Q2 2023 Walmart Inc Earnings Call

<unk> sales were strong up nine 9% in constant currency.

Currency headwinds negatively affected reported sales results by about $1 billion.

Each of our major markets delivered positive comp sales with Mexico, and China, leading the way.

E Commerce sales on a constant currency basis grew 15% on top of strong gains last year.

Comp sales in Mexico increased nearly 11% with strong growth in stores as well as ecommerce sales, which grew 18%.

The team is doing a good job reinforcing our price message and positioning as customers manage through this inflationary period.

And China comp sales were up more than 14% with strong growth in e-commerce sales, which increased 77% in the quarter and more than 150% on a two year stack.

E Commerce penetration continues to climb in both our Sams clubs and hypermarket stores as customers increasingly choose omni solutions to meet their shopping needs.

Canada comp sales increased more than 10%, even as higher levels of inflation are starting to pressure consumer spending and discretionary in general merchandise categories.

Flip cart continues to meet our expectations and the team is gearing up for big billion days.

I traveled to India last month and was impressed by how the flip cart and phone paid teams are innovating for the customer and driving growth.

<unk> continued to see strong growth with annualized <unk> of over 830 billion, reaching a record level of monthly transactions of about $3 1 billion.

International operating income in constant currency increased more than 28% partially attributable to the previously mentioned insurance recovery for prior operational disruptions in Chile.

Sams club had another strong sales quarter with comp sales up 10%, excluding fuel and tobacco and increase of more than 20% on a two year stack.

<unk> transactions increased nine 8%.

Ecommerce sales grew 25% with strong contributions from both curbside and ship to home orders.

Membership income was up nearly 9% with another record high quarter and overall member counts and continued growth in plus member penetration.

Sam's added more new members in Q2 than any other quarter in recent years benefiting from membership campaigns.

Sam's leveraged expenses of 131 basis points, including fuel and 72 basis points, excluding fuel due primarily to higher sales and lower COVID-19 cost, but gross margins were down as elevated markdowns supply chain and fulfillment cost and a 70 basis point inflation related LIFO charge pressured profitability.

As a result operating income declined about 35%.

Now, let's turn to guidance with the updated financial guidance. We released last month, we outlined the pressures that led us to take a more conservative outlook for the current year profitability.

Let me take a minute to provide you with more detail.

When we provided guidance three months ago, we didn't expect food and fuel inflation to accelerate to the levels that we experienced in Q2.

In fact, Walmart U S food inflation was up double digits year over year, and we saw a nearly 400 basis point step up as the quarter progressed compared to levels at the end of Q1.

The rising cost for a central items and customers re prioritization of spending led to significant mix shifts in our business.

Grocery sales mix increased nearly 300 basis points, whereas general merchandise sales mix decreased more than 350 basis points.

This resulted in additional general merchandise markdowns in our U S business, particularly in apparel at a time when inventory clearance was already higher than expected in the industry.

Higher fuel prices also pressured our supply chain expense.

We finished the quarter on a strong note. However, and ahead of our updated Q2 guidance provided last month in the Q3 back to school season is off to a solid start.

Contributing factors to the better performance included strong sales at the end of the month with good flow through to the bottom line and lower than expected supply chain cost.

We're taking additional pricing actions in Q3 to improve inventory levels in the back half of the year and we built in more conservative category mix assumptions within our guidance our sales and profit view reflects trends, we've seen year to date as well as the uncertainty around inflation and consumer spending in the coming quarters.

Updated our fiscal year 'twenty three guidance to reflect the better Q2 results versus the guidance we provided in July .

We continue to believe the sales and profit guidance, we provided at the time for the back half of the year appropriately reflects elevated uncertainty in this environment and is our best view of expected performance.

For Q3, we expect net sales growth of about 5%, including comp sales growth of about 3% for Walmart U S.

We're expecting operating income to declined 8% to 10% and adjusted EPS to decline 9% to 11%.

For fiscal year 'twenty, three we expect net sales growth of about four 5%, including comp sales growth of about 4% for Walmart U S.

We expect adjusted operating income and EPS declined 9% to 11% <unk>.

Excluding the effects of divestitures. This would translate into net sales growth of five 5% and a decline in adjusted operating income and EPS of 8% to 10%.

Before I close I'd like to share my perspective, as someone that is new to Walmart and meeting many of you for the first time.

I'm excited to join the company at such an opportunistic and transformational time.

Certainly in retail broadly is being pressured right now, but that shouldn't detract from the incredible opportunity that we have in front of us it starts with our mission of helping people save money. So they can live better.

We do that every day at a scale that is unmatched by helping people be able to buy the things that they want and they need.

This mission permeates, our culture and everything that we do.

I've joined an exceptional leadership team their history of operational excellence their strategy. The drive to win is simply something that I wanted to be a part of.

And you combine that with the resources, we have and the investments, we're making in things like supply chain automation, improving our e-commerce capabilities and diversifying our portfolio with higher margin products and services like data and advertising that will result in more durable earnings streams as they scale.

We have the potential to not only be relevant in the next chapter of retail that helped define it and when we execute on these things we have the ability to appreciably increase our shareholder value overtime.

I believe that some of the best days of Walmart or in front of us.

I look forward to working with you and now we'd be happy to take any of your questions. Thank you.

Thank you we will now be conducting a question and answer session.

If you'd like to ask a question today. Please press star one from your telephone keypad.

Please go ahead with your question Keith.

Let me first start to if you like to remove your question from the queue.

Thank you, we'll take our equipment.

Sorry to pick up your handset before pressing the starkey.

Let me address questions from as many participants as possible. We ask you. Please limit yourself to one question.

Thank you.

First question is from the line of dermal with Guggenheim Securities. Please go ahead with your question.

Good morning.

John David Welcome Congratulations.

Thank you.

Maybe two quick questions if I could the first one.

Doug you mentioned that in a sort of middle and higher income shoppers are choosing Walmart just wondering if you can elaborate some more on the trade into Walmart that is allowing you to take market share in grocery and the second question is just wondering if you could give us a little bit more flavor on what you're seeing what you saw sort of with sales late in the quarter.

And what you've really seen so far early Q3. Thanks.

Yes, Hi, Bob This is Doug I'll kick it off and then ask John to comment.

Walmart U S business, we have seen mid to higher income customers come to Walmart looking for value as you would expect food and consumables in particular are places where they're looking to save some money. That's not a total surprise I think the strength of it is encouraging and as it relates today end of the quarter.

There are several things going on fuel prices started to move a little bit back to school was strong and then this income phenomenon that you pointed to also provided some some strength to the last week or so of the last month of the quarter, which is a little different than the pattern that we had seen in the first two months of the quarter.

Hey, Doug it was a bit different than in May and June for sure.

Ed.

As led to at the beginning of Q3 being stronger in places like back to school.

Consumables continue their momentum.

And I think.

No it really changed in late Q3 early Q.

I'd say late Q2 early Q3 was less traffic and it was a bit stronger than what we've seen in the gym.

Two months.

We were laughing before the call started today about some of the anecdotal stuff that's going on yes. It won't surprise you that backpacks are strong for example, but it does surprise us how strong mens flannel is and we've got a program. That's just under $12 up about two of them personally.

Great value and at the same time some of our clearance price points have gotten really low we're trying to work through what we would call season to apparel and we've got new stuff selling well. So it's almost like you can point to different areas to kind of make the case for what you want the sales story.

Thank you.

Next question is from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.

Hi, good morning, Thanks for taking our question.

Quick question is centered around markdowns were curious if the level of markdowns that planned to be taken in Q3 will be at a similar level as what you did for Q2.

And it sounds like inventory won't be much cleaner by Q4, but it seems like there's still a lot of inventory in the industry and the consumer that might need to be motivated by promotions given the amount of inflation, how should we think about the markdown environment than in Q4.

Even in the context of cleaner inventory at Walmart.

Hey, Kate this is Doug.

Thanks for the question I think what we should do is to hear from all three segments as it relates to that we've made progress John why don't you go first but let's also here from from Katherine from Judah.

Good morning, Kate.

I will start with the second quarter.

From from the end of Q1 and Q2, there was some definite progress in inventory of about 750 basis points of improvement.

Q2 as.

Being most urgent to clear through the apparel and summer seasonal that we need just out of the way and sold before Q3 really began to arrive. We certainly made progress in apparel theres more work to be done on inventory in general with a 25% increase in about 40% of that inflation and then the remaining.

Two things one it helps us in terms of in stock we were out of stock last year all throughout the year. So we have made improvements on in stock I think our results in many categories reflect improvements in availability and in stock. But then there is some backlog that we continue to work through at the end of Q1. We said this would take a couple of quarters to work through I would just reiterate that that.

It remains true and we will continue to leave room to make sure that we manage our inventory levels, well and head into a position in Q4 and the end of the year that we'll be proud of.

The fact that we were so lean last year.

Combined with how much inflation impacted the number is kind of been lost in the story, but it's true that we've got too much inventory and that that credit mark down pressure, particularly in Walmart U S apparel.

When we look at the overall inventory is John Davis as already commented today. It is not like the vast majority of those vast majority of it is merchandize that we didn't want we just were turning goods a year ago and the year before that frankly, it's such a high level that we needed that inventory just to fill side counters and to fill our features that's right in <unk>.

2020 'twenty, one we would have had record sell throughs in seasonal categories.

Markdowns at the end of season, and so of course, there is some normalization to get back to where it might have been before the pandemic began but again, we still have something some time to work through the remaining excess inventory, we're repeating ourselves, but the level of and the pace at which inflation changed in the first quarter and that continued for.

Food and consumables into the second.

Just cause behavior to flip fast and that caused apparel to be more difficult than what we anticipated and that's where the dollars are kept pressure came from Curt do you want to go next and really to say.

If I look at our inventory position at the moment. So I'll ask jes like we talked about we've had 10 quarters of double digit comp.

For the last two years, we have struggled to stay in front of having enough inventory and then so we're off a deflated base. When you look at what our competition is.

They see then I'll say have the contraction with inflation, what we see.

Payments that we've got really good quality inventory, we're really happy with what the seasonal sets. We've got Halloween looks fantastic back to school back to college as being good tailgating has been great.

I think what I would say is in our number in this quarter a portion of it has been Mark Downs and a portion of it is actually an inventory reserve because we wanted to get in front of it and just make sure that we put aside the money for Q3. So that we can have a really strong Q3 kind of results.

How we.

Addressed markdowns in Q2.

Yes, our international we saw some good progress on inventory quarter on quarter helped by the FX position on that but underlying as while I think you guys are today about 75% of our increase year on year is absolutely plot in Florida.

It may Miss that we had last year is really coming through and I think that's the same for athene for everybody. We just didn't have enough inventory at that time that leaves about 25% today, which is some GM categories and a couple of markets, specifically, which would be July in Canada.

I am very comfortable with the way that the market now.

With that and just as a reminder, ladies Chile, a core trend is a months and yet that may enterprise core trends that were already seeing some of that clearance.

Thanks for that market.

Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

Hi, Good morning, guys. Thanks for taking the question just want to talk a little about grocery.

Strength, there, particularly in food can you talk about pricing. How you are managing that I know units. It looks like they were down for the quarter, but improving I guess flattish as you exited the quarter, just how you're thinking about pricing relative to unit.

What's the promotional environment you are seeing.

Within grocery and just how the grocery strength is split in.

In store versus online and curbside. Thank you.

Hey, good morning, Peter It's John let.

Let me let me take your question in parts for just a second here I mean first.

Value is always top of mind when it comes to us and deciding how they want to serve customers. So and we'll always lean on the on the value for the customers above other things and what we wanted to do and what we've tried to do throughout this entire period.

Is go up as late as possible.

We certainly have been passing pricing through when we see things like landed cost of goods going up those have to be pass through we're managing our supply costs as well as we can units did strengthen throughout the quarter.

Particularly in July late July I think you heard that earlier, so seeing some positive units. There was was refreshing, giving and how do we had started the quarter fuel prices were coming down. So we think that could have had some of an impact as well.

In terms of the market.

We're really focused on everyday low price, we have a strong rollback campaign all across the store, which would include food consumables and general merchandise.

And then in general just across the food categories. Our availability improvements I think you can see in stores more consistently and across categories. Just youll remember this time last year, we had pockets of out of stocks that kept emerging.

The only one that we really face in the second quarter in a big way was baby Formula which is now improving.

The unit stories, one the transaction count being up a little in this environment is also important to call out.

<unk> basket was way up but it's great to see transactions grow in the Walmart U S business also.

Thank you. Our next question is from the line of Steph Wissink with Jefferies. Please proceed with your question.

Okay.

Good day, everyone I wanted to follow up Doug on your comments regarding how the bank. It is shifting for consumers I think you mentioned in the protein category and even some areas.

The label strengthening can you take us into the household budgeting that youre seeing with respect to your transaction structure and then as you're looking at your guidance for the back half maybe a follow up would be what you're assuming in terms of the basket composition.

Lots of good or even within private label versus National brand. Thank you so much.

Yes, John you jump in here too I think what you should.

Takeaway from Q3 and Q4 guidance.

And the environment to look a lot like Q2.

And as it relates to the choices people are making the thing I would call out John variety.

<unk> got all kinds of income level shopping in different ways and we've seen strength in some categories. It's really encouraging for those that are under the most pressure that are most price sensitive.

Pivot brands are stronger pack sizes or different opening price points, John you might talk a little bit about what you saw at the holiday meeting looking ahead for things like Thanksgiving meal. The team's done a great job of protecting opening price points for people that are most price conscious.

Steph I was thinking back.

One of the meetings, we had in New York in 2020, we talked a lot about serving customers flexibly as we develop the different businesses and so just to tag on to Doug's comments, serving customers in store is something we have that.

Fresh ourselves on a long time, our pickup business continues to grow delivery is growing with Walmart plus so the variety of ways that we can serve customers I think has been helpful, especially given the number of shifts customers have had in their lives. The last couple of years from now.

Working at home and then meaning in many cases back out into the workplace, though as customers change. We can we can serve them a number of ways. When you think click into products our wide portfolio of products both in e-commerce and in stores, including the numbers you heard from John David earlier marketplace gives us the ability to serve a wide range.

Are customers and then as Doug mentioned last week, we had all of our managers together in Denver, which is always a fun exciting experience to get the team together.

But what I heard consistently is the team is doing a very nice job balancing out how to improve quality and sell higher price points and remaining focused on opening price point. So yes.

Thanks, giving meals.

In a position where you can buy an entire mill for under $50 for a family of four is exciting so theres a value play it is a quality play and wherever the customer goes and how things shifts will be ready to serve them and we're building the capabilities to be able to do that at will.

Steph I would just add this is John David as it relates to our guidance in the back half of the year that the swings that we've seen in consumer behavior have been.

Difficult to predict and Ah patient, which they've happened has been sharp and so our guidance for the back half really just assumes.

No change in what we're seeing in the second quarter in terms of mix changes in our business.

Thank you. Our next question is from the order to Alaska with UBS. Please proceed with your question.

Good morning, Thanks, a lot for taking my question and welcome John David Wong.

Thank you.

Walmart's been experiencing some discrete and arguably temporary factors that are weighing on its profitability. This year.

<unk> staffing issues of <unk>, and the well documented inventory issues.

Looking towards next year when some of these inflationary pressures.

Cost pressures are going to seemingly rule rollback.

And you will have moved through some of the challenges and the underlying.

Drivers of the operating alternative operating profit grew should continue why wouldn't Walmart position.

Position to generate growth.

Above its long term algorithm in 2020.

Sure I'll take that Michael Thanks for the question.

Certainly we've incurred some cost this year that are more call it onetime in nature related to supply chain and higher inflation.

But it's.

It's difficult to predict how long that will persist certainly the inventory situation has gotten better but the effect on the mix changes in our business that are largely the result.

Of higher inflation and that May persist for some time and so we're being cautious with respect to the outlook. We're obviously not giving guidance for next year right now.

What I would point you to is the conviction that we have in our long term plan has not changed has not wavered. When you look at the long term plan that was laid out by the management team previously in terms of what we're doing with the flywheel strategy the ability to grow operating income faster than revenue and you look at that over a multi year basis.

Much conviction today as we did when we laid that out so very excited about the future but.

The short term period. This is a moment in time and we're being cautious with respect to the outlook because theres a lot that we don't know.

Thank you. Our next question is from the line of Edward <unk> with Piper Sandler. Please proceed with your question.

Hey, good morning, Thanks for taking the question John David curious in your perspective, given your most recent stop on Walmart advertising and Fintech businesses. I know you have a lot of experience from people on that.

Do you have sense kind of where they're at today and kind of how do you think about the longer term growth opportunity. Thank you.

Sure I appreciate the question.

Certainly I am a believer in what's happening in digital payments fintech broadly and the secular tailwind that exists there with consumer behavior moving more digital more online.

If you look at the investments that Walmart has been making there and those areas whether it be expanding their e-commerce capabilities their marketplaces, even getting into financial services as I have an early peek into what the company is doing and I've got to say I'm very impressed with.

The broad capabilities and the resources devoted to this and so I think that's a huge opportunity for Walmart going forward and frankly.

One of the reasons that I'm, so excited to be part of this and help shape. This outcome.

Maybe it's what Ajay.

Financial service as shown pay.

<unk> had that we would add John David <unk>, which says as well and got to visit the baseball Scott.

You'll have seen from the.

Scripts that we had today.

Danielle.

<unk> <unk>, two 830 billion last quarter that was $770 million. So really good progress there and they are also now got monthly transactions of $3 $1 billion, a month, which is an incredible I think whats really encouraging with the way that direct pricing. This space is that.

And then looking not only at payments, but also imagine services in that two sided network is an important part of that but equally and to expand into financial services, while we say real focus at the moment on insurance and pushing that.

That knowledge and the ability to share that knowledge around the world.

Other markets, such as Mexico from a best practice and what they should be looking at has been incredibly valuable I'm one of the real benefits of being a global company I'll just add Judy I shared the <unk>.

<unk>.

When we went to India and met with the team to put it in perspective, what phone pay is doing and if you look at the largest.

Digital payments companies outside of China, and the World phone pay after a very brief history as already roughly two thirds the size of that and what is going to be the largest market in the world in a very short period of time. So it's a really exciting opportunity sure. Thank you also asked about advertising the relationship between digital growth marketplace.

Grove advertising is something that we're trying to take advantage of.

And in the case of the U S business the ability to attribute sales later on to in store transactions makes us uniquely positioned and we made a few enhancements lately for people that are consuming advertising from us.

Doug and and knowing more about customers in the way they shop and knowing more about them in retail is important and the growth in pickup and delivery and the growth in plus the growth in marketplace and E Commerce, all help us be able to.

Identify the right sellers and suppliers that we can connect hence the term Walmart or the name Walmart connect you can connect them together to have an environment, where not only is it accretive to the profit and loss statement, but more importantly accretive to the customer experience and help them get to exactly what theyre looking for.

I can't remember a business with the margin structure of the advertising business here at Walmart and having 30% growth for the quarter was nice to have.

Our next question is from the line of Kelly Bania with BMO capital markets. Please proceed with your question.

Okay.

Hi, Good morning, and I'll add my welcome to you John David.

Joey.

A lot of comments on the inventory, but just had a couple of more.

Can you clarify.

Dollar amount of inventory that you estimate would be excess and can you help us understand how much of that is in apparel or other category and the magnitude of markdown that you expect to clear through that and the timing of when you expect to get back to a clean position and I guess to follow up on that do you think.

Discounting from you and others in the industry could pull forward some demand.

Through from the second half and have you considered that and to your second half guidance.

Sure I'll take a stab at that Kelly. So if you think about just take the U S inventory increase in the second quarter of $11 billion.

Composed out about 40% of that is due to inflation. So don't thank you and I just think just dollars and then you look as Doug noted at things like the fact that we're growing as a company that we've had.

Lesson stock next year and you normalize for all of that you're really whittle that down to about 1 billion and a half of inventory that if we could just wave a magic wand wed make go away today.

And the factories will sell that.

But if we were.

From scratch, that's what when we get rid of in terms of the types.

John noted that the inventory issues, where most acute in apparel in the second quarter as we look into the third quarter I would say is home electronics and apparel are probably the areas that stand out the most.

Sure.

Our next question is coming from the line of Simeon Gutman with Morgan Stanley . Please proceed.

Good morning, everyone still focusing on gross margin in the U S growth was down about 106, or so or seven in the second quarter can you comment how much is mix versus markdown and to us it looks like the mix is not getting any worse. If that's fair and then the clearance levels in Q3.

Versus Q2 will be clear and slash markdown occupy a greater proportion in the third quarter versus the second.

Sure Simeon I'll take a stab at that as well and John might want to jump in so.

I will just point you to the 132 basis point decline overall and gross margin.

And there's really three things that I would say in order of magnitude that contributed to about call. It two thirds to 75% of that so number one would be markdowns number two is mix and number three is the LIFO charge that we.

We talked about in Sam's and then there is all the various puts and takes.

That round out the balance of that is it.

It relates to markdowns in the third quarter look we feel like we're in a better inventory position and those are obviously very related.

And so we would hope that.

We're not going to see the level of markdowns that we experienced in the second quarter, but we also.

Assuming that nothing changes with the consumer so as we noted we're being cautious on the outlook and more wait and see what happens in.

In the U S. Simeon this is John <unk>.

We did not have the LIFO charge, so a larger percentage of our markdown issue would have been in apparel, we still have a bit more to work through but we are close if you compare to where we might have been before two years ago. So we're getting close to a position where apparel is behind us and that was the issue that through.

Q2, we spent the most time worrying about because we need to move through it because the bids have been purchased a long way out regarding the rest.

In Q1, and then in Q2 as the backlog of containers worked itself through that has created a lot of what the issue is today, where we said that we would've liked to have had months ago and then this season.

As all here at the same time, so we've adjusted all of that inventory, we've largely gotten out of the container storage and movement business. We have the inventory in the network. So we have a good handle on what we own where it is and then as I said earlier in the call.

Q1, we need a couple of quarters to work through it and Thats exactly what you said John David's right.

Sell it we'll work through it yes, there will be some liability in it but apparel was was definitely the issue that we had that was most acute in would have would have really hurt us had been unaddressed.

I mean, sorry, Daniel I was going to say something on your on your mix question. If you go into our filings you'll see our mix change year over year and Youll see that in Q2 as well when we file our Q.

The end of Q1, it was a fairly significant shift as we were lapping stimulus saving stimulus spending we recalibrated our expectations at the end of Q1 and then it was even worse than we expected for Q2, so thats what youre seeing.

Get reflected in our view as we look to the back half we don't want to.

Kind of get ahead of ourselves.

Just because sales have been strengthening at the end of the quarter, Yes, I was going to kind of double click on a loan on that a little bit more to fuel coming down in recent weeks is helpful. It's still about 27% inflated per gallon versus a year ago nationally.

The absolute spend that American families.

Deploying the fuel is still high <unk> is the amount of food inflation and I think Q4 last year as the moment, where we started to see U S. Food inflation tick up it was kind of low to mid single digits. So when you get to Q4, you start to anniversary of food inflation number against the food inflation number.

So the two year stack of food inflation won't be something that we'll be keeping an eye on if you told us that fuel was going to continue to take down and then food inflation was going to moderate that influences. How we think about general merchandise inventory and as we've worked with the merchants over the last few weeks, it's been kind of fascinating too.

Think through how you make choices item by item in autumn and category by category. Because you don't want to go into too much of a defensive mode and we were looking at Halloween decor last week, John and there are some things outdoor to core in particular like Inflatables that are really fun.

All new items and when do you see that we can sell all you can buy that like we're going to blow out of some of those and we want the buyers in some categories to have that mentality and be aggressive and other places we want to be more conservative. So that we don't repeat the mistakes that we've had in the first half of this year at such an interesting thing to work through it takes a lot more leader.

Ship from our merchant team for example than it might ordinarily.

<unk> think we have made some good decisions subcategory by sub category for the back half of this year canceled some orders trying to get that right area by area. So that we don't end up being too conservative in places, where we shouldnt be.

Our next question comes from the line of.

Thanks of America. Please proceed with your questions.

Hey, good morning, Thanks for taking my question.

A follow up on that.

I think it's probably harder for you guys to predict where fuel prices are going but you have some visibility on food inflation given how large you are a player in that.

It accelerated a lot in the second quarter.

That continued in the third quarter.

I guess since the guidance it assumes it stays at the level of the second quarter or do you think it could.

<unk> be up more than <unk> before maybe it fades against the comparisons in any kind of color on what youre assuming would be.

Great and a quick second.

Per cap is just the home and apparel comps were much stronger at CMS was that all clearance or is there something different between Sam's and Walmart U S in terms of home and apparel sales.

Hey, Ravi it's John I'll take the first part of your question.

Emulation too.

As it relates to food inflation at <unk>.

<unk> moved up in the second quarter and moved up in the months of the second quarter. So July was higher than June June was higher than May I think it's too early and into the third quarter to try to make a call. If this is where it will be if it will go higher or go down. So for now we're assuming that this is the level we're at.

Yes.

And it could continue and some of the factors though to consider.

One of the costs that are part of the way, we price food as the cost of moving food. So diesel fuel and fuel continued to move down that could be a tailwind related to inflation. How are there still some commodities up we do see a few categories in the store where prices are starting to come down but there are other categories, where we're still rising. So I think it's just too early to call.

During the quarter.

We hope that some of these larger macroeconomic conditions would lead to lower prices in food.

But we're not able to say that we see that happening just yet.

And as Kathryn Sam on the home and apparel, what I'd say is its actually a multi story. So it's not clearance it's dean.

Investments, we've made and the quality that we've had in <unk> seasonal and we're seeing better quality brands and we've seen that resonate with our member base and that has continued through into this year.

Also a higher income member than the profile you would see in Walmart U S.

Our next question is from the line of <unk> <unk> with Oppenheimer. Please proceed with your question.

Good morning, Thanks for taking my questions. So first on the markdown front I was curious if you can at all comment on what.

You view as excess excess markdowns as we try to think about next year and then secondarily on Sam's club gross margins declined nearly 300 basis points I wanted to get a sense of if you expect any of that to be structural or do you expect that to recover the margin decline overtime.

And good morning on markdowns.

Kind of break it into pieces last year and year before there weren't really many markdowns to speak of because we were chasing demand in many cases at the end of the seasons, where we're very clean so returning to a point where there are end of season markdowns as a pretty normal thing that we would experience.

And the way, we're trying to manage the sell through season by season as compared to historical rates back in 2018, 2019 and of course things are always going to be different but it is a good barometer to determine where we land. The second the business is much larger than it was in 2019. So so these volume levels continue to improve which then lead to the dynamic.

How much your purchase which ultimately a magic purchase versus demand will lead you to yourself through and markdown number so far.

For the fourth quarter, we mentioned.

Cancel a $1 billion in orders, we feel much better about the back half of the year, we still have inventory to work through and ingest from the backlogs as we said so we need a couple of quarters to do that and then heading into the next year, we'll have a purchasing levels that are more in line with the way. We see demand is going today of course, a lot can change we need to know more about <unk>.

Pricing and inflation and the state of the consumer as we get there, but we have definitely had more time and more success in getting purchasing in line with our current inventory levels and the way, we see demand going in terms of mix today.

Thanks Sam.

As part of the question I would say if you look at our GP rate.

Two major things going on there one is the LIFO charge of $123 million and the other one is what we had code markdown, but there's two things at play there.

Largest part of that amount is a strategic decision we made to create an inventory reserve for Q3, and so that's really pulling forward those markdown from Q3 into Q2 to set ourselves up for success and to make sure that we're really competitive going into Q3. So I don't say that as a trend I would say that is just this quarter the impact.

On this quarter.

Our next question.

From the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Hey, guys. Thanks for taking the question.

Wanted to check in on what you're seeing with the supply chain. These days.

I mean, I know fuel cost has come down and we're hearing container cost prices have come down but.

Are you getting a more regular flow of inventory as you need at this point or just just your view of the global supply chain would be really helpful.

Yes.

Hey, Joe John .

First let me just say a big thank you to our supply chain team our merchants they have been through a lot.

The environment has been extremely dynamic.

And they have really just made a huge difference for the entire company.

The last couple of quarters, what's it been like there was the backlog of containers that really started last fall when the ports backed up.

We've worked those through in terms of container cost they are down from where they were but they are still higher than they were a year ago and a year ago was higher than it was higher than they were the year before that so still inflated and those costs are flowing through.

Costing as Doug said earlier fuel has come down from its peak at the end of Q1 early Q2, but it still remains elevated and those are real costs that are passed through and customers will see those prices at the counter and on the site.

So in general we see.

Better flow, we see better availability or availability rates in food consumables and then.

Consumable portions of general merchandise are much better than they were a year ago, but I still think we have work to do to get back to where we were back in 2019, Brazil uneven in places.

And anytime in retail that inventories back up the way. They did it does cause pressure on being able to get the right inventory at the right location in front of the customer.

<unk> that can improve as these inventories come down, but it's going to take a few more months to work through the backlog of the inventory that's in the network.

So I would just add from a P&L perspective, and you think about the.

Cadence of earnings from <unk> to <unk>, we started experiencing more pronounced supply chain cost in <unk> last year. So from a cost side that makes the comps a little bit easier.

If youre thinking about operating income.

In the fourth quarter versus the third quarter.

Thank you. Our next question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Thanks, very much and welcome John David When you unpack the factors behind the better back to school and strong finished in July and it sounds like in August so far I guess, how would you rank the key contributors lower gas prices there was a big uptick.

State tax holidays, this year versus last and I guess is the improvement altered your view of the upcoming holiday season, and any way in terms of how you think the consumer is going to react.

Hey, good morning.

Theyre very three vectors that stand out and you'll see this in the numbers. One is there are more customers shopping in the brand and what we've seen previously previously including better traffic numbers.

Fuel prices did come down throughout the month of July and I think the third it's important as school attendance levels. We think will be higher there are very few instances of schools that are remote at this point and there were some of those last year, so things like backpacks and lunch boxes.

And then there are other programs, where some school lunches, we're paid for last year that this year will be funded by families and parents. So there is a shift in all of those factors that are leading to more spending.

That led to more spending late in July and early in the third quarter as far as how it relates to the rest of the year.

Again still sell a lot of unknowns as we get into the rest of the year fuel prices are still moving but they continue to move down that would be a great thing.

And we'll have to watch the shape of the consumer and see how they're buying but just.

I would just reiterate what John David said earlier, we are really committed to the long term plan and our long term view of the business and it's been great to see some of the improvements in the areas on the flywheel that are adjacent to retail that will help the overall business over the long term John I would add as it relates to <unk>.

Better than expected performance for <unk>.

As noted supply chain costs came in better than we expected and in any quarter. When you close youre going to have some puts and takes at the end of the quarter Sunday. Following your favor semi works against you in the first quarter supply chain costs came in worse than what we expected when we closed the quarter. So when we updated our guidance at the end of last month, we had assumed.

Our expectation it actually fell the other way in our favor and so that contributes to the better than expected performance relative to our guidance at the end of last month.

I would just add when you're thinking about supply chain costs were getting invoices all quarter end to end.

A lot of the things that we were experiencing these last several quarters have been unusual container fines.

Excess fuel charges and things like that so there was it was a higher expectation of higher costs.

Felt favorably.

Okay.

Thank you our final question from the line of Ben <unk> with Stephens. Please proceed.

Hey, Thanks, good morning.

I wanted to ask when you move through a cycle like this with consumers trading down in Baton Rouge.

Market share and picked up new customers.

Sticky does that share ends up being on the other side of this inflation might we see this bolster your long term share position and maybe leave you guys coming out of this environment in a stronger position with the consumer.

And then as a follow up you noted youre seeing Midland differential unhelpful trading into Walmart what are you seeing from lower income households are you seeing any trading down away from Walmart.

Yes, we certainly hope to hold share around the world and I think this inflationary environment is going to last for a while so people aren't going to be value conscious, which which plays to our strengths.

E Commerce experience end to end as a focus of ours, we want to continue to grow our pickup and delivery businesses around the world. We of course want to grow and maintain share.

Of customer spend in the stores as well.

Moving away I think.

If any of you want to comment you can I think we are.

Holding at the lower end and adding at the upper end generally speaking, Doug I think thats exactly right and in relation to the first part of your question Ben what have we seen in previous cycles. We did see some pickup in the last cycle that was a downturn 2008.

<unk> nine but there are few things that are different now that I think I'd like to point out in that time period, we had our store business in a small ecommerce business. We did not have food pick up we didnt do delivery from stores within deliver.

Groceries, we did not have Walmart and home, we didn't have Walmart plus so our ability to serve customers more flexibility and a more flexible manner than what we could have 13 14 years ago was pretty dramatic so.

Definitely a lot of work to do to ensure that we're taking care of those customers and we're focused every week on satisfaction scores and accuracy of delivery and things like first time pick rate, which is an indicator of did we get your entire order right at the very first time, we tried to deliberate those will all be important in terms of being able to hold onto new customers, but we definitely have.

A number of ways that we can serve customers today that just quite frankly did not exist last time, we went through a downturn planning to sell some more Walmart plus memberships to to help solidify those relationships and the Paramount announcements should help us do that and we're excited about the announcement Doug.

R&D Paramount has a lot of programming for kids. It is live sports there are other movies and drama. So it's a wide variety of content that I think our members will enjoy and that was quite frankly, a member led research when we talk to members and ask what are the benefits. They were looking for the number one feature outside of delivery of product.

From both stores and E. Commerce was an entertainment benefit and there are others. They talked about but entertainment is the top of the list and that's what led to the decision to two to add this benefit to the program.

Thank you at this time, we've reached the end of our question and answer session I will turn the call over to Doug Miller for closing remarks.

Okay as usual thanks for your attention. We appreciate you're focusing on our company I will just wrap up with maybe three points. The first one is hopefully youre seeing in the results and hearing from us that.

We're making progress.

Addressing our inventory issues, we're pricing to reflect our cost structure.

<unk> more people are choosing Walmart and Sam's club and our brands around the World Bodega business in Mexico. For example is really strong so being able to attract more and more customers in a more diverse set of customers is a positive for us and then third we're continuing to change the business execute our strategy our e-commerce growth our digital transformation growing the <unk>.

It plays growing these related businesses that are unlocked by this.

Digital transformation that's happening in the company has is something that we're focused on regardless of the short term pressures, we're making progress towards the longer term, we certainly hope to put the pressures that we've had in the first half behind us as quickly as we can claw back the operating income percentage Delta that we've experienced in the first half to.

To the extent possible as fast as possible, but as you can see in our guidance we acknowledged a reality.

The world around around the world is feeling various pressures most pronounced from a inflation of course.

So we think we've put ourselves in a good spot to continue to make progress.

Value when when customers and members are focused on value is something that plays to our strengths. So we will take full advantage of that.

Thank you all.

This.

Today's conference.

Connect your lines at this time, thank you for your participation.