Walmart Inc (WMT) — Q4 2018 Earnings Call Transcript

Thanks, Rob. Good morning, everyone, and thank you for joining us today to discuss Walmart's fourth quarter and fiscal year 2018 results. Joining us on today's call are Walmart President and CEO, Doug McMillon; and CFO, Brett Biggs. Doug and Brett will have some opening remarks in a minute, and then we'll take your questions. We'll do our best to get to as many of you as possible. We're excited to be hosting this call today. You may have seen in our press release announcing this call that we've made a process change to have a live earnings call with executives in conjunction with our fourth quarter results going forward. It feels appropriate that we share our thoughts as we wrap up one year and begin another. Also, this timing is well spaced from our June and October meetings. We plan to follow our typical earnings release process for other quarters during our fiscal year. Now 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 earnings release and in our filings with the SEC. Please review our entire safe harbor statement and non-GAAP reconciliations on our website at stock.walmart.com. And with that, it's my pleasure to turn the call over to Doug McMillon.

Good morning, and thank you for joining us today. We just completed an exciting year with solid fourth quarter results and continued momentum in the business. On a constant-currency basis, total revenue grew approximately 3% both in the quarter and for the full year. We reached more than $500 billion in revenue for fiscal 2018 for the first time as a company. For the quarter, Walmart U.S. delivered strong comp sales growth of 2.6% due primarily to improved comp traffic growth in stores of 1.6%. Strength was broad-based across merchandising categories, formats and regions, and holiday sales were solid. In addition, comp store inventory declined again for the 11th consecutive quarter, so we are well positioned as we begin the year. Sam's Club comps improved to 2.4%, and in International, 9 of 11 markets posted positive comp sales. So overall, we were pleased with most aspects of the quarter and confident in the foundational aspects of the business as we enter this new fiscal year. Walmart U.S. eCommerce sales growth in the fourth quarter was 23%, down from 50% in the third quarter. The majority of this slowdown was expected as we fully lapped the Jet acquisition, as well as created a healthier long-term foundation for the holiday. A smaller portion of the slowdown was unexpected as we experienced some operational challenges that negatively impacted growth. Overall, we finished the year with eCommerce sales growth of more than 40%, so we feel better about the year than the quarter. Looking ahead, we expect eCommerce growth to increase from the fourth quarter level as we enter the New Year with about 40% growth for the year. We're confident in our strategy to transform the company, and we continue to be guided by four key objectives: make every day easier for busy families, change how we work, deliver results and operate with discipline, and be the most trusted retailer. We're accelerating innovation in the business to make shopping faster and easier for our customers. Creativity, decisiveness, and speed are priorities. We made good progress this past year to save busy families time and money, and we'll do more. By becoming stronger at mobile and leveraging digital capabilities, we improved in-store experiences, including our pharmacy and money services areas. We enabled Easy Reorder online. We're making the checkout experience easier with Scan & Go and also digitizing the returns process. We made acquisitions to improve our online assortment, and we're partnering with others like Google and JD in new ways. We're expanding Online Grocery in the U.S. and around the world and broadening our delivery capabilities in the U.S., China, and other international markets. It's really all about providing more convenience for customers. Customers that shop across all channels are important to us. As we said in October, U.S. customers that shop us in-store and online spend nearly twice as much as customers that only shop with us in stores. Their loyalty to Walmart strengthens overall. Online Grocery customers are a great example as they spend more with us in total once they start using the service. So we'll lean in this year by nearly doubling the number of Online Grocery locations in the U.S. We're also becoming more efficient by changing the way we work, including leveraging technology to equip and empower our associates to be successful. They now have better information, tools, and training. Finally, we're always striving to earn and maintain trust. We're focused on not only helping our customers save money and live better, but also on creating shared value for our business and the communities we serve. In his remarks, Brett will go over the financials and guidance. This will include an overview of the benefits of tax reform and the strategic choices we're making to further strengthen our business. Tax reform gives us the opportunity to accelerate plans for the U.S. You may have seen our announcement last month about investing some of the proceeds in better wages and benefits for more than 1 million U.S. hourly associates. We'll also continue to lower prices for customers, improve technology in our business, and accelerate grocery delivery in the United States. Now let's get into more details for the segments, and I'll start with Walmart U.S. We had a strong year of top line growth, and we're seeing signs that the productivity loop is turning. In our stores, we're making shopping easier and equipping associates to serve customers more efficiently. In the fourth quarter, we took steps to restructure our store leadership teams and corporate support areas to be more nimble. We're becoming more efficient, and it's contributing to the expense leverage that physical stores have delivered all year. Beginning this week, we increased the U.S. starting hourly wage rate to $11. We're also proud to announce adoption benefits for associates that went into effect earlier this month in addition to expanded paid parental leave for all associates that will take effect in March. Investing in our associates will help us attract and retain talent in the future. In addition, we've invested in nearly 200 training academies that have further developed the retail skills of more than 250,000 associates. So our stores are executing better. We’re innovating more. We’re lowering prices, and customers are responding with higher sales and traffic. As I mentioned earlier this has also been a year of good progress in eCommerce. We launched free 2-day shipping on Walmart.com, and customers continue to love Online Grocery pickup. We're expanding our test of same-day and next-day delivery, and our Walmart.com assortment has grown to nearly 75 million SKUs. Acquisitions like Bonobos and ModCloth bring unique, private-branded products to our shopping experience. In addition, partnerships like the agreement with Lord & Taylor will help create specialty experiences that complement our own assortment with more brands customers want. Jet.com complements Walmart.com nicely. Walmart.com, including Online Grocery, has been the key driver of our eCommerce growth, and that will continue. The Jet brand over-indexed with higher-income, urban, millennial customers when we made the acquisition, and we intend to build on that strength going forward. The cost to acquire a new customer on a nationwide basis is cheaper with the Walmart brand, so we've been investing more in Walmart.com on a national basis and reducing marketing investment in Jet, except in certain urban markets. Due to this change, Jet will not grow as quickly as it did in its early days but it will be well positioned where we've chosen to focus the brand. We'll continue to evaluate ourselves on the total U.S. eCommerce growth number. Moving to Sam's Club. You'll remember that we made a decision to close 63 Sam's Club locations in the U.S. We've talked about transforming the Sam's business, and part of this transformation means managing the club portfolio to include clubs that are both financially viable and that fit within the strategic framework for the future. Closing stores and clubs is difficult. It's obviously difficult for our impacted associates, and there is never a good time to do so. John and the Sam's team are working to place as many of them as possible at nearby locations. These closures will help us run a healthier business. We also took additional steps recently to align resources around the initiatives that are most important to our members. We enhanced the value of the Plus membership with a free shipping proposition. We also made the decision to remove tobacco from certain clubs. In addition, Sam's Club changed its merchandising structure to encourage more expertise and continuity in buying roles. The strategy continues to come to life, and we're already seeing progress. Our International team continues to deliver consistently solid results. While Walmex led the way this year, our good performance was broad-based. In fact, 10 of our 11 markets posted positive comp sales for the year, and 5 of those markets grew comp sales by more than 5%. To give a little more detail, Walmex comp store sales increased 6% this year, and we're really proud of how the team is combining our stores with eCommerce to deliver a convenient, seamless shopping experience. As we mentioned in our October Investment Community Meeting, there's more work to be done on the portfolio. We've set priorities, focused on our North American core, and key growth markets including China and India. During the fourth quarter, we made the decision to wind down the Brazil first-party eCommerce business. We always want our resources aimed at winning in the most strategic places. So overall, the International segment continues to make steady progress as we find new ways to serve customers more effectively through stores and eCommerce. In conclusion, we have a plan that leverages our unique assets and strengths to benefit customers and shareholders. It's resulting in momentum. We're being disciplined about cost and capital, and we're acting faster as a company but are pushing to increase our speed. Thank you for your interest in Walmart. Brett, you want to pick up there?

All right. Thanks, Doug. Good morning, everyone. We're pleased with the company's performance during the fourth quarter and for the full year. We've made progress on several fronts, and we have good momentum across the business as we enter the new fiscal year. Adjusted EPS for the quarter was $1.33 and $4.42 for the fiscal year. GAAP EPS of $0.73 for the fourth quarter and $3.28 for the fiscal year was negatively impacted by a number of discrete items totaling $0.60 and $1.14, respectively. Most of these items position the business for more efficient growth going forward, including closing 63 Sam's Clubs locations to create a more viable fleet and healthier business. In addition, we discontinued real estate projects in the U.S. following our decision to open fewer stores and clubs, with greater emphasis on comp sales and eCommerce growth. We also completed our third bond tender of the year to take advantage of more favorable interest rates. A full reconciliation of GAAP EPS to adjusted EPS is included in today's earnings release. During the quarter, we had additional EPS headwind related to some smaller unplanned items and expenses we incurred as we pulled forward initiatives to take advantage of a higher tax deduction. These were only partially offset by slightly more favorable currency exchange rates. Before we get to the results, I'd like to highlight some accomplishments for the full year. Total revenue surpassed $500 billion for the first time and increased $15.1 billion or 3.1% in constant currency. Walmart U.S. comp sales grew 2.1%, the highest growth rate since fiscal 2009, led by traffic growth of 1.4%. Walmart U.S. eCommerce sales grew 44%, reaching $11.5 billion. We made good progress on expenses, especially in Walmart U.S. stores and International. Without the discrete items mentioned in arriving at adjusted EPS, we would have leveraged expenses. Adjusted EPS increased 2%. Operating cash flow was $28.3 billion. The company returned $14.4 billion to shareholders through dividends and share repurchases, and strong working capital improvements continued. Let's move on to the quarter. We delivered a solid quarter to finish out the year as constant-currency revenue grew 3.1% to $135.1 billion. Comp sales were positive in all 3 segments with growth of 2.6% and 2.4% at Walmart U.S. and Sam's Club, respectively. On a 2 year stack basis, comp sales accelerated for the third consecutive quarter for both of these segments at 4.4% and 4.8%, respectively. Even more encouraging is that these results were driven by strong in-store traffic. International grew net sales 2.8% in constant currency, led by strength at Walmex. Consolidated gross profit margin declined 61 basis points. Approximately two thirds of the decline was driven by price investments in certain markets and the mix effect from our growing eCommerce business. The remaining one third was driven by Sam's Club inventory markdowns associated with closures and other International items, including the wind down of our Brazil first-party eCommerce business. Looking ahead to fiscal 2019, we'll continue to make investments that will pressure the rates some but not to the extent of this quarter. Similar to our full year results, SG&A and operating income were significantly impacted by charges for discrete items. Excluding these items, we would have leveraged expenses in the quarter and operating income would have decreased less than 1%. Let's move on to U.S. eCommerce. As Doug mentioned, the slowdown in growth during the quarter was a bit more than we planned. Looking ahead, we have a number of new initiatives planned for the year. We expect eCommerce growth to increase from the Q4 level as we enter the New Year, with about 40% growth for the year. Now let's discuss the results for each operating segment during the quarter, beginning with Walmart U.S. The U.S. team continued to produce strong top line growth. Customers are responding well to our everyday low prices and the convenience we're providing through a variety of initiatives. All store formats had positive comps, and we saw strength in key categories with increased customer traffic and units. During the fourth quarter, comp sales increased 2.6%, led by traffic growth of 1.6%. Comp sales performance on a 2 year stack was the best in 8 years, and eCommerce contributed approximately 60 basis points to the segment. Gross margin rate declined 50 basis points in the quarter due primarily to price investments, higher transportation expenses, and mix effects from our growing eCommerce business. Also, the team leveraged operating expenses slightly even when considering adjustments for discrete items in both current and prior year periods. Overall, we like the momentum we see in Walmart U.S. Our strategy is working, and customers are responding. International had another solid quarter. The teams around the world have done a nice job of delivering top line growth through a focus on price as well as strength in fresh and private brands. Growth was broad-based across the markets, and results at Walmex were particularly strong. Overall, net sales in constant currency increased 2.8% and grew 6.7% on a reported basis. Changes in currency rates benefited net sales by approximately $1.2 billion. It's also important to note the divestitures of Yihaodian and Suburbia created a headwind to sales of about $400 million when compared to last year. From a profitability standpoint, fourth quarter operating income decreased 16.1% in constant currency and 10.9% on a reported basis. As detailed in this morning's release, restructuring and impairment charges in certain markets negatively impacted operating income. Without these items, operating income would have increased year-over-year. Overall, we're pleased with the consistent performance we've seen from our International business, and we feel good about the year ahead. Sam's delivered solid top line results. Comp sales without fuel increased 2.4%, led by traffic increase of 4.3%. Tobacco negatively impacted comp sales by 120 basis points. eCommerce growth was solid and contributed 80 basis points to the comp. Also in the eCommerce space, the team recently announced the free shipping offer from SamsClub.com for Plus members. The team is moving quickly and making decisions that we believe will benefit our members and the business over time. I'll close today with guidance. As always, we have a number of assumptions on our guidance, including the economic conditions and the tax and regulatory landscape, and our largest markets remain generally consistent. You'll recall that we issued fiscal year 2019 guidance last October at our meeting for the investment community. Since that time, we made some decisions and assessed other potential opportunities to accelerate investments, primarily as a result of tax reform. Let me start with our expectations related to tax reform. Our estimates are based on available information and our current analysis regarding the application of the new law. We expect our effective tax rate for fiscal 2019 to be 24% to 26% compared with our previous guidance prior to tax reform of 32.5%. Our global blended rate is higher than the new U.S. federal rate due to state taxes and taxes we pay outside of the U.S. In terms of cash flow, in addition to the income statement benefit from a lower U.S. tax rate, we expect a cash tax benefit due primarily to accelerated depreciation. Including all aspects of tax reform, we currently expect a cash benefit of around $2 billion for the year. Additionally, we are reviewing our cash positions overseas in light of the new law but have not made any decisions regarding potential repatriation. Our priorities for capital allocation remain unchanged. We'll focus first on investing in our business and other growth initiatives. We also remain committed to our dividend, as evidenced by the increase we announced today. And we announced a $20 billion share repurchase program back in October. We've consistently talked about investing in the business for the long term while balancing near-term results. As tax reform is taking shape, we took the opportunity to step back and assess various aspects of the business, including potential investments. We will continue to be aggressive but thoughtful to ensure we win long term. We recently announced some additional investments related to increased wages, training, and benefits for our associates in the U.S. In addition to that, we'll look to accelerate investments in our customers through lower prices, and we'll make investments in technology, supply chain, and eCommerce to better position the company for the future. We'll also continue to prioritize winning with customers in our grocery and fresh business, ensuring we make shopping with us simple and at a great value. At the October meeting, Doug talked about some decisions we had in the Q, but it was too early to comment further at that time. During the quarter, we took several actions, including: a wind down of the first-party eCommerce business in Brazil, the closure of 63 Sam's Clubs locations in the U.S., and the decision to remove tobacco from certain locations at Sam's. These decisions impact the guidance we gave in October, particularly in regards to total sales growth, so I'll quantify the impacts and compare back to the October guidance. Let's first talk about Brazil eCommerce. We expect a headwind to sales of approximately $500 million related to the wind down of the first-party portion of the business. In terms of profit, the benefit of fewer operating losses will be largely offset by onetime costs associated with the wind down. As for Sam's, we anticipate a negative impact to sales of about $6.3 billion related to the decisions to close clubs and remove tobacco from certain locations. Additionally, recall that we sold our Suburbia business in Mexico in the second quarter of last year, and this will create a headwind in the first quarter of this year. The combined top line impact of these items will negatively impact consolidated net sales growth by about 140 basis points. And as a result, we now expect net sales growth to range between 1.5% and 2% in constant currency. Adjusting for these changes, this growth compares to the guidance of at or above 3% that we provided in October. As for comp sales, we expect growth at Walmart U.S. of at least 2%. Sam's Club comps excluding fuel and tobacco should range between 3% and 4% and flat to negative 1% when including the impact of reduced tobacco sales. We expect International total net sales growth to be around 3% in constant currency. Our October guidance for fiscal 2019 also included expectations for expense leverage, relatively steady operating income margin and EPS growth of around 5%. The incremental investments mentioned earlier will pressure operating expenses more than anticipated in October. On a consolidated basis, we still expect to slightly leverage expenses but not to the extent we originally planned. Excluding the impact of the reduction in Sam's Club sales, leverage would be stronger. Overall, cost management is continuing to improve across the business, and we remain pleased with the progress. As for operating margin, we expect consolidated operating income as a percentage of net sales to be approximately 4.3% to 4.4% in constant currency, resulting in a low single-digit percentage decrease in operating income versus operating income this past year, adjusted for the discrete items. Considering all of these items, we expect full year EPS to be in a range of $4.75 and $5, an increase of 7% to 13% compared with adjusted EPS of $4.42 in fiscal 2018. This range represents an increase from the guidance given in October. Additional guidance is included in the materials we issued this morning, so please reference these documents as you analyze our outlook. Going forward, we're moving to an annual guidance framework with quarterly updates as warranted. We considered a number of factors when making this decision, including management's long-term view of the business, the transformation of the business, the investment time horizon of many of our shareholders and the uncertainty of the timing of investments during the year. There could be fluctuations within the quarters, but we believe EPS growth will be relatively consistent across the year. We look forward to updating you on our progress throughout the year. So with that, I'll close by saying thank you to our shareholders for your support of Walmart. And now I'd be happy, along with Doug, to take your questions.

Thanks. Good morning, guys. And thanks for doing the call. My first question is on the eCommerce growth in the fourth quarter relative to next year. You mentioned some operational issues. Can you elaborate and then talk about what gives you confidence that the eCommerce run rate will accelerate heading into next year?

Hi, Simeon. This is Doug. Happy to elaborate a bit more. First of all, I would say that, as we try to communicate in our remarks, most of that was expected and planned. As we came around the fourth quarter and looked at what we did last year promotionally, realized we're lapping Jet for some time now, we've expected a lower growth rate. The minority of the miss that was more operational in nature that we're referring to is related to the fact that, during the seasonal spikes, seasonal inventory, think electronics, toys, gifts, things like that, came into our fulfillment centers and there was enough cube that it harmed our basic in-stock on more everyday items, and our basic in-stock for eCommerce suffered as a result. So we're learning how to deal with higher volumes and learning how to deal with a higher peak than what we had previously. But again, that was the minority of the issue. Most of this was planned and in our numbers.

And Simeon, this is Brett. In October, we guided to $11.5 billion of revenue for Walmart U.S. eCommerce, and that’s approximately where we ended up for the year.

Okay. And then if I can ask my follow-up. Brett, you mentioned you were doing the comparison with pre- and post-October guidance. So I think at that point, EBIT was supposed to be up maybe low single digits, and now it's going to be down a little bit. Can you just tell us if the entirety of that change is tax reform spending? Or is any part of it reflective of higher costs in the business in some form or another?

Yes, Simeon. I still feel good about the cost management in the business, and we're making progress there. When we provided guidance back in October, we mentioned an operating income range that would be similar to what we had previously experienced. As we reassessed the situation, we decided to proceed with the investments we discussed, and that is included in today's guidance. While it may be a bit challenging to compare before and after, the investments we are making highlight the difference. Overall, I feel confident about the cost management aspect of the business.

Thanks, Simeon. Rob, next question, please?

Good morning, guys.

Hey, Robbie.

I would like to follow up on Simeon's comments regarding the eCommerce growth outlook. My first question is about the confidence in returning to approximately 40% growth. Are you already observing this in the first quarter, and what factors differentiate returning to that 40% from the fourth quarter? Additionally, could you connect this to the gross margin outlook you provided? I'm interested in your perspective on potential investments in pricing. Lastly, Brett, I believe the guidance indicated that gross margin rates would decline less in fiscal '19. If eCommerce is set to reaccelerate toward a 40% growth rate, why is there not greater pressure anticipated on gross margin? Thank you.

Thanks, Robbie. This is Doug. I'll start with the eCommerce question, and Brett can elaborate on it too if he would like to. We're not expecting the first quarter to go all the way to 40%. We think it'll start to ramp up from the fourth quarter to approximately 40% for the year. We're going to continue expanding our eCommerce business as it relates to food. Online Grocery's ramping up. As we've said, we're going to almost double the number of locations that do Online Grocery. That will drive eCommerce growth to a certain level. And then on top of that, we've got the activity planned for both Walmart.com and Jet. So we've got an investment plan there. We have an assortment plan and other innovations, as you saw last year, that will be occurring as we go through the year. So we think by the time we get to the end of the year and look back at the number for the total year, it will be approximately 40%.

Yes. Robbie, I'll elaborate on gross margin. As we've mentioned previously, several factors influence gross margin, including price, shrink, and transportation costs. Therefore, it's challenging to assess gross margin on a quarterly basis; a longer-term view is more appropriate. I have indicated that we anticipate next year's decline will not mirror the one we experienced in the fourth quarter. Considering our guidance for operating income and our remarks about moderately leveraging expenses, you can infer some expectations regarding gross margin. We take into account the mix of our business and will remain aggressive yet strategic with our pricing and investments, both in stores and online. We will be deliberate with how we allocate those investments.

Thanks, Robbie. Rob, next question, please?

Hi, thanks. Just two clarifications and then a bigger picture question. So on the gross margin, the comment that you expect next year's decrease won't be where you were in the fourth quarter, is that including or excluding Sam's? So is that the 61 basis points or around 40?

That's all in next year as far as gross margin rate.

Okay. And then I know you kind of said that your comments on earnings growth will be - the cadence growth rate will be similar throughout the year. Is that fair to say, for U.S. comps, you don't really expect a lot of volatility throughout the year?

Yes. I don't expect a lot of volatility throughout the year. Overall, for the year, we expect it to be 2% or higher, but I don't expect a lot of volatility during the year, Karen.

Okay. I wanted to ask about acquiring customers on Walmart.com compared to Jet.com. Since you are shifting to a lower-cost customer acquisition strategy, can we say that eCommerce losses have stabilized? Does this align with your previous statements about eCommerce losses bottoming out in 2018? Also, in a broader sense, what are your thoughts on Jet? Do you still feel optimistic about Jet's prospects, or is it simply a matter of numbers making it more logical to focus on Walmart.com customers?

Yes, Karen, this is Doug. Thank you for your questions. As we navigate through the year, we are aiming to maintain flexibility in our eCommerce investments on a monthly and quarterly basis. While it's possible we might incur slightly higher losses in eCommerce this year compared to last, we generally expect the losses to be around the same level. We have better visibility into various costs such as picking, shipping, margin rates, and customer acquisition, which is encouraging as we evaluate our marketing investments. Regarding our brands, Walmart is a well-established brand recognized for its value across the country, particularly in places like Oklahoma and Texas, making it sensible to invest in that brand rather than spending more to introduce a less familiar brand. Conversely, in markets like the New York metropolitan area, the Jet brand is well-recognized and resonates with urban, millennial, higher-income consumers. This decision on positioning was made prior to the acquisition, and we wanted to keep our options open to maximize the use of the Jet brand. Our initial thoughts on Jet have been reinforced; it effectively reaches certain areas and can market brands that aren't yet sold on Walmart.com. We anticipate that Jet will undergo a period of adjustment before starting to grow again, focusing on specific markets and opportunities, while Walmart will remain the core of the business and a key area for growth.

Thank you.

Rob, next question, please?

Hi. Thank you. Regarding eCommerce and the road ahead, what are your thoughts on profitability and the smart baskets and pricing and how you're thinking about grocery pickup as well as supply chain in the context of bricks post clicks? And would love your thoughts on eCommerce M&A and on correlated assets as you've been quite creative about thinking about how to build this business over time? Thank you.

Yes. Let's break it into pieces. This is Doug. I'll try to do so quickly. If you look at this business, look at it for the quarter or for the year, I think the first thing to always remember is we've got this really big and now strong business in U.S. supercenters. Our comp traffic's up. We're in a really strong foundation there, playing more offense than before. So the big part of the company is in good shape and foundationally strong. Now we've got Sam's to a point where it's starting to get repositioned. We'll see more traction and improvement in that part of our business. Internationally, the big businesses at Walmex, Canada and even the U.K., which is a big part of our International business, has been stronger lately. So kind of those big platforms are there and stronger, and I wouldn't want us to spend this whole call talking about a smaller part of the business, although it's of vital strategic importance. So now let's click to eCommerce. In the U.S. specifically, and don't forget we've got food eCommerce opportunities around the world, but let's focus just on the U.S. for a second, we've got this tremendous advantage of having the stores and the supply chain that put us within 90% of U.S. customers within 10 miles. So you can build on that to build a strong food eCommerce business, and that's what we're doing. Learning how to pick in-store enables Online Grocery. Learning how to pick in store enables delivery, which we'll continue to expand and learn more about as we go through the year. Now let's click to the part of the eCommerce business that doesn't come out of our stores. That's where you get into eCommerce fulfillment centers, the opportunity to leverage smart cart to build an eCommerce basket, not just selling eaches. Like selling a television at cost for Cyber Mondays, not all that exciting as it relates to being a way to make money, but driving baskets on eCommerce is. So you'll start to see smart cart functionality move over to Walmart. You'll see us continue to make assortment improvements to bring in new brands, be more increasingly open to not only the Jet brand but the Walmart brand. So as that happens, your mix starts to change, and you're selling a basket and a more profitable basket. To do that, there are times when an acquisition makes sense because it accelerates the improvement that you can make in your assortment. It might take us longer, for example, to do it organically. There's so many suppliers and so many brands to acquire to get on the platform. So some of the acquisitions we've made have been specifically aimed at assortment, and I would expect that some of that will continue.

Thanks, Oliver. Rob, next question, please?

Thanks. Good morning. A follow-up question on gross margin. So can you talk about the 60 basis point decline in the U.S.? Where was that relative to your expectations going into the quarter? And then what aspects of those buckets moderate as you look to the upcoming year such that the gross margin degradation improves? Thank you.

Yes, Chris, this is Brett. As we mentioned earlier, the 60 basis points you referred to was for the entire company, and about a third of that was related to the Sam's Club closures, the Brazil eCommerce shutdown, and a few other factors within International. So approximately a third of that was due to one-time items. In the U.S., there are numerous factors affecting margin in a quarter, including pricing, shrink, and transportation costs. Therefore, I think it's challenging to analyze gross margin from one quarter to the next. We will continue to invest in pricing, which we have been doing for the past two years. There are different elements to consider. I won't delve into specific competitive aspects, but we are confident that the gross margin decline we expect next year will be smaller than what we experienced in the fourth quarter.

Chris, this is Doug. I'll just add that I think we're getting better at managing our price investment considering all the other investments that we're making. So Brett and I and the management team are watching eCommerce growth rates, eCommerce profitability, store traffic counts and making decisions in a relatively fast cycle on how much price to invest and where to invest it, and we're monitoring what happens when we do that. So we're just going to calibrate this thing as we go through the year. It's one of our big levers, and we're excited about the fact that the investments we've made in the past are driving traffic and starting to get this productivity moving, which is ultimately what we're after. And one of the metrics that I get excited about and have been for some time now because the team's doing such a good job is inventory. For us to be down in comp store inventory again for the 11th consecutive quarter while shelf in-stock is going up is awesome and remarkable. And the cash flow benefits and the other benefits are flowing through to the overall business. So on price, we're being thoughtful, we're being strategic. And we'll manage margins just like we do the other parts of the P&L, a quarter at a time, balancing short term and long-term.

Thanks, Chris. Rob, next question, please?

Good morning. Thanks a lot for taking my question. Several years ago, Walmart was ahead of the curve, investing in stores, e-com, in price, and you really saw a gain in terms of market share and your outperformance relative to a lot of other retailers. Now it seems like some of those share gains may be slowing a bit. So do you think you're seeing diminishing returns on your investments and you'll have to make even greater investments in order to outperform at the rate that you have been versus others?

No. Michael, this is Doug. That's not my perception, and the data doesn't support that. When you look at our share numbers, we feel really good about them, and not only the dollar share numbers but also units. I'm specifically thinking of the U.S. business in my comment. But the tonnage moving through our stores is increasing, and I don't feel a trend shift there.

Thanks, Michael. Rob, next question, please?

Thank you for taking my question. I agree that our data shows you are gaining significant market share, especially in food. My question pertains to a scenario five years from now where around 60% to 67% of your sales come from pharmacy and food, with a significant portion being through click-and-collect or home delivery. How should we assess Walmart's profitability in that context? Have you given this much thought? Thank you.

Sure, why don't we both share our thoughts? You can go first, Brett.

Yes. As Doug mentioned, we spend considerable time as a management team preparing for the future, including the next quarter, the next year, and projections for three to five years ahead. We strategize on how to manage our portfolio, which encompasses our international operations, Sam's Club, eCommerce, and Walmart overall, while adapting to the evolving business landscape. We recognize that customer preferences are changing, and our goal is to remain ahead of those shifts. The diversity of our portfolio provides us with multiple approaches to meet these changes. We have a clear vision of where we want to be in five and ten years, and we have various strategies to reach those goals rather than relying on a single course of action. This allows us flexibility in our management going forward.

I think the only thing I would add is that we're learning kind of the activity-based cost aspects of different paths. And I think, over time, if we could, and I think smart cart causes us to believe we might be able to, we'd like to bring the customers into this conversation and help them understand through our pricing and our communication that if you want to buy a single can of corn for under $1, there's not going to be a better, more efficient path to you than a supercenter visit. As the shape of a basket changes, food and non-food, and it goes up, and remember, Jet had a much higher units per order and still has a much higher units per order than the Walmart brand does, you can start to change the economics of eCommerce to be profitable with a unit per order that looks more like 7 than 2 and a blended basket margin that helps you to have basket economics rather than eaches. So part of what we're trying to build with eCommerce, and I think you can see it, frankly, in the fourth quarter choices that we made around pricing on eaches, is that we're really focused on building a basket business because that's a big key to profitability.

Thanks, Scott. Rob, next question, please?

Thanks a lot. Good morning. I think I have a different way of asking the eCommerce and profitability question. Understanding that this is a year in which you're probably making some investments that you may not have made because of tax reform, is there anything that you learned since you spoke with us back in October that suggests it would be more expensive due to market conditions to get to 40% annual eCommerce growth than you had previously thought?

No, I don't think so. Matt, my head, when you asked the question, started dividing it into food and non-food. There's nothing new on food. I think if you go back and listen to or watch our October analyst presentation where we walked through the strategy for food, all of that, even more convicted, still holds. On the non-food side, we're building a business. It's – non-food eCommerce has not been our historic competency over the last few decades and the history of the company, and so we're learning something new. We're trying to build an assortment that enables a margin ultimately, and that's got components to it like attracting brands, being able to execute from a fulfillment point of view during a busy season. We've got some exciting things coming out with site redesign and other things this spring, I think, that will help us make more progress in that area. So I don't think it's that we've learned something new. I think it's a question of pace. And are the operational improvements and merchandising improvements happening? And are you investing marketing to kind of coincide with those improvements.

Thanks, Matt. Rob, next question, please?

Hi. Thank you for taking my question. Just to drill down a little bit more on some of the questions that have been asked. I think apparel has been highlighted by several media outlets over the weekend. Can you walk us through what the overall apparel strategy is in-store and online and how you're balancing national brands with private label?

I'm looking forward to going to Houston later this week. All our store managers will be there, and I hear the new apparel brands that have been covered in the media look fantastic on the sales floor. We're concentrating on enhancing quality while still managing our good, better, and best tiers; maintaining our opening price points, which we excel at; and reducing our SKU counts in apparel to improve presentation. We are also implementing new fixturing in some stores this year to ensure everything aligns—product quality, value, brand presentation, and the effectiveness of our displays are enhanced with fewer SKUs. We have a substantial apparel business that is growing, but there are even more opportunities to expand it in-store. Online, we see many chances to develop private brands, collaborate with direct-to-consumer brands like Bonobos and ModCloth, and potentially attract additional brands to both Walmart and Jet to enhance our apparel offerings and manage our product mix. Therefore, apparel is currently a significant focus for us.

Thanks, Kate. Next question, please?

Hi, thanks. You've talked about accelerating certain investments, so I'm just curious if you could be a little bit more specific on what those are and whether or not there'll be any lumpiness by quarter that we should consider. I know you're giving annual guidance, but just want to make sure we consider the quarters as well.

Yes. Dan, this is Brett. The investments that we're going to make are going to continue to change how we work as a company, help us continue to stay ahead of the customer, and those are going to be in the areas of technology. They're going to be in the areas of supply chain, pricing. And you can imagine, for competitive reasons, we're not going to get into a lot of things that we plan to do, and we'll be talking about those as we go throughout the year. We mentioned we think EPS growth will be pretty consistent throughout the year quarter by quarter. There could be a quarter or two where we make an investment that's different than the other quarters. And if that's the case, we would talk about that when we release earnings. But right now, I don't anticipate major changes quarter-to-quarter.

Thanks, Dan. Rob, next question, please?

Good morning and also thank you for doing this call. Just wanted to circle back on margins. The guidance for 4.3% to 4.4% for the year, obviously, a lot of moving parts and some acceleration in investments. So just want to confirm that your thought process is that there is an ability to find further leverage over time and expand from those levels as we look forward. And also, more specifically, for the current quarter, if you can just touch a little bit more detail regarding the transportation cost impact that you saw and what your expectations are on that particular line item going forward.

Sure, I appreciate it. I'll start with the operating income question. We're only providing guidance for this year going forward. We did achieve expense leverage, and excluding one-time items for the year, the leverage improved as the year progressed. I am optimistic about the expense leverage we are seeing in the business, especially in International and Walmart U.S. stores, and I expect that this progress will continue. Improved expense management gives us more flexibility and various ways to manage our profit and loss, allowing us to better serve our customers. That's the only guidance we'll provide on operating income for this year. Regarding transportation costs, these fluctuate from quarter to quarter. Fuel prices have increased slightly; compared to last year, I estimate they are up about $0.30 this last quarter. This influences our operations from year to year and quarter to quarter, but that's the main point regarding the fourth quarter.

Thanks, Paul. The next question please.

Hi, thanks. Good morning. Thanks for taking my question. Could you talk about the working capital opportunities that you see for FY '19? Obviously, you've done a great job in inventory in the U.S. Can working capital continue to be a source of cash for Walmart? Or have you harvested all the opportunity that you can?

Thanks, Ben. Yes, there's always more opportunity. If Greg Foran were here, he would mention that as he visits each store, he still sees opportunities for us to improve and become more efficient. The technology and investments we've discussed will continue to facilitate easier ways for our associates to manage and stock goods, which is beneficial. I believe there is always potential for optimizing working capital. The last two years have been impressive, particularly regarding payables and inventory. I think there's still room for improvement. While I won't specify what that potential is, I do believe working capital can remain a source of cash for Walmart moving forward.

Thanks, Ben. Rob, next question, please?

Hey, guys. You've shown signs of being willing to rationalize the asset base here more recently, but, obviously, continue to invest in eCommerce. So how do you see the ROIC profile evolving over the next few years? Just curious how important stabilizing that metric is to you as you guys think about your broader priorities? Thanks.

Yes, great question. And Peter, as you know, we've talked a lot about ROI. It's important to us. Returns are important, along with a number of other metrics that we've mentioned this morning. If you pull out the discrete items, ROI would have been in a much better place in this last year, and we've seen improvements in our asset base and rationalizing that operating income being where it is. Returns short term, long term are really important for the company. We are going to make sure that we win long term. And as we've said before, there may be times year-to-year where that has an impact on ROI that is different than we would want on a long-term basis. But we will make those decisions when we need to do that. But returns are very important for us, and we talk about it a lot as a management team, as you would imagine.

Thanks, Peter. Rob, next question, please?

Hi, good morning. I have two quick questions. First, did you provide any details on inflation and the trends you’re observing, particularly regarding food inflation? Secondly, regarding fulfillment centers, I understand you are converting 10 of the Sam's Clubs into fulfillment centers. Can you share your thoughts on your capabilities related to the fulfillment center initiative in your business?

Yes. Bob, regarding inflation, we did not observe a significant impact in the quarter. Looking ahead, there may be a slight impact next year, but nothing substantial really.

And on the fulfillment side, I would say we're in pretty good shape in terms of square footage and where it's placed. We had these 6 fulfillment centers with Walmart, the 3 we picked up from Jet. And Marc and the team are learning how to mirror inventory in certain places to improve customer service levels and to lower cost. So that's underway, but the physical plant is in pretty good shape generally. It's going to be fun to watch what happens with the Sam's Club efforts here. If we're going to take Memphis as a place to learn, we basically use the same facility, same steel that we use when members shop in the club and pick from those. That's going to help us with speed. It's going to help us reduce transportation costs. And once we have the wrinkles ironed out there, we'll use more facilities over time. Generally speaking, I think we're in pretty good shape. Over the years, looking ahead, as we grow the business, we may open a fulfillment center here and there, but that's where we stand today.

Thanks, Bob. Rob, next question, please?

Hi, thanks. I wanted to tie it back a little into the reinvestment of the tax benefits. I think you guys have invested about $750 million in labor that was announced about a month ago. When you think about the magnitude that would go back into price, should we think about it being similar to what was in SG&A? Or how would we even frame that? And you can answer to this year or even over the next couple of years. Thanks.

Yes, Greg. As I said earlier, we're not going to get into a lot of detail about how we're going to invest. The wage amount you mentioned, about $400 million of that was the onetime bonus. The other part would be going forward into next year with the increase in the start rate. And I'll say what I said before, which is we're going to be thoughtful about these investments. And we have a lot of levers that we can use to satisfy that customer, and we're going to be thoughtful about which levers we pull.

Thanks, Greg. Rob, next question, please?

Yeah, hi. Good morning. I would just like to talk about - or ask about investment in grocery at this point, just in terms of price investment, how you're thinking about the returns that you're getting on that investment, how you balance that against investing in the digital experience for the customer. I would think that, at this point, you're getting to an area, given your price perception and competitive marketplace, that maybe digital is the better return. And then you did mention grocery delivery. Could you just give us an update on where you stand there at this point?

Sure. As you think about price investments in store, think about grocery, consumables and the fact that, across the store, there are some items, windshield washer fluid in the automotive department, tennis balls in sporting goods, that are high-turn, price-sensitive items to a degree. And when we think about the price investments in the store, we're not singularly focused on dry grocery. We're thinking about this in a broad way. The supercenter assortment is a big advantage, and we want to deliver low prices across the store, which also helps us drive traffic to the store and manage margins across the entire store. So evaluate the price investment through that lens rather than just grocery. And the returns we're seeing there are attractive. You can see it in the store traffic. And we're going to continue our strategy as it relates to those. We're not cutting short the eCommerce investments. I think part of what we're doing now is just letting the business mature and learning how to become stronger operationally in eCommerce. There may be a point this year and looking ahead where we want to be even more aggressive on eCommerce marketing, if we feel like those operational improvements are on the right path. We kind of watch that very continuously basically. As it relates to grocery delivery, we've had this small pilot going on with our own associates, and we'll continue to play around with that and learn what works there. But the expansion will happen through a variety of platforms. We'll use, depending on the spot in the country, different providers to get the product to the customer, and we'll be keeping an eye on NPS scores in particular. Our Online Grocery business has a really high Net Promoter Score, and we want to, as we start to grow delivery capabilities, ensure that the customer experience is as good through delivery as it is for pickup. So we've got some things to learn there, and it'll happen at a pace based on the customer experience.

Thanks, Ed. Rob, we have time for one question.

Hi, thanks. Good morning. Doug, from a capital allocation standpoint, could you discuss a little bit about closing the 63 Sam's stores earlier? And then should we expect to see continued closings both in the U.S. and International? And then for Brett, on the digital side, could you shed some light on the growth between 1P and 3P for the e-com business? Thanks.

Sure. I'll start with capital allocation. If you think back a few years, we closed several stores globally, including over 100 Express stores in Walmart U.S., which were part of a pilot format. We decided to discontinue and close those. At that time, we reviewed all 11,600-plus units globally, going through the real estate market country by country and making strategic portfolio decisions. We completed a significant amount of that cleanup then, but we did not address Sam's Club at that point. We were still sorting through several issues, taking things step by step to ensure the proper sequence. My focus was to ensure that the U.S. store business remained strong. We made investments in wages and pricing while also refining the portfolio. We have been concentrating on developing our eCommerce business, which is still in progress. Now, we are focusing on Sam's Club, where we have a strategy we believe in and a leadership team we are excited about, and we are making investments to increase comp sales there. It's been more about the sequence, and we've assessed the portfolio thoroughly. While I can't guarantee there won't be any more closures, a store here and there may be reasonable, but we've completed most of the significant work for now.

Chuck, regarding your question about first party and third party, both are important to us as we aim to meet customer needs. Sometimes we can fulfill these needs better through first party, and other times through third party. Currently, we have around 75 million SKUs on our Marketplace site, which is one of the strategies we have to determine the best way to fulfill customer needs while also considering our overall performance.

Well, thanks, guys. We certainly appreciate you joining our call today. And have a great day.

Thank you all.

Thank you.