Q3 2023 Walmart Inc Earnings Call
Greetings welcome to Walmart's fiscal year, 2023 third quarter earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to Steph Wissink Senior Vice President Investor Relations you may begin.
Thank you welcome to Walmart's third quarter fiscal 2023 earnings call.
I'm joined by members of our executive team, including Doug Mcmillon, Walmart's, President and CEO , John David Rainey, Executive Vice President and Chief Financial Officer.
John Furner, President and CEO of Walmart U S G.
Judith Mckenna, President and CEO of Walmart International.
Kath Mclain, President and CEO of Sams club.
A few moments, Doug and John David will provide you an update on the business and discuss third quarter results that will be followed by a question and answer session.
Before I turn the call over to Doug Let me remind you that today's call is being recorded and will include 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.
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 Dot Walmart Dot com.
It is now my pleasure to turn the call over to Doug Mcmillon.
Good morning, everyone and thanks for joining us to discuss our results for the third quarter, Let me highlight what you'll hear from US This morning.
First it was a good quarter, we delivered strong results on the top line across our segments and our value proposition is resonating with customers and members around the world we.
We see this in our grocery business in stores and online in key markets like the U S and Mexico.
Customers that came to us less frequently in the past are now shopping with us more often including higher income customers.
Second, we're being thoughtful and balanced about inventory levels by category and expenses as we worked through the fourth quarter and position ourselves for next year. There are places, where we'll remain aggressive and others, where we're being more conservative.
Third while we prioritize retail fundamentals, we're also connecting and scaling newer naturally related capabilities to our larger business. So they become mutually reinforcing.
Marketplace fulfillment services and advertising are examples.
As it relates to the third quarter. It began with topline momentum from the back to school season in the U S and Mexico and that continued through festivals in India, China and through early deals for days events in the U S.
<unk> had a great quarter, and so did Sam's club in the U S. As we continued our string of double digit comp club sales growth.
Catherine the team at fans have run double digit comps for almost three years.
We like the way those numbers compound.
As a total company, we're seeing strength in stores clubs and ecommerce transactions are positive and our penetration of ecommerce sales continues to climb so.
So far this year, 13% of our total sales as a company now start in a digital fashion and that's led by Walmart International which is already at 20%.
With the cost of everyday items still stubbornly high and too many categories more customers and members are choosing us for the value and assortment, we're known for and they're responding to the changes we've made to save them time.
With this in mind, we're focusing on earning repeat business from customers, who are now shopping with us more frequently than before for example, a strong presentation throughout fresh in apparel, our priorities along with executing pickup and delivery to create a delightful experience this saves them time.
And in the case of Walmart U S. It also means selling more Walmart plus memberships.
As more people look to us for value, we want them to see that the experience of shopping with US is also compelling due to the new capabilities we develop.
Our app experiences around the world are a place where we introduced these newer capabilities.
As our App becomes more a part of daily life for our customers and members. They find that they can do so much with it like easily build a shopping cart schedule a time to pick up an order or have it delivered when it's convenient for them skip the line with scan and go or find an item in their local store.
As you would expect we're helping family stretch their dollars as we head into the holidays. The Walmart U S team has set the retail prices for a typical Thanksgiving meal the same as last year.
Removing inflation on a basket of traditional Thanksgiving food items, including whole turkeys for under a dollar per pound.
The members dollars going further as Sam's club too with racks of Lam and lobster tails priced more than 40% lower than last year.
We're also making the everyday shopping trip better by lowering the price of the cafe hotdog combo by nearly 10% to $1 38.
Around the world our teams have this type of mindset.
In Mexico, we've widened price gaps and our popular bodega format by 100 basis points. This year, it's incredible value at a time when customers need it most.
Finding creative ways to relieve pressure for families across our merchandise categories and countries.
I'm proud of how our associates continue to step up for <unk>.
Grateful for how they've navigated our inventory challenges this year and continued to prioritize the customer and member experience while doing so.
During my store club in D. C visits they inspire me by the way they work together the way they serve others and how they are embracing change and contributing ideas to improve our business.
Looking ahead, we updated our outlook for the year on results from Q3, yet we remain balanced in our approach to the rest of Q4 and next year.
Inflation is being especially stubborn in some categories like dry grocery.
Living with high prices through this year has a cumulative impact on our customers, especially for those that are most budget conscious and so we're focused on bringing our cost and prices down as quickly as possible by item and category.
Regardless of income levels families are more price conscious now.
It's as important as ever that we earn their trust with value.
And just a minute John David will share more about the guidance. We gave this morning, we're working to position ourselves to succeed regardless of demand levels through value and the experience we offer and the way, we're positioning inventory and expenses for into the details business by business. This is not a time to paint with a broad brush.
We're focused on the things we can control.
We delivered good expense leverage during the quarter across our segments strong sales growth helps but we're also doing a good job of managing costs and we're doing it in a sustainable way, we can keep costs in line and continue to invest in our people and technology, including supply chain automation and continued to deliver value for customers.
<unk> and shareholders.
We've made good progress to improve our inventory position globally inventory is up 13% for the quarter, including 12.4% for Walmart U S and two 5% for international.
Inflation drives the majority of the increase rather than units.
In stock on Replenishable items, and active management of seasonal item quantities and sell throughs are the priorities we expect.
This progress to continue through the fourth quarter and that will end the year in even better shape.
Our merchants have taken an item by item category by category approach to match inventory with demand.
We've worked through a unique period in history as we chased inventory in 2020 and 2021 and were too heavy and some general merchandize categories. This year.
Given where inflation remains and that economic uncertainty seems higher than normal.
Entity choice, our merchants make is even more crucial than in a more normal time.
Back when there was such a thing as a more normal time.
We can be more aggressive on shorter lead time items like food and consumables, but we're especially sensitive to quantity decisions on longer lead time items that are imported.
We're thankful to have so many experienced and talented merchants they've accomplished a lot. These past few quarters.
Just like John Cath shoot it in the rest of the team have done they've demonstrated good judgment and a lot of hustle.
Our flywheel continues to take shape, we're scaling our newer businesses and connecting them to our larger established retail businesses, primarily about how we design digital interactions.
One example is how our growth in e-commerce, especially the marketplace fuels our ad business.
More items and sellers drive G M D and improve customer satisfaction and it also drives success in advertising they're mutually reinforcing.
If we double click on advertising with Walmart connect in the U S. We see it's benefiting from growth in e-commerce and from improvements made within the business itself and we've seen strong growth in return on AD spend over last year and.
In turn this helped drive the highest AD spend all year for sponsored search in Q3. These improvements underscore connect strength and position the business for continued growth.
We also continue to see strong growth with flip cart adds in India.
Much of what we're doing advertising is working for us globally, because we have something unique to offer media buyers and these businesses create momentum for each other.
As with advertising growing our marketplace business also unlocks fulfillment services opportunities through both fulfillment centers and last mile delivery.
Our scaling these businesses in the U S and we're starting to ramp up in Mexico and Canada.
The team in Mexico increased the number of sellers on our marketplace by 20% during the quarter.
In the U S. The marketplace on Walmart Dot Com now offers about 370 million Skus, that's an increase of more than 50% from Q2.
Many of these sellers want to leverage our fulfillment network.
They also want to use our advertising capabilities to drive demand and were making that easier for them. We recently shared that all new marketplace sellers in the U S will be automatically on boarded onto our self service AD platform. We believe this seamless integration will help both businesses scale even faster.
What you see in our results is that we can run compelling stores and clubs scale of first and third party ecommerce business and connect them together in an omnichannel fashion that saves customers and members money and time.
Our strategy unlocks growth opportunities for us and a thread that runs from digital retail to fulfillment and advertising and opens up even more opportunities with health and wellness in financial services.
This quarter demonstrates again that we can navigate short term challenges and build for the long term simultaneously.
It's been my experience over all these years that Walmart is a well positioned business and is inherently hedged.
When times are good we have room to grow when things are more difficult, we sell things people want and need at a value and in ways they want to shop.
And with new levers for growth across our flywheel, we're becoming even stronger and more resilient.
I'll close today by saying Thank you for your interest in our company, we like the momentum were creating in our business and we recognize the need for a balanced approach in the near term given continued strains on our customers and members.
Our team is focused and alert.
Happy holidays, everybody Here's John David.
Thanks, Doug I'd like to start by thanking our customers associates and partners for helping us deliver a strong quarter.
I will focus my comments on the themes, Doug mentioned first our sales momentum and share gains.
Second operational actions, we're taking to improve inventory and supply chain.
Third progress, we're making to further connect our alternative value streams to our core business and lastly, our guidance for the balance of the year.
Our Q3 results exceeded our expectations due to sales upside with operating expense leverage across all three business segments.
While we're encouraged by our position and our confidence in our business remains high the macro backdrop remains challenging as persistent inflation is impacting the consumer and our business.
As I discuss our results it's important to note the charges related to the opioid legal settlement framework affect year over year comparisons. So my comments regarding Q3 results will focus on the business excluding adjusted items.
Total constant currency revenue grew 9.8% is our omni model and strong value propositions continue to resonate with customers. During this period of broad inflationary pressures.
Each of our segments delivered strong sales results Walmart U S comp sales accelerated sequentially to eight 2% growth with increases in average ticket size as well as transactions.
Constant currency sales in Walmart International were strong up 13.3% led by flip cart and wall Max While Sams Club U S delivered its 11th consecutive quarter of double digit comps with growth of 10, 3%, excluding fuel and tobacco.
Our purpose of saving people money has never been more important as inflation remains consistently high.
High fuel prices and mid teens food inflation have forced consumers to manage household budgets more tightly making frequent tradeoffs and biasing spending toward everyday essentials.
We continue to manage pricing in a way that preserves our price gaps while gaining market share profitably.
Walmart is well positioned to serve customers and gained greater trip frequency during tougher economic periods, and we have even more tools to do so in the cycle.
For example, we've continued to gain grocery market share from households across income demographics with nearly three quarters of the share gain coming from those exceeding $100000 in annual income.
This quarter, our private brand penetration in food categories increased about 130 basis points, reflecting customers increased focus on quality products at value prices.
We observed incremental trade down in categories, including proteins baking goods baby and dog food.
Working hard to keep prices low and help ease the burden to make customers' lives better. This includes working with vendors to reduce product cost and minimize inflation impacts on final goods pricing.
Consolidated gross margin rate decreased 89 basis points.
More than half of the decline was due to markdowns and sales mix in the U S.
The remaining headwind reflects a $113 million LIFO charge at Sam's club due to inflation and the timing of sales events and international including flip carts Big billion days.
Notably the rate of decline in gross margin improved from two Q is inventory remediation efforts are progressing.
We've been very targeted and reducing certain categories of inventory in our system and our actions included canceling orders and increasing the level of markdowns. The team has done a really good job of addressing our inventory situation.
As reflected by Q3 inventory being up only 13% versus last year, including 12, 4% growth in Walmart U S.
In aggregate this level represents a more than 10 percentage point improvement versus the end of Q2, notably about 70% of the year over year increase relates to inflation, we feel good about our ability to sell through the majority of this in Q4 and expect continued year over year improvement, even when including the effects of inflation.
We saw stronger expense leverage this quarter, our selling general and administrative expenses leveraged 75 basis points due primarily to higher sales and lower COVID-19 costs.
We're focused on what we can control and continue to work down inventory levels and managed general and administrative expenses tightly taking.
Taking all this together adjusted operating income on a constant currency basis increased four 6% GAAP.
GAAP EPS was a loss of 66 cents, but adjusted EPS was $1.50. The difference between adjusted and GAAP EPS reflects a one dollar and 11 cent impact from unrealized losses on equity investments, primarily J D dot com in a $1.05 charge related to the <unk>.
<unk> litigation settlement framework.
We're pleased that our adjusted EPS outperformed the guidance we provided in August due primarily to better operating expense leverage on higher sales across the business.
Operating cash flow for the year to date period decreased $600 million to 15.7 billion, primarily due to the timing of certain payments and a decrease in operating income partially offset by moderated inventory purchases.
During the quarter, we returned four $5 billion to shareholders through dividend and share repurchases.
We're committed to continuing to provide strong cash returns to shareholders, while still appropriately investing in our business for the long term.
And our board has just approved a new $20 billion share repurchase authorization that we expect to utilize over the next several years.
Let me briefly referenced key highlights by segment for Walmart U S comp sales momentum accelerated in Q3 with a two year stack of 17.4% up 570 basis points from Q2.
Monthly sales gains were relatively consistent throughout the quarter.
Food sales continued to lead with mid teens growth.
We're particularly encouraged to see year over year growth in food units sold after experiencing a slight decline last quarter.
We also continue to make good progress on improving in stock levels in our grocery business. Despite the heavy volumes we're experiencing.
Inflation remained high of mid teens percentage in food categories, reflecting an 80 basis point step up compared to levels at the end of Q2.
We've seen incremental levels of inflation month over month be less significant but it's not clear if this represents a sustainable trend.
However, we believe our strong price positioning is contributing to share gains as we attract value seeking customers across the household income spectrum.
General merchandise sales declined low single digits with softness in electronics home and apparel.
E Commerce accelerated sequentially to 16% growth even in store transactions continued to grow.
We experienced strength in pickup and delivery from stores marketplace fulfillment services and advertising.
Gross profit rate decreased 77 basis points, due primarily to higher markdowns and product mix headwinds, but the team delivered strong SG&A expense leverage of 60 basis points, reflecting higher sales and lower COVID-19 cost.
As a result, we deliver better than expected operating income growth of nearly 5%.
Walmart International delivered strong sales results with sales up 13, 3% in constant currency despite continued macro headwinds.
E Commerce sales on a constant currency basis were exceptionally strong up 46% in the quarter.
The earlier timing of flip carts Big billion days event was also a benefit to sales results.
Currency negatively affected reported sales results by about $1.5 billion.
Each of our major markets delivered positive comp sales led by a great quarter from Walmart's with comp sales growth of 11.7%, reflecting strong performance in bodega stores, Sam's clubs and 17% growth in E Commerce.
And China comp sales were up five 6%, reflecting strong e-commerce growth as well as strength at Sam's club.
E Commerce sales grew 63% and penetration reached 41% of sales.
Canada comp sales increased more than 5%.
And in October we launched Walmart fulfillment services in Canada, where sellers of all sizes on the digital marketplace can now contract with us to take care of their inventory storage and logistics needs.
The new offering will provide faster shipping of customer orders within a two day window to 95% of Canadians.
And India flip cart had a great quarter with strong customer response to our big billion days event, which move forward into Q3. This year from Q4 last year, we had over 1 billion visits to our site. During the eight day event and importantly saw more than 60% of those customers coming from tier two and tier three cities.
Phone pay also continues to perform well with annualized total payment volume or T. P V now over $920 billion and reaching a record level of monthly transactions to about 3.6 billion.
This was the first time phone pay had a quarter with more than 10 billion transactions.
International segment operating income was better than expected and increased 3.2% in constant currency led by wall mix in China.
And Sam's club U S. We had another strong quarter with comp sales up more than 10%, excluding fuel and tobacco and an increase of more than 25% on a two year stack.
Both comp transactions and average ticket increased about 5% and ecommerce sales grew 20% with strength in curbside orders and ship to home.
Membership income was up 8% with another record high quarter, and overall member counts and an all time high plus member penetration.
Sam's leveraged expenses 68 basis points due primarily to higher sales.
This helped offset a decline in gross profit rate due primarily to a 53 basis point or $113 million inflation related LIFO charge.
For the quarter Sam's operating income increased more than 18% with fuel and nearly 8%, excluding fuel and including the impact of the LIFO charge.
And binding these results with my comments about international you can see Sams club is performing well around the world and we're pleased with the leverage we see across markets with members Mark as an example.
As we navigate changes to our external environment, we continue to advance our strategic initiatives that were enabled by our omnichannel retail capabilities globally.
Globally as we are building a larger ecommerce business, we're scaling our marketplace, which unlocks it strengthens our fulfillment and advertising businesses and expands the number of families that choose to be members.
Across our segments e-commerce is enabling deeper engagement with customers and members that helps drive strategic growth in our alternative value streams.
New sellers of our U S marketplace are contributing to our advertising growth and we added more than 8000 sellers in Q3.
Third party Buildout helps diversify and strengthen our product assortment, which now includes more than 370 million skus.
Strong digital advertising growth continued this quarter, increasing over 30% on a global basis led by 40% growth in Walmart connect in the U S and flip cart adds in India.
As we focus on membership our ability to leverage our data improves. So we continue to sign on more customers to our data ventures offering Walmart illuminate.
And the number of Walmart plus memberships continues to grow.
We gained some of these new Walmart plus members after expanding our last mile delivery capabilities through a four fold increase since January and the number of pickup points serviced by the spark driver platform.
We're making good progress and fulfillment in automation the spark driver platform now serves customers in all 50 states for more than 10000 pick up points with the ability to reach 84% of all U S households.
This coverage includes a growing revenue stream from businesses utilizing Walmart go local our delivery as a service offering has already made over 1 million deliveries since launching last year.
Building Walmart fulfillment services in the U S. Mexico and now also in Canada has been an important asset in growing our seller base as they seek an integrated omni sales and fulfillment solution.
For example, almost 30% of orders on wall mixes marketplace are now being fulfilled using Walmart fulfillment services, which was launched a year ago and.
In September we opened a nextgen fulfillment center in Illinois. This $1 1 million square foot facility features robotics machine learning in automated storage, resulting in increased productivity and a better service for our customers that faster delivery times and.
And last week, we acquired alert innovation as we expand our market fulfillment center build out M. F. CS are positioned inside or attached to Walmart supercenters and use robotics and AI to fill online orders more quickly.
We're putting the building blocks in place to deliver powerful mutually reinforcing ecosystem that not only benefits customers and partners, but also shareholders with more durable and diversified earnings streams.
Turning to guidance in this period of macroeconomic uncertainty. We believe that we are well equipped to continue gaining market share in an environment, where consumers need to stretch their dollars further.
We will continue to advocate for customers and work with our supplier partners to maintain strong price gaps and deliver lower relative pricing versus competitors.
We're also navigating real inflation on our own cost structure and continue to seek ways to reduce cost and improve leverage potential.
With these considerations in mind, we're maintaining a balanced approach to our guidance.
Incorporating a cautious view on the consumer together with our confidence in our ability to execute.
We are updating fiscal year 'twenty three guidance to reflect the Q3 upside and leading our sales and profit assumptions for Q4 unchanged.
Despite a good start to Q4, our guidance assumes that the consumer could slow spending, especially in general merchandise categories, given persistent inflationary pressures in food and consumables are.
Our guidance provides flexibility to compete in a promotional environment accounts for pricing action to reduce remaining excess inventory and anticipates ongoing mixed pressure.
For Q4, we expect net sales growth of about 3%, including comp sales growth of about 3% for Walmart U S with food and consumables growth continuing to outpace general merchandise.
We expect year over year operating income within a range of a 1% increase to a 1% decrease in adjusted EPS is expected to decrease 3% to 5%, including higher year over year tax and interest expenses.
For the full year, incorporating the Q3 upside we now expect net sales growth of about five 5%, including comp sales growth of five 5% for Walmart U S.
On an adjusted basis, we expect operating income to declined six and a half to seven 5% and EPS to decline 6% to 7%.
Excluding the effect of divestitures and on an adjusted basis. This would translate into net sales growth of 6.5% and a decline in operating income of five 5% to six 5% and a decline in EPS of 5% to 6%.
Looking beyond Q4.
Some of the unanticipated costs experienced this year shouldn't repeat next year.
That said, we're planning our business with the assumption that inflation remains somewhat elevated in.
In addition, we've had significant currency headwinds this year.
Based on year to date results and current FX rates, we estimate a year over year sales headwind for this fiscal year of $4 $1 billion from currency.
Potential sales headwind of about $3 billion next year.
Also as we've had $236 million in LIFO charges. This year at Sam's club.
We're likely to experience LIFO charges in Walmart U S as well next year.
Based on current assumptions. These LIFO charges next year for both Walmart U S and Sams club could approximate roughly $1 billion of gross profit headwind.
It's important to note that inflation inventory levels and additional factors that are challenging to predict will influence the aggregate amount.
We're committed to providing you ongoing updates to the assumptions as we report our quarterly results and with that we'd be happy to take your questions.
Thank you, we'll now be conducting a question and answer session.
Please ask a question today. Please press star one on your telephone keypad and a confirmation tone will indicate your line is just the question queue.
Maybe first start to feel like to remove your question from the queue.
So just as they're using speaker equipment may be necessary to pick up your handset before pressing the stocky.
Can we poll for questions.
Thank you and our first question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for taking our question.
We wanted to focus on inventory.
Inventories were just wondering how much remains from the spring the spring inventory how you would describe your in stocks for Q4 versus last year.
And you also mentioned it would be aggressive in some cases <unk>.
<unk> inventory is that just finished short of the 10 categories are Kenny.
Can it be anywhere else. Thank you.
With me to answer that question across all three segments, but John why don't you go first Cherokee Hey, good morning, K, a couple of things on inventory.
First I think the team here and the merchant supply chain teams have done a really nice job improving the year on year results from second quarter and to the end of the third quarter. As we said earlier were up $12 four.
From just over 26% in the second quarter and the first thing I think it's important to consider.
Second over the quarters of the year in Q1, when we were the highest the majority of the extra inventory wasn't supply chain and part of the backlog problem.
In the second quarter that balanced more evenly between stores and the total and then this quarter at the end of Q3, what we see is an increase of 12 four but the stores are still heavy so the inventory is moved from the supply chain.
Balanced analysis in the store.
And when you look at the dollar amount that's up about 70% of it three fourths of it roughly as inflation and the rest.
We get approximately two pretty significant improvements in in stock over last year.
Last year, we were we were quite low so we see a really isn't a permanent in stock and then specifically.
Typically in your last question.
Probably around.
Something just under 1 billion around $1 billion would be what we consider excess that's down pretty significantly about a third of where we are at the end of the end of Q2, So we're making improvements.
Apparel in certain categories and GM are the heavy categories and we'll continue to work through those and just a reminder, we said at the beginning of Q1, we needed a couple of quarters to work through the inventory and we continue to do that and then John David had mentioned in his comments earlier that there is room in our forecast to continue making progress on inventory.
Other than an important center last weekend.
And bound is in really good shape. The orders are in line. So I think the team that have done a really nice job adjusting to the end of the year.
Yes, sorry international.
Tuna.
For the quarter.
Helpful Tailwind.
Let's say the underlying partial quarter.
Jamie the last three quarters.
Pretty healthy shape across the all of the markets around the world at close there are a couple of pockets.
And that will continue to focus on as we go through Q4, but I'm actually really pleased from an in stock level because last holiday season.
We had to areas, where we are right.
Im encouraged to see at each market being in a good place guidance this holiday season.
And from a Sam perspective inventory is up 36% I think.
50% of that increase is us actually being in stock to your question.
As Doug and John David talked about we've had 11 consecutive quarters of double digit comp growth, we have been chasing <unk> for the last two and half and.
Finally in a great position from an in stock going into the into the holiday period.
Strong in stock and 50% of that 30% of it is inflation and the rest is kind of something thats, we dig into kind of Christmas.
Really happy with the quality of that inventory.
Leaning forward into into the rest of the Kate This is Doug thanks for the question.
<unk>.
Point out that we handle inventory and thinking about inventory into different categories.
First category is replenishable merchandise, where we want to be in stock all the time, we even though we were heavy in inventory during the course of this this year. So far we did not let up on trying to get in stock on Replenishable goods and wouldn't want to do that.
Second category of non Replenishable items, which are often features we're managing that aggressively category by category and don't want to get too conservative.
Places, where we should still play offense through this quarter and into next year and then lastly, I think it was appropriate for us to last couple of quarters to break out how much inventory, we wish we didn't have that.
That number is getting down to the point, where we probably won't be talking about that going forward. Because we always have some inventory we don't want even in a more normal circumstance.
So we made a lot of progress feel a lot better about it.
Thank you.
Our next question is from the line of Bob <unk> with Guggenheim. Please proceed with your questions.
Hi, good morning.
Just following up a little bit on the inventory side.
Couple of things can you talk about sort of the vendor reception to reducing product costs that you mentioned on the call and I guess the other piece of this is you can take it was a $1 billion and a LIFO charge or the expectation can you just talk about your assumptions around inflation over the coming quarters.
What the offsets are as you think about that as we proceed throughout the next year. Thanks, I'll take the supplier question first.
We're not really changing what we've always done.
We are trying to find ways with our current suppliers to get costs down and provide value to customers and members and we're trying to be creative about it and in some instances some suppliers are more aggressive than others and we welcome that and we're going to try to do the best job. We can category by category item by item of getting prices down as we get through.
Next year and that's been consistent that's the way, we always behave and there's not really anything different as it relates to that.
Sure. Bob This is John David I'll take the LIFO aspect of your question first I would say that the core business.
And to perform pretty well in the face of a difficult macro environment, but we do have headwinds next year as we called out both currency as well as the LIFO charge.
LIFO charges as a result of the inflationary environment that we're in and it's heavily dependent upon what our inflation and inventory assumptions are next year for.
For planning purposes, we're basically assuming that prices stay where they are the result on a year over year basis from an inflation perspective would be.
A little north of 3%, so a little greater than 3%.
The extent that that changes that affects that $1 billion estimate, but I think it's important to note.
That.
To the extent that we get back to a deflationary retail cost environment. This $1 billion headwind actually reverses out as a benefit in later periods.
Okay. Thank you very much.
Our next question is from the line of Robbie <unk> with Bank of America. Please proceed with your question.
Hey, good morning.
Quarter, just actually I had two.
Questions. One just a follow up I think.
I think Doug you might have mentioned this strong start to the fourth quarter.
The others have sort of mentioned.
Maybe a slower start to the holiday shopping season.
One last year.
I was just curious if you could give any color on if youre seeing any of that kind of behavior and then my second question. Just a separate question was just.
Label was called out could.
Can you all remind us the private label capabilities at Walmart U S and how much that could grow from here.
As it relates to the strong start Robbie this is Doug and then I'll toss it to John .
The quarter has just started and as John David said in his remarks, we're trying to build in some conservatism I think the fact that we're strong in food and consumables is relevant here and we mentioned that.
Annual of that activity that we've experienced so far is.
And the range of what we would expect generally so it's just early days, we will see how the rest of the quarter guys.
Hey, good morning, Ravi let.
Let me talk about private brand, but more broadly first we want to be positioned for customers whatever they want whenever they want it between the stores pickup delivery E Commerce, Walmart and home, we're prepared and positioned well to serve a variety of customers and that would include merchandise strategies like private brands.
And we've been pretty open over the years that we don't necessarily manage private brands has set a target below what we do in private brand.
As develop great quality items at great values, and then we are there for customers in whatever situation that they're in and we've seen some customers. This year train into private brands more than they did in the previous year.
That's not necessarily true of all customers customer shop differently, depending on the position that they're in and one of the things John Davis said, that's important as a large percentage the majority of our share gains in the last quarter have come from high end customers. So we wanted to be ready to serve our customers with great quality, great value private brand items, yes, I'll be able to serve customers well.
With premium items, and we definitely see that in channels like e-commerce and pick up.
Great. Thank you.
Our next question comes from the line of Cory <unk> with Jefferies. Please proceed with your.
Hi, good morning, and congratulations on the strong quarter and thank you for taking my questions.
So I have a two part question first on international for Judith and second on Sam's club for Cat. So firstly on international net sales were up a strong 13% I know you highlighted flip cart, but can you further unpack what drove that growth and what you see driving continued success in this segment ahead.
Secondly, on Sam's club I believe the company's driven close to 11 consecutive quarters of double digit comp growth or close to three years.
Or what do you attribute this continued and consistent growth too and how should we be thinking about this momentum as we head into holiday and next year and then could you also touch a little bit on how you are seeing memberships trend I know you mentioned that there is an uptick there that continues to be strong and as memberships are reaching record levels.
Yes, let me start with <unk>.
National business. Thank you for the question, Yes, we saw a really tough quarter for international.
That.
Sales growth was encouraging.
The real story.
But we are really starting to see the benefits of the diversification and portfolio.
That we did over the last few years that led us to be able to focus where it matters across the international portfolio and I'm definitely seeing the benefit of that as we look kind of across the last couple of quarters of growth and profitability that we've seen and for the quarter specific claim might be K markets to call out.
What we call the flip top but to give you a little bit of color on that Big Dalian day event fell into Q3, followed this year. It was in Q4 of last year.
Some kind of differences in our results between Q3, and Q4, which we call it out.
That is in Nevada, which is designed to try to bring new customers onboard for fleet costs.
It looks to us being successful in doing that again.
Thanks, guys.
Days of the event shows you the amounts of traffic that that generates and the customer is shopping many of them for the first time. So caught continues to meet our expectations and we've been pleased with that quarter state of the market I would call out is next.
So really strong.
From Mexico, Thanks to all of them.
<unk> sales growth and strong profit growth as well.
We encourage you know.
Okay.
But equally the 5% that hopping on building solutions for customers across that ecosystem, so that cash <unk> payments.
That by Telecom business.
Imaging housecat businesses, helping drive customer connectivity back into the business.
That trading today, a real powerhouse for the international segment across the other markets.
The only other market that I would highlight is China, which leads the way from an e-commerce.
Ed.
E Commerce penetration for the quarter was 23%, but we also saw in China is 41% e-commerce penetration.
From that market about how to deal with those kind of volumes and deliveries and e-commerce as well as South club and is that the rail great Paul not SaaS.
As far as in sharing much of the private brand and much of the innovation at Sam's club in the U S. It's bringing Trey I think it is that focus on the core business will should omnichannel capabilities around the world that are strong.
So looking at how we can make sure that we build out these ecosystems, which are mutually reinforcing as well will help drive us for the future too.
And thank you for the question, Matt Sam described I think we have a pretty simple flywheel, that's been sitting at the heart of Jonathan That's the last three years and it all starts with creating a member of this culture.
Are you that you can't help but create items and services that members love.
Is it create items Memphis lab, you can buy and get cost advantages that you pass on to the member and again, great items that disruptive prices and you open up the channels of vaccines like you talked about any health Jonathan membership income and as we've driven that we've been able to take.
Take some of the funds back and invested in our associates, who then helped create this memberships. This culture and that is the flywheel. That's the same fueling the 11 quarters of double digit comp.
Thanks.
As you kind of look at that.
You can also see on membership income as being up kind of high single digits.
And over that three year period, as well and so it's really just reinforcing flywheel.
You think about member's Mark Amendment, Mark item is actually made.
And for our members. So we have 40000 members of council on the items before we launched into the market, which means that they always launch successfully and we end up with about a full point to start writing minimums.
Got it that's creating items that members love.
In short our successful when a large part of the magic that sitting in that corner of 11 11 quarters.
Great. Thank you very much and best of luck.
The next question comes from the line of Kelly Bania with BMO capital markets. Please proceed with your questions.
Hi, good morning, Thanks for taking my question.
I wanted to just talk a little bit about the general merchandise business that while our U S. Just curious how you think you're performing on that side from a market share perspective, and if there is.
Strategy to better leverage the very strong traffic on the grocery side of the business.
And also how do you think the promotional activity continued or contributed to the performance there because it looks like some of the categories.
That did perform well on in garden and automotive.
We're meeting the categories that were not quite as promotional but maybe you can just help us understand.
Stan.
How that played out in the quarter.
Hey, good morning.
Yes, first I think something you said there is really important the traffic that comes from food and consumables.
Where a lot of our shopping journeys began in it over the last few years, we've positioned the business to have a strong online pickup delivery business from stores, which includes an omnichannel approach, which enables customers to shop, the entire business any way that that.
They want to.
In the last quarter specifically.
Specifically I think there has been really good progress with a number of items that have come onto the marketplace, including the number of sellers in the offering.
Growing pretty significantly just in the last quarter.
Count of items up about 50%.
Which positions us well in categories like apparel as we look forward.
And also other strong categories like home.
The share point.
I think the categories you mentioned in one of our important towards show share gains and others, we felt pretty good about the overall market share.
Remaining in a positive position through through the quarter. So for the next three months, we're really focused on delivering and executing well for for all of our customers there'll be a lot of holiday spending as people prepare for gifts.
Doug mentioned earlier that our first I know that was basically in line with expectations, but theres a lot of there's a lot of daylight between now and the end of the quarter still 75 days ago. So we are really focused on the next few weeks as we lead into December and get ready for the holiday period.
Yes.
Our next question is from the line of Simeon Gutman with Morgan Stanley . Please proceed with that.
Yes.
Good morning, everyone. Two part question first on the third quarter.
You had set it up conservatively and this came in much better.
Can you talk about what's what's changed is the clearing of inventory inflation definitely picked up but your transaction too.
And maybe if I had it seems like you have some pricing power and then the second question is.
Maybe John David the timing of LIFO is it is it.
A lot of companies experienced a lot of LIFO pressure during 'twenty, two because of how high inflation was.
Why is it lagged is it because you're you lag the.
The pricing that you went through into your price as it is with other some other dynamic with LIFO.
Some reserves anyway.
I'm wondering why it's hitting your next year.
Sure So I'll take both of those pieces.
On the <unk> I think there's a couple of things that stand out.
In terms of the performance relative to our guidance first is.
As we've talked about in our prepared remarks, we gained share during the period, which.
And this time of high inflation.
Putting pressure on the consumers it shows that our value proposition is more relevant than ever at the same time. There's also been an extreme focus on the expense side of the business and so you see that we've leveraged by almost 80 basis points in the quarter.
We're continuing to focus on.
Providing the best.
Alex to our customers, but in the most efficient way that we can and so those will be the two areas that I would call out that are most notable in terms of the outperformance with respect to LIFO, what we've experienced this year with the over $200 million LIFO charges has been entirely related to Samsung.
Sam's uses the weighted average cost method for their inventory counting Walmart users Ram of retail inventory method and so there is a slight nuance difference there that results from the lag, but our expectation given that we.
Thinks that these prices will persist is that Walmart U S. We will then will soon begin incurring these charges as well in terms of the timing of next year, it's more frontloaded than.
Ben.
Then the <unk>.
Back half of the year.
Thank you.
Uh huh.
The next question is from the line of Chuck Grom with Gordon Haskett.
Yes.
Hey, Thanks, good morning, and congrats to the team Doug in your prepared remarks, you said customers that came to us less frequently in the past are now shopping with US more often can you flush that comment out a comment a little bit more for us I think it's interesting I'm curious the timeframe that youre speaking to and then regionally just curious if there was any.
Callouts in the quarter, particularly in California, with the rebate checks paid out in the month of October .
Ill respond to the first one and then John you can help I mean as it relates to customer shopping with us more frequently this share gain with people, making more than 100000 household income is what I was referring to.
As you would expect just about everybody if I think about the U S. It's probably true in Mexico, and other places to shop at Walmart at some point.
A lot of people may come to us for are tied or come to us for bananas.
But they may not buy.
T shirt or a sweater, we've got really high market shares in some general merchandise categories.
Which would tell you a lot of America shops at Walmart and.
During a period of time when people are more sensitive to price. It makes sense that they would increase the amount of their wallet.
Would be coming to Walmart because of value. So that's what's happening. So that leads you to the second question, which is can you keep them.
And I think some of the things Jon mentioned, a minute ago like pickup and delivery help but as I mentioned in my remarks fresh.
Fresh food in apparel or other areas home's another one where if we can stand tall. During this period of time, we think they'll keep coming back to us because we do have quality, we do have value and we've created a lot more ways for them to save time in the store and with pickup and delivery.
So that's what we're out to do yes exactly.
Good morning, Chuck.
The business has really positioned itself to be an omni business. So we're ready for our customers. However, they want to shop.
Certainly.
I would.
Yes.
Repeat and higher income customer groups, we are seeing more and more often.
You're seeing more digital engagements with customers more app downloads more users people shopping more frequently and I think that speaks to the strength of the strength of the flexibility of what we built in for a long time, we talked about the value of the store customer plus shopping on E. Com how much more valuable that was we see that accelerate when it's pick up ecommerce and stores. So.
Going forward, you'll hear us talk about this more and more as an omni offer which is really flexible for the customer and doing things like having options for Thanksgiving meal that are priced the same as last year are really helpful. At a time when customers are feeling the pressure of inflation.
And then last thing regionally.
No real differences to report in the third quarter.
Across the geographies, we saw strength in many geographies I wouldnt say that theres anything that what would be a real standout in terms of one region being much stronger than others. The formats, where were strong across the board and we saw consistency throughout the quarter.
Yes.
Thank you.
Our next question is from the line of Michael Lasser with UBS. Please proceed with your questions.
Good morning, Thanks for taking my.
My question I have two questions Firstly, Doug.
Start of your prepared remarks that we mentioned.
To bring down prices for consumers as we move into next year likely that some of the pressures that caused all the inflation and consumer goods will start to.
How is Walmart going to handle that could you actually see prices come down and thats important given that Walmart tends to be the price setter across a lot of consumer goods and youre going to have this growing pool of alternative powerful for like you can actually support lower prices.
Into next year and then my follow up question. This is John .
John David and David will provided a couple of loose parameters for how to think about 2023 between $1 billion.
LIFO headwind to gross margin and a $3 billion.
<unk>.
FX drag to sales next year.
That mean, we should expect that two.
2020.
Bob.
<unk> for Walmart.
<unk>, 4% topline growth and four 5% operating income growth.
Then we will get that back in 2024, and some of those headwinds.
Such that the combination of those two years should produce the algorithm. Thank you very much.
Yeah, Michael this is Doug.
Algorithmic algorithm is the first thing that came to mind. When you asked the question about how we will approach prices.
At 4% and greater than 4% numbers are certainly on our mind does that indicate that we think we can grow operating income percentage of the company over time.
As we navigate next year that will be one factor that we're thinking about obviously, we'll be thinking about customers and members as well and driving top line and growing share. So it will be navigating it basically week to week month to month as things change in commodities like protein categories have already started to risk.
Bond they move quickly based on demand there'll be volatility.
Categories like fresh food general merchandise categories have started to move as demand softens and things like transportation cost change.
We've seen some downward movement in general merchandise and I think that will continue but I guess in the next year to some degree and we'll manage margins in a price gap and general merchandise Department by Department category by category as we always do but have an eye towards leading down while protecting profitability.
Much as we can I think.
Dry grocery consumables will be more stubborn.
Wage rates have gone up.
That won't change and some input costs have been high for those categories.
It's the area, where we need to partner, even more with our suppliers and come up with more creative solutions and try to do the best we can of relieving that pressure for customers and members. When you add it all up we will watch our price gaps, we like where our price gaps are as you've heard us say many times.
We understand where price gaps that need to be to drive our sales and then we manage the rest of the pieces to consider.
Consider operating income and return on investment.
Yes, Michael with the second part of that question well I wasn't here when we first talked about the growth algorithm I'm quite certain that the team did not contemplate the $1 billion LIFO charge in that number or the FX headwinds. So I would encourage you to think about that over a multi year basis. That's a framework to think about the opportunity that we have.
And our business, we're calling that out now because it's a <unk>.
Headwind that we recognize we're going to encounter but that shouldn't take away from the tremendous growth opportunities that we have with our changing business model moving more to.
Our scaled omnichannel retailer as we invest in things like marketplace advertising fulfillment services and so all of those things give us a lot of conviction that that growth algorithm is well in place, but I would encourage you to think about that over a multiyear period.
Can I clarify that real quick.
If you're expecting the $1 billion headwind gross margin from LIFO.
And let's say the next two or three quarters does that mean.
I'll get back in the subsequent two or three quarters based on everything we know today.
That's the right way to think about it Michael I don't want to be so specific as to say that.
<unk> of quarters, or which quarters, but over the past call. It 35 years, we've generally been.
Either because of our business model of everyday low prices or just what's happening with retail prices in general we've generally been in a deflationary retail cost environment. We don't expect to live in this era of high inflation Forever I certainly hope not.
If we do get back to what we've seen over the last three decades, you would expect that to reverse out in a reasonably quick time period. So this is not something that if we get back to a normal environment, it's going to take years to reverse out. So what you said is generally correct I can't be so specific as to be so.
Which quarters are going to happen, though thank.
Thank you very much and have a great holiday.
Gotcha.
The next question comes from the line of Peter Benedict with Baird. Please proceed with your questions.
Hey, guys good morning.
A couple of quick ones first just John David maybe you guys can talk a lot about the flywheel new capabilities understanding that those are all integrated.
The business in different ways.
How should we be thinking about the impact that can have.
The business either currently or over the next few years.
A way you can help us frame that and then the second question is just around the trade down and the increase in private brand penetration just curious how the pace and magnitude of that shift that you guys are seeing compares to maybe past periods, where we've had economic stress is it similar is it happening.
Acutely just those are my two questions. Thanks, so much.
Sure I'll take the first part of that and then pass it onto John for the second part of the question.
One of the things Peter that excites me the most about this business as the opportunities that we have going forward with a changing business model that is really.
Reflective.
Our consumers consumer patterns are shifting to we've seen the world moves more online I think we are unique in our ability to be a skilled omnichannel retailer and so when you consider things like advertising or fulfillment services. These are areas of our business.
Not only are faster growing they have a higher margin associated with them and so that's.
That's included when we when we contemplate or our growth algorithm and so hopefully we look up and a number of years from now and we've got a much more diverse and durable earnings stream that also there is a different multiple ascribed to those earning streams than what exists today, we're quite excited about the opportunity in front of us.
And Peter It's John I'm, just talking about private brand for a second.
What we've seen really for the last three years up until Q1 of this year was.
Our flat private band Rand penetration not much movement in 19, 2021, and then the movement the training to private brands from other brands really started.
March of this year and then as we said in the quarter, it's increase its penetration in the food categories by about 130 basis points. So a relatively decent amount has moved into private brands.
Comparisons to prior periods.
I think the last time, we would be able to say anything about us from a 12 to 13 years ago. So I don't think I have anything today to offer with specificity other than.
What we've seen in the last three quarters is quite a bit of switching amongst some consumers that are there other consumers that are trading to Walmart.
That are not trading in private brands. They are branded customers and they are buying more premium items. So.
Again, I would just repeat.
Repeat the fact that we positioned ourselves in terms of merchandising in the portfolio and what the channels by which we serve customers in a very flexible way. So that we can we can help customers in whatever economic situation. They are in and we will be ready for the rest of the year I think what you guys have done on the Thanksgiving meal is a great example of how we're helping.
Pressure there Peter a group of items that make up the scratch cooking aspects of Thanksgiving 25 items for $88. The same as last year.
Thats one basket, we've looked at Thanksgiving baskets in different ways and taken other actions on products that are more convenient not scratched that like our $71 or 17 different items.
That alleviates the need to switch.
Some of these are branded items I think thats a great example of how we can step up and absorb some of this to help families that need it most.
Really pleased to see you guys take that action.
Appreciate the perspective, thanks, guys.
Thank you. Our next question is from the line of Scott <unk> with RFID capital. Please proceed with your questions Hey, guys. Thanks.
In here, so I guess I wanted to get back to the idea of Nick.
Michael was talking about with the inflation receding.
I guess, the big wildcard in that if we get a big.
Inflation going away, where does demand underlying demand.
Suggest maybe underlying demand is being destroyed.
Potentially and so how do you guys think of your business as we move through that.
Type of environment.
Sure ill start and others can jump in this is John David.
One of the biggest impacts on our business. This year has been the change in mix, particularly as we think about the U S business, where the margin profile is different on general merchandise versus food.
Food and consumables.
We don't have an assumption that that bounces back rapidly next year.
With continued high prices consumer continued continuing to be pressured we expect to have that mix effect effects prolong into next year and so.
I know there is hope that things will bounce back and certainly some of the onetime costs that we've incurred this year related to supply chain are not going to repeat next year, but.
The consumer is.
<unk> one of the things Thats assistant that thus far as relatively strong balance sheets among consumers assisted by stimulus payments, that's not going to last forever and so that's why we take a rather cautious view on the consumer but at the same time as all of US submission this is where our value proposition.
Really shines when customers are looking for value as Todd just value the social product assortment one of the things that John mentioned and I think it's worth repeating but it's not just the 370 million skus that we're offering between first party and third party e-commerce acceleration of that that's a 50% increase quarter over quarter.
And it shows you that not only are we providing products at the price point that customers want.
Additional products and assortment for them to buy.
Scott Good morning.
I would add.
John David said.
Really three parts of this.
First we have to focus on what we can control in any environment and that we consistently great merchants positioning ourselves for value, which is relative value and taking a longer term approach to consumer and then finally strong execution.
We've made some progress with inventory as we said quarter to quarter from from high <unk> to just over 12% over last year, so having an inventory position that strong going into the year with some flexibility is a really important part to be able to maneuver any environment that we'd get into so we will continue to focus on those three.
And we will be ready for customers in any scenario that we find ourselves in in the next couple of years.
So as a follow up to that John Lake. If you look at the U S business ex LIFO.
Do you anticipate EBIT growth.
We're not prepared to give guidance for next year, we'll talk about that more on the fourth quarter call. So really good try though Scott.
So you're all tempted to jump in and say something.
John David gave you the appropriate answer.
Alright, thanks, guys.
Thank you. Our final question today comes from the line of Paul <unk> with Citigroup. Please proceed with your questions.
Hey, Thanks, guys. Just curious you mentioned again seeing a higher income consumer trading into your store Im curious if youre seeing them shop other parts of your store outside of food and grocery are you seeing them show up in general merchandise and I'm kind of curious just as you look out to the competitive environment for holiday what are you.
In terms of the promotional cadence out there and maybe just talk about the opportunities that you have for holiday this year as well as challenges.
Hey, Paul.
What's exciting about the rest of the season as we still have a couple of big events. This month, we're excited about Thanksgiving next week because of the way we are prepared in the food business and then we have.
An event in December that we're looking forward to as well.
The customers that are trading into the brand as I said earlier is it's a mix, which which is great. We're seeing more customers more often we're seeing them in more categories.
Historically in the last quarter.
We do see a lot of new customers, who come in via food and consumables and then through the digital experience. What we did over the last really 12 months was integrate the original Walmart grocery shopping app in the Walmart Dot com app into one place. So the entire assortment up to 350 plus million items are all there in one place.
<unk>.
I think we're positioned well to be able to navigate as far as promotions.
As we said earlier the guidance will include the ability to react to a more promotional environment, but we don't know yet.
It's still mid November and there's a lot of room between now and the end of the holidays, including new year. So again, we will be prepared for any environment that emerges over the next few weeks.
No more promotional than normal late some season later than others Christmas is a day later this will be one of those years, where we're watching sales closely up until the last minute of Christmas Eve and then we will do a lot of business after that.
We don't finish until January 31, and sometimes these quarters workout wear.
The very end of December and January ended up being stronger when people are particularly price sensitive. So that's kind of what I'm expecting.
Yes.
Thanks, guys best of luck.
Okay.
Thank you.
At this time, we've reached the end of the question and answer session I'll turn the call over to Doug Mcmillon for closing remarks.
As always thanks for your interest in the company.
Are pleased that we had a stronger quarter I think there is a lot to look at it in the metrics that we've shared we shared a lot of information. This morning that would indicate not only are kind of the key short term operational metrics being managed well, but we are building a different business model.
John David talked a bit about that in his prepared remarks, we're excited to see progress in terms of how marketplaces scaling and how these businesses connect to each other so we're not just focused on the short term, but we are focused on the short term.
As we build for the long term the key.
Issue has been inventory management.
And I'm really thankful to have a team with a lot of experience in and able to consume a lot of data to make good choices about where we position inventory by country by category.
For the rest of this quarter and into next year I'm sure there'll be some things that surprise us, but we are engineered for flexibility and as I mentioned in my remarks, one of the things I Love about this business Theres, a long list of things I love, but one of the things I love their all the natural hedges.
I don't want to buy something we'll sell them something else at the pricing can be a little lower we will figure that out if a problem needed to be dealt with will deal with it and there'll be something else going well, but helps us manage the total portfolio and that's the way I think about it I'm excited about this holiday and the challenges in front of US and hope you guys have a great holiday yourselves. Thank you all.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.