, the timing of planned expenses is more concentrated in Q3 versus Q4.

In closing. With the results we've delivered through the first half, we're in a good position to achieve our financial goals for the year. Our business model is delivering strong momentum. eCommerce is sustaining its strong growth and pulling new value streams and profit pools along with it. Simply put, our value proposition is broader and more relevant to our customers and members than ever before.

We appreciate your interest in Walmart and are now ready to take your questions.

Oliver, I'll try to address each of those questions real quickly. In terms of the outlook for the consumer, let me characterize this or give some context in the second quarter. So each of the months of the second quarter were relatively consistent. If you were to look at the pure comps for each month, July was actually slightly higher, but we think that that's largely a result of where the days of the week fell in the last month of the -- or the last week of the month. So we did not see a step-down. And our outlook for the back half of the year is really for more of a continuation of what we've seen. Even in the first couple of weeks of August here, things have been remarkably consistent. So I know everyone is looking for some piece of information that maybe indicates further weakness with our members and our customers. We're not seeing it. But we feel like we're, as I mentioned in my prior response, measured in our outlook and positioned well.

With respect to general merchandise, I'll make a couple of comments, and maybe John or Doug wants to jump in, but we like what we're seeing in general merchandise. First time in 11 quarters that we've seen positive inflection there. I think some of this is not so much what's happening broadly in the economy, but specific to our business. If you take our Marketplace business as an example, there are many categories that grew over 20% in the quarter. As we're expanding our assortment, we're more relevant to customers. And I think that's driving some of what we're seeing in general merchandise.

Lastly, on eCommerce. I would say that that continues to have an outsized contribution to our results. If you look at the second quarter and you were to parse out the various pieces of our business, for example, advertising, membership, fulfillment services; core eCommerce, without the benefit of any of those, was the single largest contributor to our year-over-year operating income improvement. So we really like the progress that we're making there, John may want to comment on some of what's happening in the U.S., but continue to make good progress.

Yeah. And hey, Oliver. It's Chris Nicholas here from Sam's Club. Just to build on that answer from a Sam's Club point of view. Our incredible associates have done a great value for -- a great job for our members, and our results are reflecting that. And if I think about how we've done that, digital engagement has been a really big part of it. So if we think -- if we take a look at the numbers, John David talked about some of them, but eCommerce is up 22%. That's delivery from club, that's delivery from fulfillment centers and that's pickup from club, and all three of those are resonating really well.

On top of the eCommerce piece, we have a digital engagement in-club with our Scan & Go up 190 basis points. Our Just Go frictionless exit that John David talked about is really resonating, I think last -- when this went to print, it was 325. We're now at 380 clubs. So we're feeling really good about that. And what that does is it helps drive just a much deeper engagement with our members. They are spending more, they are more prone to renew, which we feel really good about. And it's worth mentioning, and it's something we've talked about before, that the Sam's Club eCommerce business is profitable and it's growing rapidly. So we're feeling good about the mix, we're feeling good about the offer. And it's across the membership base too.

Hey, Kate. Chris Nicholas here from Sam's Club first, and I'll just touch on the membership growth piece. We are seeing all-time high membership growth, we're seeing all-time high Plus penetration too. So the health is really good. And we're also seeing growth across all income cohorts and all generations. One of the really exciting things we're seeing is that 50% of the growth that we saw in the quarter was Gen Z and millennials. And that really talks to a really strong health for the future. We're getting people early in their lives and we see them continuing to be sticky. The reason that it's working is we're focusing on all parts of our value proposition. So we're focusing really hard on enhancing the core value proposition, we're focusing really hard on that deepening of digital engagement. And Member's Mark is doing really well as well. And you saw that in terms of transactions, our units were ahead of comps too. And what's good about that for a membership model is the more engagement you have, the more frequently that they engage with you, the more prone they are to renew. So just good-quality health of the Sam's Club business drives more members in and drives that renewal rate up.

We still have lots of room to improve, but the progress we've made on the eCommerce experience across businesses, across markets, puts us in a position where we can play more offense and be more aggressive as it relates to marketing. So whether it's that or the capital investments in supply chain, what you're seeing is that we are playing offense.

Simeon, this is Doug. We are being thoughtful and deliberate about reinvestment. And we start out thinking about the customer first, what's the level of price investment? Where are gaps? And as we've been saying for some time now, we're feeling comfortable with where our gaps are and we'll continue to support those as needed. And it is great to see prices come down. We are wired to help bring prices down. And we'll continue working on to get more rollbacks to help customers and help members save money.

The second thing we think about is our associates and where is our level of compensation, what investments need to be made there. And you've seen now for years a string of different investments that we've made in our associates, whether that's hourly or management. We obviously think about shareholders all the time. And it's not lost on me that our operating income percentage came down for a period of years as we made investments, and it feels good to have turned the corner on that and have a healthy business mix so that we can do both in parallel.

So whether it's a one-year operating plan or it's a five-year plan, we're kind of in that season right now where we think about a five-year view, we're trying to be deliberate about reinvesting in the business so that the momentum continues and we don't find ourselves having managed the short term to the detriment of the long term.

I'll just add. On the newer businesses, we continue to see great progress there. In the quarter, just to maybe cherry-pick a couple of them. If you took advertising and membership, those two alone accounted for over 50% of our operating income growth. And so as Doug and others have alluded to, all these things work together. We've got to be really good at the core basics to have those work, but continue to be pleased with these faster-growing, higher-margin parts of our business that you all are seeing are changing the reflection in terms of how our financials -- our margins are inflecting higher.

Hey, Krisztina. Good morning. It's John. I'm happy to address the question. Of course, I'd say we're proud of the progress in Walmart Plus. The team is working really hard on ensuring that, number one, the offer is built in such a way that it's very relevant to our customers all across the country. The core of the offer, of course, is delivery without cost from either the fulfillment centers or stores. And our ability to attract people starts with the offer; our ability to retain people ends with how well we execute that proposition. So we spend a lot of time and energy. We start every week going through all the metrics on how we did on the week before, the month before, the quarter before, and then building roadmaps to ensure that any friction that we are putting in front of customers, we're doing everything we can to try to eliminate that. We know that when we deliver what we call a perfect order, which is part of our [Indecipherable] customer experience score, that the likelihood of repeat and renewal goes up significantly. So we focus a lot on ensuring that customers get what they ordered, when they ordered it, with only appropriate substitutions when those are absolutely necessary. And those are all helping.

In terms of Assist and other things, we have a membership program that should and is, we believe, very applicable for customers at all income brackets. We have members who are delivering very frequently who are below $50,000 a year in income, and we have members who are delivering frequently and growing above $100,000. And so this flexibility is super important. And as I said earlier, when a customer moves from just shopping in the store to stores in eCommerce or stores in eCommerce and they become Plus, and then within Plus, they use what I described earlier as on-demand sub-three-hour delivery, we really see spend rates and the amount of time and energy, money people are spending with us go up significantly. So it's about the entire journey. And as Doug said earlier, I wouldn't weigh too heavily on one metric in particular. Walmart Plus is an important part of our program. It's not the only thing we do. We do a lot of other things. But for the people that join, we want to make sure that we deliver the very best experience that we possibly can that's within our control.

Yeah, Corey, first, I would say we want to sell brands. It's important to Walmart to sell brands and show a value, and so we're hoping that our branded suppliers do the right things with both quality and price to get to the value that our customers want to see. I would guess that private brand continues to grow, although it'd be okay with us if the percent of total leveled out for the reason that I've just mentioned. Our teams are doing a better job with private brand as it relates to both the development of the product, the quality of it, and the value. So that's good and helpful for customers and we'll keep doing that.

Looking ahead, from a pricing point of view, fresh food is behaving like it does. Supply and demand moves faster and things adjust, whether it's the proteins or it's fruit and vegetable. General merchandise has come down. My guess is it doesn't come down a whole lot more. But it's great that the prices are down and that rollbacks are being reflected. In drug -- grocery, processed food consumables are where inflation has been more stubborn. And as we mentioned, we still have slight inflation even in last quarter in the food categories. So I'm hoping that what we see from our branded suppliers is investment in price, and we're seeing that from some of them and not others. We have less upward pressure, but there are some that are still talking about cost increases, and we're fighting back on that aggressively because we think prices need to come down.

So I don't forecast that we're going to see a lot of deflation in our number. Looking ahead, it probably levels out about somewhere near where we are, with the mix being reflected as I just described.

I'd just add to that, Paul, that if you look at some of the drivers of the gross margin improvement, as Doug noted, business mix drives a large part of that. We've also seen improvement, as I mentioned earlier, in just core eCommerce losses. Within the core merchandise mix, we had a little bit of benefit from improved shrink in the quarter, similar to what we saw last quarter as well, as we were at higher levels last year. But as Doug noted, we're advocating for our customers. We want to drive everyday low prices, and we're not intending to achieve any of our margin performance by passing this along to our customers and members in the form of higher prices.

What does BBD stand for?

Kelly, this is Doug. I'll go first, and if anybody wants to add, they can. I don't know that we can add a whole lot more color, except to say that value matters to everyone, whether you're above or below $100,000 in income. We do see behavior differences in the lower-income levels, more focus on opening price points, end-of-month behavior looks different, all the things that you would expect, but they still need us for general merchandise price points. And as it relates to higher-income people, they can buy more discretionary goods and they can pay more for convenience, and we're offering all of it. So I think our future looks like it's got a spread across income levels that's different than our past because of convenience. I think the Walmart Plus membership, delivery, the things we're doing with remodels, John, in the U.S. stores, I think all these things are coming together to give us a shot at continuing to have growth with higher-income levels regardless of what happens in the economy.