Q1 2024 Walmart Inc Earnings Call

Speaker 1: four for one to to that.

Speaker 2: Greetings. Welcome to Walmart's Fiscal Year 2024 First Quarter Earnings Call.

Speaker 2: At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star-zero from your telephone keypad.

Speaker 2: Please note this conference is being recorded.

Speaker 2: I will now turn the conference over to Steph Wissink, Senior Vice President, Investor Relations. Steph, you may begin.

Speaker 3: Thank you and welcome everyone. We're excited to discuss the results of a strong first quarter and our upwardly revised outlook for the year. Joining me on the call are Walmart CEO Doug McMillan and CFO John David Raney.

Speaker 3: Following prepared remarks from Doug and John David, we'll take your questions. At that time, we will be joined by our segment CEOs, John Ferner from Walmart US, Judith McKenna from Walmart International, and Kath McClay from Sam's Club.

Speaker 3: In order to address as many of your questions as we can in the time allotted for this call, please limit yourself to one question. The operator will mute your line after your question has been posed. After management has responded, we will move to the next person in line.

Speaker 3: and management may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC.

Speaker 3: Please review our press release and accompanying slide presentation for a cautionary statement regarding forward-looking statements, as well as our entire Safe Harbor Statement and non-GAAP reconciliations on our website at stock.walmart.com.

Speaker 3: Thank you for your interest in Walmart. Doug, we are now ready to begin.

Speaker 4: Good morning and thanks for joining us to discuss our Q1 results. We had a strong first quarter. Sales growth was strong globally, including growth of 26% in e-commerce.

Speaker 4: Frofford grew much faster than sales and we made further progress on inventory levels.

Speaker 4: The omnichannel model we're building continues to resonate with customers and members.

Speaker 4: As expected, a higher mix of sales in the food and consumables categories negatively affected gross profit, but strong expense management and progress with our newer, mutually reinforcing businesses helped us grow profit ahead of sales at 17.3%.

Speaker 4: The business model we outlined at our recent investor conference is taking shape.

Speaker 4: International had a great quarter, continuing our momentum from last year.

Speaker 4: Sales grew 12.9% in constant currency and profit grew even faster at 41%. China, Walmex and Flipkart all saw double digit top line growth. In China, the reopening of the economy coincided with the Chinese New Year season and that drove traffic to our clubs and stores.

Speaker 4: Stamps Club China continues its strong performance.

Speaker 4: For India, a group of us were there last week and we left even more excited about our opportunities. Flipkart and Phonepay are doing well. Our Walmart tech team there is strong and we have a big opportunity to increase our exports from India across quite a few merchandise categories.

Speaker 4: In the U.S., both Walmart and Sam's Club performed well with good transaction growth, positive units in food, and strong e-commerce growth. We continue to gain market share in the grocery category, including with higher income and younger shoppers, and we saw good growth in membership income in both businesses.

Speaker 4: At SANS Club US, member count and plus member penetration hit all-time highs in the quarter.

Speaker 4: Our growth is now being driven by convenience in addition to price. We see it across formats and in common age cohorts.

Speaker 4: In terms of inventory, we're in good shape. In stock is improving and excess inventory keeps coming down. We see it in the numbers and I'm seeing it on store and club visits.

Speaker 4: Globally, customers continue to seek value given the impact of inflation. We see it in the U.S. and in other markets like Mexico, Canada and Chile.

Speaker 4: Private brand penetration is up about 110 bases points versus last year for Walmart US and 50 bases points for Wal-Mex.

Speaker 4: We continue to manage our price gaps and deliver value for our customers. In Walmart US, general merchandise costs are now lower than a year ago, which is great, but they're still higher than two years ago on like items.

Speaker 4: In the dry grocery and consumables categories like paper goods, we continue to see high single digit to low double digit cost inflation.

Speaker 4: We all need those prices to come down. The persistently high rates of inflation in these categories, lasting for such a long period of time, are weighing on some of the families we serve. This stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year. We all need those prices to come down. The

Speaker 4: because of the cumulative impact on discretionary spending and other categories, specifically General Marching us.

Speaker 4: We think we've got guidance where it should be, reflecting the appropriate amount of conservatism given the external environment. We feel very good about our performance, our multi-year momentum, and our ability to serve people however they want to shop and do it at a value.

Speaker 4: We're executing well and performing well in all three segments. John David will say more about how we're thinking about guidance in a minute.

Speaker 4: Because we look ahead to Q2 in the rest of the year, we're focused on getting our merchandise costs and retails down to fight inflation for our customers and members, which will help us with mix.

Speaker 4: pickup and delivery execution, whether that comes from a store or an FC, expense management, and inventory management by item and category. There are places to play offense and there are places to be more conservative. We shouldn't be treating every category the same way and we aren't. We're playing offense where we should and controlling what we can control.

Speaker 4: Last month we hosted our investor meeting in Florida where we visited a DC, a store, and a sand glove.

Speaker 4: For those of you that made that trip, thank you. We really enjoyed it and hope you did too. We had three takeaways. First, we're positioned to grow because we can serve customers and members however they want to be served.

Speaker 4: Second, over time, we expect to grow profit faster than sales and improve operating margin due to productivity improvements and the mix of businesses. And third, we'll be disciplined with capital to improve ROI as we grow operating income.

Speaker 4: I hope you can see how the investments we've made in recent years are driving results.

Speaker 4: We added nearly $11 billion in sales in Q1, delivered 58 basis points of expense leverage, and expanded operating margin by 34 basis points.

Speaker 4: As for returns, we want operating profit growing faster than sales, and we expect to see an inflection in ROI in the coming quarters as we begin to lap large one-time items from past quarters.

Speaker 4: The investor meeting also gave us an opportunity to show off a piece of the automation we're working on in an ambient DC. And while it's an important piece of what we're building, our overall set of capabilities go far beyond that. We're building a more connected, intelligent and automated network. We're adding Market Fulfillment Centers, or MFCs, which utilize automated storage and retrieval systems.

Speaker 4: And we expect to add thousands of electric vehicles to support our last mile delivery capabilities. It's about creating a supply chain that's better, not just bigger. Here.

Speaker 4: We're excited about how our new capabilities will help our associates by making some of our more physically demanding jobs into more rewarding, higher skilled career paths.

Speaker 4: We're hosting our annual Shareholders Week events in a couple of weeks here in Northwest Arkansas. Part of the experience will include a tour of an MFC we've just opened. It'll be a good chance to see another piece of what we're building.

Speaker 4: I'll close by saying thank you. Thank you to our associates for helping us deliver another strong quarter. We're proud of them and pleased that both Walmart and Sam's Club in the US were recently certified as a great place to work by the industry leader in workplace excellence. Thank you for your interest in our company. Now over to John David.

Speaker 5: Thanks, Doug. I'd like to start by thanking our customers, associates, and partners for helping us deliver a strong quarter to start the year. Despite a challenging macro environment, the team executed, and we made progress advancing our various strategic initiatives.

Speaker 5: I'll begin by reviewing highlights for the quarter using the framework of growth, margins, and returns.

Speaker 5: Then I'll spend a couple of minutes reviewing key themes for our recent investor day before detailing our updated guidance.

Speaker 5: Starting with growth. For the first quarter, constant currency sales increased nearly 8% or about $11 billion with strength across all segments. Walmart U.S. Comp Cells, excluding fuel, increased 7.4% including 27% growth in e-commerce.

Speaker 5: After a strong start, sales growth moderated as the quarter progressed. The 90 basis point deceleration and comp sales growth from Q4 was driven by pricing and the effect of lapping higher inflation rates in the prior year period. We continue to gain share and grow unit volume and grocery.

Speaker 5: This was consistent with our expectations and how we built our plan. At the headline level, consumer spending has proven resilient. But below the surface, we continue to see signs that customers remain choiceful, particularly in discretionary categories.

Speaker 5: In Q1, we saw nearly 360 basis point shift in US sales mix from general merchandise to grocery and health and wellness.

Speaker 5: To benchmark, the magnitude of this shift exceeds the 330 basis points of category mix shift we experienced in all of last year. In addition to the persistence of inflation and food and consumables, customers were also impacted by a reduction of SNAP benefits and lower tax refunds.

Speaker 5: These impacts were partially offset by higher spending tied to an increase in the cost of living adjustment for Social Security benefits.

Speaker 5: In our international segment, sales were strong, up nearly 13% on a constant currency basis, led by double-digit growth in China, Wal-Mex, and Flipkart. Many of the same impacts on consumer spending in the U.S. affected our international markets be Ess casualty.

Speaker 5: And SAMH's Club US Comp Cells increased 7% with member fee income up 6.3%. Average spend for member increased mid single digits.

Speaker 5: Now on margins, consolidated gross margins decreased 18 basis points with ongoing pressure from category sales mix globally.

Speaker 5: This headwind was partially offset by a reduction in supply chain and freight costs relative to last year's heightened levels.

Speaker 5: Category mix was a notable headwind across geographies and formats. Walmart U.S. General Merchandise cells declined mid-single digits, while food and consumable cells increase low-double digits.

Speaker 5: Headline inflation and food and consumables came down over 400 basis points from the start of Q1 to the end of the quarter. But prices remain high, and customers are being cautious with their spend in discretionary categories.

Speaker 5: And while we make attractive margins in food and consumables, they have a lower margin than general merchandise. We expect category mix to remain a gross margin headwind for the balance of FY24. The higher margin initiatives that are connected to our core Omni retail business, including marketplace, advertising, and membership, continue to meaningfully outgrow the base.

Speaker 5: I'll discuss each of these. First, marketplace and fulfillment services.

Speaker 5: We're growing our marketplace with new items and sellers and an improved experience.

Speaker 5: We've increased seller counts in the US by more than 40% year over year, and the number using Walmart fulfillment services has more than doubled.

We're adding higher profile in demand brands that our customers are searching for, but not typically distributed at Walmart. Elevating our profile is a digital shopping destination. And in India, Flipkart's commerce platform continues to scale, growing first time e-commerce customers and expanding its reach in tier 2 and tier 3 cities.

Flipkart's E-Cart business now includes more than 35,000 Corona partners, as well as providing fulfillment services for Flipkart's sellers and other third parties.

Moving to advertising. Our global advertising business delivered strong growth of over 30% in Q1.

In the US, Walmart Connect advertising sales increased nearly 40% as we experience strong momentum in new advertisers, particularly from marketplace sellers.

And the number of 3P sellers utilizing our ad capabilities has doubled over the past 12 months.

SAMS Club Ad Business called Member Access Platform grew double digits with a number of active advertisers up more than 50% versus last year.

Advertisers are responding to our recently launched InClub Cells Attribution feature, which provides advertisers with clear insights on the returns of digital ads been both online and in clubs, while enhancing member experience.

In an international, the advertising business continued to show strength led by Flipkart ads, which was up over 50%. And lastly, membership. Sam's Club member counts have had a multi-year run of robust growth with another record high achieved in Q1.

Member counts have grown nearly 30% over the past three years, and we're increasingly attracting greater numbers of Millennials and Gen Z.

We also like the trends we're seeing from Walmart plus members. Nearly 50% of our Walmart plus members are coming from the online pickup and delivery channel.

Members spend more than non-members. They shop with us more frequently. And the membership deepens engagement helps enable personalization and allows us to offer more services and to provide more offers on things that are important to our customers.

Turning back to the middle of the P&L, S-GNA expenses leveraged 58 basis points aided by strong sales growth across the enterprise, a continued focus on managing costs into moderating sales growth as inflation lessons.

and lapping some COVID-related wage cost in the US last year.

Taking all this together, our operating income grew more than 17%. This is relative to sales growth of nearly 8%, which resulted in operating margin expansion of 34 basis points, reinforcing the financial framework that we laid out at our investor day.

As signaled when we issued FY24 guidance in February , several below-the-line items impacted our Q1 earnings results, including higher net interest expense.

Q1 net interest expense was more than $550 million, and we issued $5 billion of debt at favorable rates.

Non-controlling interest was also higher in the quarter, due in part to stronger results from Wal-Mex.

Adjusted EPS of $1.47 was better than we expected, as sales outpaced our plan and cost leverage exceeded plan.

Gap EPS was 62 cents. The difference between adjusted and gap EPS reflects an 85 cent impact from unrealized gains and losses on equity investments.

The team continue to do a good job managing inventory and we ended the quarter down 7%, including a more than 9% decline in Walmart, US. The team continue to do a good job managing inventory and we ended the quarter down 7%, including a more than 9% decline in Walmart, US.

Managing cost and inventory are two of the key controllables as we navigate an uncertain macro environment.

We're improving inventory efficiency and merchandise flow and addressing placement in order to better serve customers, improve store in stock levels, while also mitigating future risks if demand softens.

Let me take a moment to discuss our returns, or specifically Return on Investment, or ROI, which declined by 120 basis points this quarter. We calculate ROI on a trailing 12-month basis.

As such, the decline in Q1 is a result of nearly $4.2 billion in charges we incurred in Q3 and Q4 last year related primarily to the opioid legal settlement framework and the separation of flip cart and phone pay.

Together, these negatively impacted the first quarter ROI by about 140 basis points.

These will again be a headwind in Q2 and to a lesser extent in Q3.

As we lap these charges, we expect meaningful improvement in ROI in the back half of this year. When you look beyond these unique items, our underlying operational ROI is steadily moving higher.

At our investor day in April , I said that we want our ROI to go up every year. And I still believe that will be the case this year. Let me briefly reference key segment highlights for Q1.

For Walmart, U.S., comp cells were strong up 7.4%. Reflecting higher store traffic trends as well as strong growth in store-fulfilled pickup and delivery.

From a category perspective, cop cells were driven by strong growth in food and health and wellness, partially offset by a decline in general merchandise cells.

Unseasonably cooler spring weather, negatively impacted cells, and certain seasonal hardline categories, including lawn and garden.

Gross margins decreased 41 basis points, primarily due to ongoing pressure from category mixed shifts.

As mentioned previously, supply chain cost and transportation were lower as we lapped last year's elevated levels.

Inflation remained high, up low double digits and food categories.

It's important to remember that while year-over-year inflation started to moderate as the quarter progressed, this is largely due to lapping higher levels from last year. On a two-year stacked basis, food inflation remains over 20% and continues to pressure discretionary wallets. Share gains and growth rate continue, including from higher income households.

as our strong price gaps resonate with customers who are increasingly prioritizing value and convenience.

We're also seeing market share gains in the areas of general merchandise, where we've invested to improve the customer experience, such as entertainment and automotive.

In this environment, this customers manage household budgets more tightly and are biasing spending to every day essentials. We're reinforcing our value proposition across the merchandise offering, including seasonal event savings, featuring high quality owned brands, and leaning into opening price points.

For the Easter holiday, we offered customers a curated Easter meal along with a traditional Easter basket for the same price as last year. Private brand penetration in grocery categories increased nearly 110 basis points in Q1, following a 160 basis point increase in Q4 and 130 basis point increase in Q3.

E-commerce cells were led by continued double-digit growth and store-fulfilled pickup and delivery.

Customers increasingly value convenience and speed of delivery. We have an advantage here as we leverage the proximity of our stores to fulfill and deliver digital orders to customer homes.

In many cases, we can get orders delivered faster to customers while building a sustainable, omni-economic model.

Strong flow through on higher sales contributed to SG&A expense leverage, which offset gross profit pressure, resulting in strong operating income growth of 11.7% relative to comp sales growth of 7.4%.

Our international segment delivered an outstanding quarter with strong growth in both sales and profit, continuing the momentum built in the back half of last year.

International group both the top and the bottom line faster than the enterprise.

Sales grew nearly 13% on a constant currency basis, led by double-digit growth in China, Wal-Mex, and Flipkart. Impressively, operating income grew more than three times faster than sales, up 41% with each market delivering year-over-year improvement. The strong profit flow through is particularly encouraging as the team has been delivering operating the...

Remember retention at Sam's Club. Improve trends in hypermarkets and more than 50% sales growth in e-commerce.

Walmex had another good quarter with cell strength in bodega stores, Sam's Clubs, and e-commerce.

We continue to take advantage of opportunities to expand our physical footprint, opening more than 120 stores over the past 12 months, while also scaling our omnichannel capabilities.

As customers desire for convenience increases, the team has rolled out a 60-minute delivery option to 80% of Walmart's Supercenter and Express stores in Mexico.

In India, Flipkart had strong top-line results and improved its contribution profit.

The team continues to expand their products and services. As an example, Flipkart Travel added to its portfolio of offerings by launching bus reservation services during the quarter through its ClearTrip platform and already is capable of offering 1 million bus connections to customers. And we continue to be pleased with PhonePay's great performance.

During the quarter, we reached an important milestone with annualized total payment volume, or TPV, eclipsing the 1 trillion level for the first time.

For Sam's Club, US comp cells were strong, up 7% in Q1.

In addition to solid increases in both transaction and ticket, SAM's e-commerce sales were up 19% led by strong growth in curbside.

SAMs delivered another quarter of record member counts and membership income growth was 6.3%.

Plus member penetration also hit an all-time high during the quarter.

And it was terrific to celebrate the 40th birthday of Sam's Club during the quarter with member promotions and events. We saw incredible response from our existing and new members, including the largest quarterly membership sign up on record.

Operating income declined slightly as a result of an inflation-related life-o charge of $48 million. Without that charge, operating income would have increased 10%.

At our investment community meeting in April , I outlined our plan to grow operating income faster than cells centered on three strategic building blocks of our financial objectives.

First, we're focused on driving organic sales growth from our omni-channel business model. It's clear our omni model is resonating with customers across income demographics who are seeking out Walmart digitally and in stores, curbside and via delivery. And we're growing mindshare for our convenience, which nearly matches our mindshare for price.

As we continue to scale digital capabilities in our markets around the world, we have an opportunity to drive significant growth in the top line over the coming years.

The second component of our financial model is to diversify our earning streams through improved product and business mix. To improve product mix, we're focused on increasing sales penetration in higher margin categories like apparel and home through the expansion of our e-commerce marketplace assortment and an upgraded presentation and experience in our remodeled stores. Our e-commerce assortment has grown to include over 200 million SKUs in apparel, this isoan for sales, professionalestone.com for educating workers, which has aware

and nearly 60 million in home categories.

And our newest remodeled super centers take a differentiated approach to showcase in general merchandise with more brand shops, digital displays, mannequins, wider aisles, and updated fixtures.

We're very encouraged by the early reads on customer response to these initiatives. And we plan to update 300 stores with these features this year.

In addition, as I mentioned earlier, we're making progress in improving our business mix as we scale a portfolio of highly attractive growth initiatives that reinforce our core retail model and will directly reshape our e-commerce and our enterprise profit trajectory.

This set of initiatives drives stronger returns and includes advertising, data, and membership in many markets. Collectively, these initiatives generate operating margins that are appreciably higher than our core business. And we expect will begin to positively influence operating profit growth relative to sales growth this year. The third building block of the model includes improving returns by scaling proven.

And we're allocating capital responsibly with a bias toward increasing returns.

I'll reiterate what I said at our investor day.

reiterate what I said at our investor day. We like our strategic position.

Over time, we expect revenue growth across a diversified set of drivers, improved category mix, and increasingly accretive business mix coupled with improved unit economics.

This is all fueled by supply chain investments with attractive payback cycles. We expect the outcome will be operating income growing faster than sales. This is all fueled by supply chain investments with attractive payback cycles.

Turning to guidance, there continues to be a great deal of uncertainty looking out over the balance of this year as macro pressures on the consumer have gradually intensified.

As such, we continue to maintain a prudent approach to our outlook while at the same time, having a high level of confidence in what we can control.

It's also not our historic practice to always update guidance, exiting Q1. And we don't necessarily want to establish precedent that we think in this unique environment, it's important to provide an ongoing framework as our views evolve.

We're raising our full year guidance to reflect Q1 performance and our expectations for Q2. We now expect net sales in constant currency to grow approximately 3.5%.

Our expectations are for Walmart, US, and international to grow slightly faster than our prior view, and for SAM's Club growth to be consistent with our February guidance.

We expect operating income and constant currency to increase approximately four to four and a half percent, including an expected 100 basis point impact from life of charges.

And we estimate adjusted EPS to be in a range of $6.10 to $6.20, including an expected $14 impact from LIFO.

There are also a few changes below the line. Our recent debt issuance yielded a more favorable interest rate than estimated, and as such, our net interest expense is expected to grow $600 million versus last year.

NCI or non-controlling interests is expected to be closer to a 20 cent drag to EPS year over year, including strength and wall mix.

And our tax expectations have moved toward the upper end of our prior range at approximately 26.5%.

Looking at Q2, we're offering the following view. Net sales growth and constant currency of approximately 4%.

Operating income in constant currency is expected to decline approximately 2% versus last year.

Excluding the $173 million benefit from Walmart Chalet Insurance Proceeds last year, operating income growth and constant currency is expected to be flat to up-slightly. As you compare EPS versus the prior year, we're lapping the $5-cent benefit from Chalet Insurance Proceeds and other income, and $5 cents from JD's dividend and other gains and losses.

resulting in a total of 10 cents of comparable EPS headwinds. We expect adjusted EPS of $1.63 to $1.68 in Q2 this year. In closing, the year is off to a good start.

We're positioning our business to succeed with an expanding omnie ecosystem that allows us to grow our top and bottom line throughout any economic environment. If the consumer environment tightens further, we have a compelling value proposition with everyday low prices and a suite of conveniences to continue to gain wallet share.

If the macro environment proves, we have the opportunity to sell more general merchandise and improve our margin mix through both our first party stores and e-commerce and third party marketplace businesses.

And the transformation of our business mix toward higher margin streams of value is underway, helping to protect our profits today and to drive better profit growth in the future.

I look forward to seeing many of you at our shareholders meeting activities next month here in Northwest Arkansas. And with that, let me turn it over to the operator for questions. on questions.

forward to seeing many of you at our shareholders meeting activities next month here in Northwest Arkansas. With that, let me turn it over to the operator for questions.

Thank you, and I'll be conducting a question and answer session.

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So that we may address questions as many participants as possible. We ask you please let me yourself to one question. Thank you and our first question comes from the line of Michael Lasser with UBS. Good morning, thanks a lot for taking my question. Given the prospect of disinflation and the increasingly difficult traffic comparisons and consumer environment.

that you're facing over the rest of the year. How much do you expect you will need to invest in price and other actions in order to maintain an overall stable comp in the U.S. in the coming quarters and how have you factor these investments into your updated guidance? And is it?

Fair to think that given your commentary around doing better than the 2 to 2 and a half percent prior expectation for the Walmart, U. S comp that it could be as high as 4 to 5% just given the momentum of that business. Thank you so much. Hey, morning Michael John burner.

want to start first by thanking our entire team for delivering us wrong quarter and investing in the future at the same time. It was great to see both of those things happen. First, let me just reiterate our purpose of the company is to help people save money and live better. And certainly in the last few quarters we have seen new shoppers as John David mentioned.

that we see in the market. Those are consistent with where they have been the last few quarters. Certainly some shifting that you heard about earlier from brands to private brands. And then most important right now is the flexibility that we offer consumers all across the country. We've seen quite a few customers shift to pick up and delivery.

Our transaction count has been strong. And as far as our plan the rest of the year, of course, we have built into the plan room for adjustments should the consumer change or the macro environment change. As we mentioned, some softness in general merchandise, strengthened food and consumables, we'll be able to manage things well should that continue. We certainly think weather and other factors have played into some of our mix shifts.

We have a plan that will enable us to deliver a value across the entire year. Michael, this is Doug. I'll just add to what John said to remind everybody when we were together in Florida, we talked about this being a bit of a pivot where our investments are more focused on capital investments than income statement investments. And we'll continue to proceed to invest in the supply chain things we talked about a few weeks ago, of course. But also,

We're focusing our store leadership and our store associates on standing tall in those areas and because inventory is in a better spot than it was last summer for example They can focus more on that rather than just dealing with the flow of inventory that was coming in So we can impact mix and do other things to drive our business beyond just considering income status.

to date trends for sales and if the moderation from Q1 has continued. And can you remind us when the mix lap starts to get easier with consumables?

Sure, Kate, this is John David. The second quarter, or rather the first quarter, the way that progressed is, as I noted in my remarks, we saw a moderation as we went through the quarter. February was stronger than March and April were, a bit of a tick down. And that follows some of the trends that we saw. And other consumer day Built.

behavior related to like snap benefits tax refunds and such. This quarter has started started off. Basically how the last quarter ended. So nothing notable really to say about the shift that we've seen thus far. In terms of mix mix is going to continue to be an impact on us this year. We began to I think it was most pronounced in the mid part of last year where we.

saw the effect of that and certainly as we got into the back half of the year and consumer pocket books were continued to be stretched, we saw that shift in our business, pretty pronounced from food to general merchandise. The thing that I will say that's different this year is it's not just a shift to food and consumables, we've also seen in the first quarter

I think the persistent inflation in dry grocery and consumables is the biggest issue. When you think about what we're up against and what will lap, we started to see inflation occur in the back half of 2021. It accelerated in the beginning of 2022 much faster than what we expected, got to a higher level than what we expected.

Since then, you've seen general merchandise start to come back down, but dry grocery and consumables have held. And so, as a customer, particularly if it's a customer living paycheck to paycheck, they now have a two-year stack that's a problem and eventually becomes a three-year stack that's a problem. So, today's week is going to be the milestone of our channel, and so I'm going to fix it

working with those suppliers that are on the prepared foods and consumable categories to get costs down more as fast as we possibly can, would help them drive unit volume, would help us with mix and free up cash for customers to use for discretionary goods. And that's what we're focused on.

have been focused on and it's just taking longer in those categories than we want. Our next question is from the line of Oliver Chen with CD Callan. I think the tech-enabled retail ecosystem continues to scale really impressively. What are some of the key priorities for advertising in marketplace and how they may

Interfect with artificial intelligence as well as truly helping the margin mix. And a follow-up for Judith China continues to be a really impressive on sustained momentum as well as better margins. Just highlights about how that reopening has gone relative to your expectations and any thoughts on India as well. Thank you.

Hey, Oliver, it's John . You're first really proud of the team for the performance and e-commerce in the first quarter, the 22% of something they should all feel great about. That's a combination of a few things. We noted the growth and pick up and delivery of the significant growth in marketplace sellers. And I think what's encouraging.

behind that number are the number of sellers who are using the services that we offer, like our fulfillment services, which gets more of the assortment delivered in one or two days. And we see a pretty significant increase in conversion rates when a seller is using fulfillment services and can deliver within two days. That also leads to growth in the advertising business. Now this ability that the team has developed for sellers and suppliers to reach.

the performance of the supply chain. The supply chain versus last year is in much better shape. The team is performing. So there's a lot of tailwind that's coming from our supply chain team and in their head of our internal plan. So that's a real positive. And then as John David mentioned, there's the...

There's the mixed issue that we're seeing between food consumables and general merchandise. And then growth of health and wellness at a lower margin. The next time we do something define a different starting point based on

Hi Oliver, just a matter of point on the kind of kind of enabled ecosystem in marketplace. We've seen some really strong progress on that internationally with a lot of leverage from US learning that we've been able to apply particularly from a marketplace perspective where we're building out a global marketplace capability we've just launched.

Walnut fulfillment services in a number of our markets. So that's really being enabling that on the ecosystem in here is probably one of the better examples that we have below Walmex is another great example of building out that ecosystem. But in the customer at the centre of it and using our digital capabilities to figure out how we serve them there.

in a simple and effective manner. And you heard John David talk about the work that we're doing, for example, in travel, where we can also cross-sell in India for products as well in our marketplace at the same time as selling tickets for people, whether that be for air or for buses, which we've just launched. As far as China is concerned, they undoubtedly had a very strong...

effect on the quarter. Just to give you an idea of the scale of what happened there and the response of our teams, we had all of our product positioned for a Chinese New Year event based in the cities where most people were. What happened is actually everybody went home....

into the more rural areas and our team had to pivot completely within a 10-day window and reallocate all of the inventory that we had around the country. It was a remarkable effort which just demonstrated their agility and resilience. The Chinese economy is still patches and actually consumer sentiment, if you look externally, is better than it was. It's not all the way to bright yet to pre-coating.

which is a slight softening from where it was, but that's also partly seasonal because of the Chinese New Year time. On India, as Doug commented, we were there recently. Those Flipkart and Phonepay continue to impress us and meet our expectations. They build out of the ecosystem for Flipkart, I think we've talked about, but at Phonepay, we're able to get the best out of it.

right between our tech capabilities, between our sourcing capabilities, Flipkart and PhonePay, it's becoming a mutually reinforcing flywheel of strength for that market and we're excited and what they're going to do in the future.

capabilities, between our sourcing capabilities, Flipkart and Fonepay, it's becoming a mutually reinforcing flywheel of strength for that market and we're excited what they're going to do in the future.

Thank you. Our next question is from the line of Simeon Gutman of Morgan Stanley . Good morning. I have a question for John David. The Q2 outlook, can you share if expectations has changed at all since you guided the full year? And relatedly, you talked about how the second half...

spread with EBIT for sales growth should be stronger than the first half. Can you talk about does that shape or that spread change at all? Does it widen or roughly stay the same?

Sure, Simeon, good to speak with you. You might recall on our last earnings call, we gave a little bit of a head nod into Q2 performance because of some of the specific issues that occurred in Q2 last year. And we said that at the time, we expected it to be roughly flat. Right now, we're saying the guidance is, and I'm speaking about operating income, down 2%. But it'shanded estates, generally I think there's one state located above Q3, key of

quarter for us as you think about this year. As we get into the back half of the year and we see a more pronounced impact from some of the initiatives that we discussed our investor day around these higher margin, higher growth areas, that will begin to have a more outsized impact. But relative to where we were in the last quarter, the expectation for

Our next question is coming from the line of Kelly Bania with BMO Capital. Please just use your question.

Good morning. Thanks for taking our questions. John David, you mentioned the 360 basis points mix shift between food and general merchandise, and you kind of touched on it a little bit, but should we expect that Q1 is the peak of that mix?

pressure and should that moderate throughout the year? Just help us understand what's in your plan. And then also on general merchandise, can you just help us understand what you're seeing in terms of units versus net pricing at this point?

And also the 300 stores that you're rolling out the new general merchandise initiative to can you share the list that you're seeing there? Sure, I'm writing down all these questions here Kelly. So first on mix shift, I don't think it's fair to assume that the first quarter is necessarily going to be the peak when we gave our full year guidance, you might recall that we talked about a an additional incremental.

and you break it down by segment, both SAMs in the US were, if you look at it like, say, real sales, they were basically flat. The international segment, I believe, was up around 6%, 6.5% inflation adjusted, so certainly we're seeing the impact of higher prices and the effect of consumer behavior on purchasing.

points in terms of uplift of cells. Now to be clear that would be expected in any store where you do a remodel you're going to see that initial uptick. I think what we need to continue to monitor is how that levels out over time but when if you've had the chance to go into one of these stores you certainly recognize the difference that.

Then we went to the Northeast and we put these now in a number of markets. And additionally what's encouraging beyond just the merchandising, whether it's the great brands that you see in apparel or layouts, a lot of really exciting changes. What we see is success in a number of markets. So we think this has more broad appeal than perhaps what we may have believed when we did the first one.

So the program's going well and we see several hundred of these in construction and on the way this year. Does it relate to the GM versus food and consumables mix? You might comment on what you're seeing any commerce general merchandise. And then how you would answer the question for Walmart US specifically, how you view Q2, Q2, Q4s are related to that mix. It definitely some interesting points when you...

of examples of digitally native brands that we found somewhere in the media or social media that are doing well. That actually includes, is inclusive in food as well. So the mix right now, as I said earlier, has some positives between supply chain.

Food has definitely grown faster along with consumables. The health and wellness growth is something that we didn't really expect going into the year that has accelerated quite a bit over the last couple months. And so as we look forward, some of the things that are harder to tell right now, the general merchandise impact has been going on for the last three quarters or so, but there are impacts from other things like tax refunds, the weather.

some funds out there. So a little unclear how much of this is temporary in the month that we're in versus what we'll see the rest of the year. But I certainly expect that just the trends in food and consumables and the strength that we have in those, as well as health and wellness, will persist over the next few quarters. I think that, if anything, health and wellness is the impact that it's having on food.

I also wanted to go back to your US e-commerce acceleration during the quarter. What are you seeing from a category perspective? And then for the balance of the year, do you also expect a continued significant contribution to your US comp from e-commerce?

Hi, Rupesh. Definitely excited about the quarter. The team has done a lot of work in the last year to improve overall customer experience. We measure something called CX scores, which looks at our assortment, the number of sellers, the quality of the product display pages.

And they are really in the details of the business. And the last quarter, acceleration, really across the board in e-commerce, pickup and delivery were very strong. But we do look at this entire business as part of the total omni-channel offering. And that's really important because...

When we talk about pickup and delivery at stores, that does include e-commerce orders where a customer is ordering something in general merchandise. It just happened that to be that the merchandise, the items are in the store. So in effect, we shorten the last mile which helps not only speed in time, but also helps the cost of the transaction. Categories though, they're strong. We've been strong in food and consumables, really encouraged by accelerations in marketplace in categories like apparel.

some acceleration, certain home categories, that's great to see. I think that will continue as both the seller count and the item count continue to expand. So we're really looking at customer 10 and driving the business with surge to ensure that the customer gets whatever they want when they want it from Walmart.

Our next question is from the line of Scott Mushkin with R5 Capital. Please proceed with your question. Hey, guys. Thanks for taking my questions. So, you know, just pile them all into one here. You know, I guess I was wondering, obviously, you guys have brought out some brand partnerships and exclusive partnerships. How do you see that evolving?

grocery and do you think they're ever going to respond and that's it thanks again

Hey, morning Scott. First, let me take all three of these. First brands, we really like the brand shops that we set up physically in stores that are in the remodel. I know you've seen a few, but the results are really encouraging. I think additionally in apparel.

What I really like that the team did is they brought everything together for the customer. So if you're in the men's shop, you'll see the brands at the front of the department, men's denim just behind it, shoes, accessories, all there together. So we're traditionally, we've broken these things up by category. Now they're more holistic. Pest is certainly exciting with some of the things that are coming. So if you're online, you'll start.

You will see now and you'll see a lot more in the future, a lot of branded shops inside the digital experience, which enables brands to be able to put their entire assortment online, whether it's first P or one P that's online or sold in the store. The rest of the assortment there can be shot by brand and I think these are going really well. The first dozen or so are...

What we are really ensuring on these new members is that we are helping them see the entire path to get you all the benefits we offer. The core offer, of course, is based in deliveries that are unlimited, without cost, once you buy into the membership. That's the most important thing that we get right. We measure ourselves really carefully. It's something we call the perfect order, which is exactly what we're doing.

That would include in-stock availability. It would also include the cost of supply chain. Stores I've been at recently from Virginia to New Mexico and Texas and Tennessee, I'm seeing much better execution in grocery and in-stock availability, which does help the order fillers and order pickers, which makes the Walmart Plus experience much better. So we'll really continue to focus on merchandising and pricing. Just the other day, I was with the team, and after the deployment I would PC demo with guaranteed beard size, which was pretty early, and just see someone coming in and clicking the type of ad, do we have someone coming in top, maybe someone from youromore who comes in first, or is it somebody who comes in fifth or 1st with a sexism. If you go into any of the different products I've seen,

and saw this item called Bachman's barbecue sauce, which is a digitally native Japanese flavored barbecue sauce that's just doing really well. So also I'm just personally encouraged by the way the merchants are looking at new ways to find new items, bring those to life, and drive sales all across the country.

Our next question is from the line of staff segment with Barclays. This is your third question. Hey, everybody. Good morning. My question is really on advertising. I think it's a relatively small quarter for this, but the 40% growth, obviously it's accelerating. It's very impressive. Can you elaborate on that and what you're doing to drive that?

And then maybe more specifically for Sam's, the advertising opportunity there, seeing a lot of growth in sellers on map there. So curious the opportunity. Thank you. Good morning. So first I'll talk about Walmart US with advertising. There's been a

considerable momentum really that started last year when we launched our second place auction capability. So this is a two-sided market, but ultimately what we're trying to do is connect our sellers, our suppliers to customers. And that can be at the one-to-one level, it can be at the cohort level. And so the team has done a lot to really increase our capacity and capability to handle those transactions really well. What's driving it, of course, over time will be a stronger, bigger marketplace. So more marketplace sellers and helping them connect to customers and then more assortment that's easier to find with search.

And I think that's one of the areas that we've seen a lot of good global leverage and global learning as well to really help reinforce that. And I'll just say from SAMs, we talk about, it's a little bit different from SAMs in that we don't have a marketplace, but what we are doing is stitching together, you have our e-comm growth and then you need to also look at our scan and go growth.

because both of those are indicative of a digitally enabled sale. And so what we've been doing is working with our advertising community on how do you influence the sales, whether they are in club or offline, online or offline.

and you can nudge, you can encourage, you can advertise. And now we're giving those advertisers visibility to their in-club sales and the online sales and stitching them together. They're seeing this lift on their return on advertising spent. So it's a different model.

So, we're happy with the tools and capabilities we're building out to what John and Judith have, but we're happy with the tools and capabilities we're building out and how that's resonating with our advertisers. Kelly with Wells Fargo, which is your question.

Mr. Kelly, please proceed with your question. Yeah. Hi guys. Good morning. I wanted to ask you about the gross margin as we think about gross margin and through the year. Could you maybe give us a little bit more color on how some of the pieces progress? We think about things like freight, markdowns, how that might influence the P&L in the back half. And then

We definitely felt the tailwind from supply chain versus prior periods, including the execution all across the business. It becomes more of an issue as we laugh. Q2 last year, Q2 last year, and Lake Q1 last year would have been the peak of inventories. We worked through a backlog of something like 100,000 containers that had been delayed at port. So,

Lapping those costs gets bigger as you look forward to the next quarter or so. And then as you get into the back half of the year, things tend to normalize a bit. As far as markdowns, last year we had markdown pressure throughout the entire year as we unloaded that parade and moved it from the ports to the distribution centers to the stores and through the entire chain. So the markdown comparisons will moderate slightly as we move forward. But every year, including this year.

We always leave room for seasonal markdowns and at the end of each season we want to ensure that we are clean in inventory so that we don't carry any liabilities forward. And what happens when that happens is it makes it harder to set the next season which backs things up. So we'll stay really focused on taking markdowns on time. In fact, in some categories like apparel we're pulling some markdowns forward within the quarter.

to take advantage of the traffic that we'll see over the Memorial Day holiday. So this is something that we pay a lot of attention to. Last part of your question, can you repeat again? Shrink? Shrink. Sorry, there are several in there. On shrink, it is a factor mix, as I said a few moments ago, it's affected by supply chain, it's affected by food consumable, general merchandise mix, and then health and wellness. So below that level, there is of course shrink. And as we've said in the past, it's been challenging for us, it's been challenging really for all of retail.

So we're going to actively manage this issue. We always do. We always have. And we're going to continue to take the steps that are reasonable and required to make sure we're protecting our customers, protecting our associates, and protecting our assets and inventory. We know a lot of communities have been affected by this, but it's also important to note that retail can't solve this issue all on its own. It will take communities stepping up and enforcing the law to be able to solve this issue.

alternative investments will protect profits. And that comment is a little different from the analyst day where I believe you said it would be additive and not subsidizing, I guess, four walls for lack of a better word. So I wanted to clarify that, but then bigger question I had is, could you maybe get a little color and what the spend pattern is with a higher income?

and make some prepared remarks.

All of these first of all work together. I think we it's hard to just look at core retail and then separate out Advertising membership fulfillment services. They are mutually reinforcing which is what makes them so attractive to us and it's those very

new businesses that we think will make our profits inflect in terms of the growth rate relative to sales going forward. So the protect profits for that, please don't read too much into that. That's we clearly are excited about this part of our business and this is the opportunity to have our profits go faster than sales. On the high-income cohort, I'll start there maybe John or others.

But I think the big story here is that it's around how our value proposition for convenience is resonating. We've always been known for price, but I think the steps we've taken in the last three to five years to expand our e-commerce capabilities, to expand online pickup and delivery, you see that resonate with customers.

better experiences, better product offerings, and we're seeing that and the actions that we're taking today. And we spend a lot of time.

of course, working on ensuring that we have flexible options for any customer. And in the case of the group that you asked about, we definitely see in the data that there is a higher usage of e-commerce and pickup and delivery. And then when you click into the things they're buying, you do see some differences. So we do see within pickup and delivery.

higher purchase rates of categories like PrimeV versus regular Cattleman's Grade B. So you see trade-ups within it, we see it in apparel. Definitely seeing some growth in apparel and marketplace. And that is definitely being driven by some of our newer higher-income customers. I'm really excited about the growth of not only transactions, but the number of digital users.

that we have on year-in-year which is accelerating. Yeah, and I have to say, I think there's a couple of behavioural trends that we're keeping an eye on. So I do think our lower price point units, like say in patio, sold quicker. And what we're seeing is people being very choiceful about where they spend their money. But they're also shopping a lot later. So in the past, when we set patio, we were able to sell more than $1,000 a year. So we're seeing a lot of people selling more than $1,000 a year. So in the past, when we set patio, we were able to sell more than $1,000 a year.

it's sold really quickly and now we're seeing people wait a little bit later into the season. We're seeing that like with Mother's Day sales, so those demand profiles are looking a lot like they used to in 2018-2019 versus pandemic spent. So people are buying a little later. We also saw kind of...

cooler weather which kind of changed the shape of how people are buying. But what we are seeing is that where you get this really fabulous quality value equation right, sales are up. So we were looking at beef brisket the other day. Our beef brisket AUR is down 17%, our tonnage is up 29%, our roses are amazing value.

So, in our traffic drivers, we're seeing that in our roads and sales are up 60%. So, where you get this great kind of value quality combination together, we're seeing members engage and spend and, you know, also, you know, I've been looking at kind of convenience and traffic drivers, they're up 29%.

So there are areas where you see if you get that quality equation you can drive traffic into the club And we're just watching cautiously as how they spend on those bigger ticker items and when those sales will come Our next question is in the line of Greg Millick with Evercore ISI. Please assist with your question. Hi, thanks. I wanted to follow up on inflation because it seemed to be a theme on your...

all the way back into late 21. That's when we started to see prices starting to rise. And then in 22, February , March, and April , it was quite acute, obviously, and rose at a rate that we weren't expecting going into the year. With the peak of inflation in the end year and July and August of last year, we saw high double digits in categories like food and consumables.

And as you get into the period that we're in now, we're still seeing around high single digits, double digits in parts of dry grocery and other places. But when you add that up over the three years, it gets to be a really high number, which is clearly driving part of the shift. The way we think about value, first we're always comparing ourselves to the prices that are out on the market.

We feel good about our price positioning. The second, we've been able to look at key holidays like Thanksgiving last year, Easter that we just went through, and we've been able to keep a number of items on either a rollback program or base prices where customers can buy key important holiday meals at the same price that they bought them for the year before.

As you look forward, it's not easy to predict. Clearly, we're not happy with the inflation that we see in categories like dry virtue and those persist. As you get into the later part of the second quarter and third quarter, the end year number may look lower because we'll be comparing to get such high numbers last year. But it's important to keep in mind that the two-year stack, but at that point, we still think it will be in the mid-20s. So...

Consumers are under a lot of stress. Therefore, we see the shift to private brand that John David mentioned in his earlier remarks. So more shift this year than the year before. And the year before, there was more of a shift than 21. So that trend continues. We can be good mix managers within food, but across the box as well.

for the U.S. and around the world. General Merchandise Prices, as they're coming down, present an opportunity leading down, number one. Number two, finding items and categories that have above average margins and shaving the margin off there to mix sales up. As customers want to buy discretionary items, we are in a position to be able to show them value through the rest of this year that they might not find elsewhere and we can be aggressive there. Private brand share is another thing. You're seeing that number come up. We have more influence over what's happening with private brands than we do with branded product.

And we do need some of these branded suppliers that are in dry grocery and consumables to get top line focused more than they have been for a while. It's a generalization, not everybody's in the same place, but we're looking for those that want to be aggressive. So if we can make a difference on dry grocery and consumables, lead with general merchandise, and then deal with what's happening in the fresh food categories, which are less consistent, more volatile, some are up, some are down relative to dry grocery and consumables, that's the way we pull off a basket that generates.

and how you expect that to change in 2023 and beyond. And if you can give any color, what percent of your marketplace customers can you also count as advertising and fulfillment services customers and what targets are there? Thanks.

Sure. Good growth in the marketplace in the U.S. and there may be other comments or other markets, but a lot of growth last year. Skew count, as I mentioned late, I think it was Q4 and Q1, both in the 400 million range. We expect that to grow, probably not at the rate that it grew last year.

We made a lot of progress in both SKU count and seller count. And there is continued acceleration with the number who are using fulfillment services and advertising. What's important about both of those services is, let me start with fulfillment, it helps the customer time to promise and it helps customers know when they're going to receive their item. They want to get their delivery.

When they ordered it, they don't want it early, they don't want it late, they want it the day of. And when sellers move their assortment, their inventory into our fulfillment channels, then it's more certain for a customer that it's going to be next day delivery or two-day delivery. And that just helps with conversion rates. So if you're a marketplace seller and you want to know how to drive business at Walmart, it's to list on the marketplace, the inventory and fulfillment services. And then Walmart Connect is just a great way for the seller to be able to find audiences, targeted audiences.

opportunity for the future. WALMEX added 50% of SKUs in Q1 versus the same time in the previous year. Of course our most mature marketplace is in India which has hundreds of millions of products on that. It continues to find new ways to serve customers but when they recently launched Flipkart fulfillment services that connects

trade. Thank you. This is Doug. I think I'll go ahead and wrap up here. We ran a little over. I hope that's okay. I appreciate your questions. I'm grateful to work with such a strong team, the people that have been on this call, but all those that are working in our stores and clubs and throughout the company. I think you can see in our results that we've got a very strong and capable team and one that can adapt to environments. There's been a lot of...

delivered, we can do that. We are positioned to grow profit faster than sales through productivity and through the mix of businesses, Karen, in an additive way. And then on ROI, we'll be disciplined with capital, but we are excited about our opportunities to invest and really grateful that you all came down to Florida, so many of you, and saw what we're doing there. And we just wrap up by inviting you to come in a couple of weeks. We'll show you an MFC.

disconnect your lines at this time. Thank you for your participation.