Walmart Inc (WMT) — Q4 2020 Earnings Call Transcript

Good morning. Thanks for coming. You're going to hear about our future plans from several of our leaders today; let's begin by talking about Q4. I'll give you a summary, and then Brett will come up and share more detail about the quarter, the year, and our guidance going forward. We feel pretty good about the year, even though the fourth quarter was not our best. Our momentum in food and consumables within Walmart U.S. has continued. That's been our priority, and it's good to have that strength to build on. Our volume in stores as well as through pickup and delivery remains strong. And it was good to see our U.S. eCommerce growth of 35% for the quarter and 37% for the year. Our sales missed to plan in the U.S. within our stores and related to a few general merchandise categories. Sales in November and January were what we expected, but the weeks just before Christmas fell short. We performed well in electronics, Christmas seasonal, the home categories, and health and wellness; but were short of plan in toys, media, gaming, and apparel. The sales miss to plan and less favorable mix of sales impacted operating income, and a change to our attendance policy contributed to wages being higher than they would have otherwise been. So a few things came together that affected our results. We know what happened, and we're already taking steps to address them. You'll hear more details from John and Marc in a bit, but those steps include adjusting our apparel assortment and presentation in stores. We were too opening-price-point dominant this year and we had too much of an investment in Christmas seasonal apparel. Also, we'll adjust some of the toy decisions we made, which John will say more about. And we'll change our approach to layaway, which missed sales plan by quite a bit this year. In addition to adjustments to our plan for stores, it's obviously important to accelerate progress in eCommerce, given the ongoing channel shift. We'll continue to build our eCommerce assortment by adding items and brands in key general merchandise categories. We'll improve our ability to ship eCommerce orders during peak and make sure that customers know we can do it. We exited the quarter in good shape in terms of the amount and content of our inventory. January sales are on plan and February sales have started off well, too. Sam's Club's fourth quarter sales were a little better than plan, with membership and eCommerce performing well. Walmex, India, and China were highlights in Q4. Walmex is a real gem, and we're really proud of that team. With respect to India, we remain excited about the opportunity we have there. The way Flipkart and PhonePe are scaling is impressive. In China, we drove improved momentum in the back half of the year as Sam's Club and eCommerce experienced strong results. We're managing the issues related to the coronavirus daily. Our primary focus is, of course, on our associates and our customers. Judith and Brett will share more about our thoughts and actions a little bit later. Now Brett will give you the detail on the quarter, the year, and our guidance for this year, then I'll come back up and tell you more about our plan going forward. Brett?

Thanks, Doug. Good morning. Great to be with you here in New York City, and thanks for everybody that's joining us on the webcast. So as always, there are a lot of exciting things going on at Walmart. This is my 20th year with the company, and I've seen it evolve, adapt, and grow in remarkable ways. And even as I start my fifth year in this role, I’m still amazed at the number of things we've accomplished over the past few years. Walmart remains nimble. We're focused on building the world's greatest omnichannel platform. And we continue to position this business for long-term success. There are several things I hope you'll take away from this morning. We achieved most of our full year financial goals. And while we didn't hit on all cylinders for some of the fourth quarter, we had a good year. Our ability to operate with lower costs provides competitive advantages, ensures we continue to gain market share. We're leveraging expenses at levels not seen in a while and it is sustainable. Our investments are paying off, and you can see this in reduced associate turnover, store innovation, high eCommerce growth rates, strong private brand growth, and I could name many more. The productivity loop is alive and well. So in recent years, we've widened price gaps. We've increased sales. We've leveraged expenses. And we've grown operating profit in Walmart U.S., Sam's Club, Walmex, and other markets. We're leveraging our scale, our unique assets, and financial strength to ensure structural competitive advantages. Our company's foundation is extremely strong. So let's discuss the fourth quarter. As Doug mentioned, sales were good through Cyber Monday as well as in January and February have started off well. But the few weeks leading up to Christmas weren't as strong. Doug mentioned a few reasons, but we believe also the compressed holiday season impacted stores more than eCommerce. Adjusted EPS was within our guidance, but operating income was lower than plan due to sales misses in a few GM categories and soft sales in a couple of key international markets. We still leveraged expenses by 25 basis points, but we could have been sharper in some places. We also invested more heavily in technology during the quarter, which we expect to continue this year. The technologies we've talked about are a key part of our strategy, and we'll continue to accelerate progress on back-end activities on associate tools and key customer-facing initiatives. And I have great confidence in our technology team to invest aggressively but also intelligently. Adjusted EPS for the quarter was $1.38. However, adjusted EPS would have been about $0.05 higher except for 2 items. First, as mentioned, when we gave guidance at the end of Q3, the unrest in Chile had an estimated negative impact on operating income of about $110 million. We weren't able to quantify this when we gave guidance at the end of Q3 so nothing was included. We experienced significant disruptions in nearly 3/4 of the stores at one point, with some of them completely destroyed. And now given the extent of the disruption, we don't expect the business to fully recover this year, which has been considered in our guidance today. In addition, we also recorded an unexpected legal accrual in the U.S. of approximately $75 million. As Doug mentioned earlier, we understand the factors that impacted results for a few weeks in the quarter, and we're addressing them. The core business remains very, very healthy. And in particular, the food and consumables business around the world is strong. And in fact, in Q4, Walmart U.S. grocery comps on a 2-year stack basis were among the best in the past 10 years. And we continue to take market share according to Nielsen. So let's turn to sales for the quarter and the full year, and you'll be glad I'm not going to go through all of the various numbers live. So please reference the press release and the presentation this morning, and I'll give you some highlights here. Total net sales in constant currency increased to over $140 billion for the quarter and reached $524 billion for the year, which is growth of nearly $14 billion. Walmart U.S. comp sales, excluding fuel, grew 1.9% in the quarter with roughly balanced contributions from comp transactions and ticket. And as a reminder, these results include a 50 basis point headwind from lapping last year's SNAP benefit, adjusted for the 53rd week this year. On a 2-year stack basis, comp sales increased 6%, putting 2-year stacks at 6% or more for 6 of the last 7 quarters. For the year, Walmart U.S. achieved a 2.8% comp and a 6.4% comp on a 2-year stack basis. So Walmart U.S. sales grew by more than $9 billion in FY '20. eCommerce sales were also strong, up 35% for the quarter. Grocery remained strong, but we also had good sales in several online GM categories. For the year, growth was 37%, which is slightly higher than we had guided. International sales increased 2.2% for the quarter, with strength in Mexico, in China and India, and it was offset by the unrest in Chile and some continuing challenges in the U.K. and Canada. For the year, international sales increased a solid 2.8% in constant currency. At Sam's Club, solid comp sales continued this quarter, increasing 3.8%, excluding fuel and tobacco. eCommerce sales grew 33% on top of 24% last year in Q4 last year. So let's turn now to operating income and EPS. Over the quarter, adjusted operating income declined by 3.7% on a constant currency basis. For the year, adjusted operating income decreased by 1.9%. But excluding Flipkart, adjusted operating income would have increased for the year. Consolidated gross profit margin declined 40 basis points for the year, and that primarily reflects a merchandise, channel mix shifts; price investments in various markets, including the U.S., so things we've been talking about this year; and also the inclusion of a full year of Flipkart versus a partial year the previous year. The Walmart U.S. gross margin rate was only down 14 basis points for the year. And even with lower-than-anticipated sales, we leveraged expenses of the company by 25 basis points, excluding adjusted items in the quarter, and 24 basis points for the year. Walmart U.S. operating income declined 3.8% in the quarter, but stores, U.S. stores operating income growth would have been slightly positive if not for the legal expense I mentioned earlier. Now the eCommerce gross margin rate increased, and they leveraged expenses. However, as eCommerce grows, it changes the mix of expense and margin rates for the segment. For the year, Walmart U.S. increased operating income by 2.6%. International adjusted operating income increased slightly for the quarter in constant currency. But excluding the unrest in Chile, adjusted operating income would have grown by nearly 10%. The International team delivered really solid expense leverage on an adjusted basis in the fourth quarter. The dilution from Flipkart was as expected. In fact, I had a great visit to Flipkart and to PhonePe a few weeks ago. And I always come back impressed with the energy, the management depth, the financial discipline and the entrepreneurial spirit that I see here, and Judith -- see there. And Judith will talk more about that later on. In Sam's Club, solid membership trends contributed to an operating income growth of 8% for the year, so solid performance there. Now FY '20 adjusted EPS excludes a few larger items that are noted on our release this morning. Adjusted EPS was up slightly versus last year, which is within our guidance. We finished the year in good inventory position with Walmart U.S. and total company roughly flat year-on-year. Operating cash flow for the year continued to be strong, over $25 billion, and the company returned $11.8 billion to shareholders through dividends and share repurchase. Now operating cash flow was down about $2 billion year-on-year. About half of that difference is due to the Asda pension contribution that we made during the year. So here's the scorecard for the year compared to our guidance at the start of the year. Now despite not finishing as strongly as we would have liked from a sales standpoint at the end of the year, I'm really pleased with what we accomplished for the full year. Now over the past several years, we've made great progress in transforming to win with customers and with shareholders and we've made strategic choices. And the payback on those decisions is becoming more evident. And we're glad that investors have been rewarded over the past several years. You can see how the company has evolved by looking at the composition of sales and CapEx versus just a few years ago. We used to open hundreds of stores each year in the U.S., but we struggled to gain traction on comp sales. Today, we're opening very few new stores in the U.S., and we're driving more efficient growth with solid Walmart U.S. and Sam's comps. We used to have a global eCommerce business with just over $8 billion in sales. This year, we estimate global eCommerce sales will approach $50 billion, and that's doubling just over 2 years. Now while some of that's come from acquisitions, we're changing the nature of how we interact with customers. $50 billion in revenue would put us well within the Fortune 100, even just on its own. Just a few years ago, we had no stores, no U.S. stores with online grocery pickup, and we didn't deliver groceries. Now we have about 3,200 stores with pickup and 1,600 stores with delivery. We've added a great deal of new technology, such as Ask Sam, Scan & Go, automated self-check -- shelf-scanning robots, and a whole host of tools that help customers and associates. So a lot has changed in a short period of time while we've been delivering solid financial results. This is such an exceptionally strong company, and I don't want that to get lost. There just aren't many companies in the world like Walmart: Total revenue approaching $525 billion; an incredibly strong balance sheet with a AA credit rating; a diversified asset base, physical, digital assets in the most important markets around the world; more than 265 million customer transactions a week; a 2.2 million-strong associate base; and a strong stable cash flow. And this financial strength gives us the ability to win now and in the future. Most companies have to decide between protecting its core business or growing new businesses, but we can do both. We continue to be guided by a consistent financial framework, which you've seen. And if we execute in these areas, we're going to win with customers and with investors. In the year ahead, we'll continue to focus on the most productive growth opportunities. We'll prioritize comp sales and eCommerce growth. Walmart U.S. has had more than 5 consecutive years of positive comp sales and transactions. In addition, eCommerce growth continues to be strong, and we expect that to continue. We expect total sales growth on a constant currency basis to be around 3%, which represents over $16 billion in growth. We expect the momentum to continue this year with Walmart U.S. segment comps of at least 2.5%, and that growth fairly consistent across quarters, with each quarter expected to be at least 2%. Now this growth would imply 2-year stacks of well over 5%. We expect U.S. eCommerce sales growth to be around 30% with quarterly growth ranging from the mid-20s to the mid-30s. And as you can see here, we expect eCommerce sales to represent more than half of our total global sales growth. In international, we expect to see solid sales growth around 4% with strength in Mexico and India. And we'll have some continued softness, we believe, in the U.K. and Canada. Our China business also continues to operate well, and in particular, Sam's Club. Now certainly, the coronavirus tempers our expectations some, and I'll discuss that more shortly. We expect Sam's Club to continue to have good sales momentum with comp sales, excluding fuel and tobacco, of at least 3%. One of the areas I'm most proud of is the team's work around operating discipline and expense leverage. And last year, we challenged the team with an enterprise-level goal of 20 basis points of leverage, and we exceeded that, excluding adjusted items. The Walmart U.S. stores team has leveraged expenses for 12 consecutive quarters. The investments in training and technology are helping sales, and they're helping efficiency. And I'm very passionate about getting our expense rate down even further in a smart and sustainable way. If this business achieves SG&A levels of 20%, or hopefully even lower, we will continue to have options competitors don't. And as you can see, we are bending the curve on expenses. Over the past couple of years, we've implemented smart spend initiatives across most of the organization. And you can take a lot of small projects, you can scale them across the business, and they can lead to impressive savings. We have hundreds of opportunities underway and in the pipeline, but let me give you a few examples. One example of combining a new technology with a new process is a type of store automation called the FAST unloader. Some of you have seen it. Two years ago, we didn't have any of these. Today, we have them in more than 1,700 stores. If you haven't seen it before, the FAST unloader automatically scans and sorts items coming off a truck, and it takes about a third of the time out of the truck unload. It makes the job easier. It requires less time. It automatically prioritizes products to fill gaps in the floor. Now since inception, these FAST unloaders have prioritized more than 25 million cases of merchandise that would have otherwise resulted in out-of-stocks. So you can tell when we find a technology and process that makes us better, we are moving quickly to scale it. We can also improve the business and the environment at the same time. We're investing in new technology that gives us enhanced visibility to the energy usage of store equipment. So think Internet of Things. By centralizing the monitoring and the maintenance of equipment, we expect to save around $100 million annually over time, improve the customer experience, and help the environment. So this kind of initiative really demonstrates our Save Money Live Better purpose. We're also seeing cost savings in goods not for resale, or GNFR. We were doing okay in this area before, but we weren't leveraging our scale as much as we should have. For instance, just by changing our buying process and better utilizing our scale for shopping bags, we anticipate saving more than $60 million annually. Another example is we're going to save 15% on the cost of associate vests. They're made with recyclable material, which is more comfortable and is more sustainable. In Mexico, we're increasing the use of eOptions in areas like transportation and supplies. Last year, we saved about 15% on a spend of nearly $300 million. So these are just a few of many examples of how we're doing business differently than we've done in the past, and small changes can have a really big impact on this company. We've made good progress on expenses, and we expect to achieve around 20 basis points of SG&A leverage again this year and over the next few years, assuming consistent levels of comp sales. As I mentioned earlier, the nature of our CapEx spend has changed dramatically over the past several years. This year, we'll continue to invest the vast majority of capital in store remodels, eCommerce, technology, and supply chain to ensure we give customers the convenient shopping experience that they expect. We'll also invest more this year in technology to upgrade legacy systems and lean into customer-facing technology and technology of the future. However, quite a bit of this spend will hit OpEx versus Capex. For the year, we expect CapEx to be similar to last year at around $11 billion, with slightly more going toward the U.S. versus last year. I'm really proud that over the past 10 years, we've returned close to $130 billion to shareholders through dividends and share repurchases. In fact, over the past 10 years, we bought back roughly 30% of the outstanding shares at average prices well below the current stock price. This has been a good investment. That's in addition to investing nearly $120 billion in CapEx over the past decade to grow the business. And the ability to do all of this makes Walmart a truly unique story. With our announcement this morning, we've increased our dividend for 47 consecutive years. And we also remain committed to our share repurchase program. We have approximately $5.7 billion remaining on our buyback program, and we intend to complete that this year. So here's how all this comes together, and you can find a complete listing of guidance metrics in this morning's press release, you've probably already seen it. I've mentioned our sales and capital guidance; I'll focus a little more on profit guidance. Now as always, we have several assumptions in our guidance, including general consistency in economic conditions, currency rates, and tax and the regulatory landscape. The consumer environment is pretty healthy in the U.S., and our competitive position is strong. We're also performing well in a number of key international markets like Mexico, China, and India, while the U.K. and Canada remain challenging in some respects. Based on currency rates today, FX would have limited impacts on sales and operating income for the full year, but some slight negative impacts earlier in the year. Of course, rates can change, so I encourage you to update your models as we go through the year. Also, we have not included any potential future change in the value of our investment in JD.com. We're going -- we're continuing to monitor the ongoing tariff discussions, and we'll continue to actively manage pricing and margins with customers and shareholders in mind. We're also monitoring conditions in Chile, and our guidance assumes a relatively stable environment there. We're also continuing to monitor the coronavirus situation. Our first priority, as you heard Doug say, is ensuring the safety and well-being of our associates and our customers; and we're taking actions in that regard. Currently, we do anticipate some financial impact to the China business in Q1 and potentially into Q2. Due to the current sales mix slanted heavily toward food and consumables as well as some increased expenses related to the outbreak, we could see a couple of cents negative impact in Q1. We also continue to monitor how this might impact our sourcing operations. As of now, we aren't seeing major impacts, but if there are any longer-term shipping issues, it would likely impact our business. Because the situation is still so fluid, we haven't included any specific impacts related to the coronavirus in our guidance, which I'm going to discuss next. We expect FY '21 EPS to be in a range of $5 to $5.15, which implies a growth rate of about 1.5% to 4.5% versus this past year's adjusted EPS. And this growth is expected despite the increased tech spend, which I mentioned previously. We expect operating income dollars to increase by a similar growth rate as EPS. And we expect Walmart U.S. operating income to increase by an amount of the upper end of that range. We also anticipate Flipkart's dilution to be relatively consistent with FY '20's adjusted results. Now with regards to Walmart U.S. eCommerce profitability, we expect losses this year to be flat to slightly lower versus last year. We've seen improvement in contribution margins as well as variable fulfillment costs, and we expect that to continue this year. We'll also benefit some from the recent reorganization and consolidation activities. Now on a consolidated basis, we expect the quarterly cadence of EPS growth to be in the low single digits in Q1 and Q3 and in or near mid-single digits in Q2 and Q4. Now this cadence is primarily due to the impacts of the Chile unrest, comping some expense timing in the U.S. segment last year, and the timing of increased tech spending which actually accelerated in this past quarter. As a reminder, fairly small shifts in the timing of expenses and other factors can change this quarterly guide -- this quarterly cadence. And again, to be clear, none of the guidance I just mentioned includes any potential coronavirus impacts, including the couple of cents potential impact from the China business that I mentioned earlier. Now typically, EPS growth is higher than operating income growth due to share repurchase. In FY '21, we expect the growth rates to be similar to what you've seen due to lapping some tax rate benefits from last year, leading to a slightly higher effective tax rate this year; as well as increased costs related to the Asda pension plan, which hits below operating income. We don't currently expect these headwinds to continue past this year. So as I close, I hope you have a sense of why we're so excited about the future. Our core business is really strong, and we're performing well. We are rock-solid financially. We're leveraging our scale. We're leveraging our unique assets. And paybacks from recent investments are helping fund future innovations. Expense leverage is sustainable and the cost culture is strong again. And our guidance reflects continued progress and solid performance. This is a really special company. 20 years here. And I'm so proud to be a part of this team and this company's transformation. I'm confident our strategy and our financial strength are going to make us a winner in retail for many years to come. And with that, I'm going to ask Doug to come back up. And we thought we would go ahead and just take some questions on guidance and year. And Dan, would you like to start us out?

Karen Short, Barclays. So just want to talk a little bit about eCommerce growth. I think there's a view that -- or there has been a view that the growth rate needs to slow much more meaningfully because you've been much more reliant on the grocery aspect, and that you're lapping the growth in terms of units and also the overall growth rate for click-and-collect. So can you talk a little bit about the growth rate, and if you could parse out a little bit the grocery component and the discretionary component of the eCom growth?

Yes, sure. I'll start, and Brett, you can add in if you want to. I think we've got room to run on both. If you look at the grocery side of things, the first thing that goes through my mind is product quality and what we're doing in the supply chain to make sure the stores look great. Not only is that product what we put in front of customers every day in stores, but it's what we pick and it's what we deliver. And our pickup business, as we've lapped, anniversaried stores that we've rolled out, has continued to show strong comps, and we have the opportunity to add more stores, and then we're layering delivery on top of that. And while we're up to 1,600 stores with delivery, we've still got a runway to go there to add stores and we've got comp numbers that we can drive just on delivery from store to store. So there are so many dimensions that we can build on to grow there, and the stores increasingly can start to pick general merchandise. So you'll start to see a basket that looks like it's broader than just food and consumables. Big GM assortment in stores, a lot of items that are of tremendous value to customers, and we'll layer that on. At the same time, we've got the walmart.com opportunity. And with the action that Marc and the team took earlier this year to expand the number of next-day items that we have, we've got that growth opportunity. That number, SKU count-wise, will continue to go up. And you'll hear more in a little bit about what we're doing with marketplace and fulfilled-by as a service. So there's a breadth of opportunities to drive growth there. And we think the number that we've guided towards today is a number that we can deliver, and it will be a combination of both.

Simeon Gutman, Morgan Stanley. In fiscal '20, you returned to profitable growth. The beginning of the year, you did it with a little better sales and margin, and then we ended a little soft. Going forward, we have next-day. Food seems to be outpacing the mix of other categories. How do you maintain this balance going forward? And given that the stakes seem to be rising, was there any debate whether to lean back into investments?

Well, we'll continue -- and we'll talk about this in a little bit as well, we'll continue some level of price investments. Staying on the offense and driving the productivity loop is our mindset around those things. I'm not forgetting the fact that we make money in food and consumables. And you know that with the mix of fresh, there's profitability there, and we're starting to do some membership sales which are interesting. But there is a particular focus in the company, especially after the fourth quarter, on general merchandise. As we walk our stores, we think we've got room to improve in several different general merchandise departments as well as just adding brands and SKUs like we've been doing so feverishly on Walmart.com. So we've got to execute on the GM side of the box in addition to the food side, but we're very focused on it.

And Simeon, as I went through the presentation this morning, the thing that's so great about this business is we have so many different pieces of the business and so many different levers to pull. And as we make these decisions, it just gives us a chance to prioritize in a way that's just always in line with the customer and still get profitability where we need it to be over a longer period of time.

Bob Drbul, Guggenheim Securities. Brett, you talked about just in the overall guide, increased tech spending. I was wondering if you could just give us a couple, the projects or the focus areas, exactly where that money is going.

Yes, if you'll wait just a little bit longer, Suresh is going to come up later and talk a little bit about it. But there's a number of things, Bob, in that some of it's back end. Those would be things that you would have never seen. We've talked about before, as a company, you're always going to have some tech debt, and we want to accelerate some progress around that. Several initiatives underway with things that help our associates be more efficient. John will talk a little bit about that later on. And then what's the customer going to look like in the future? How do they want to shop in the future? And Suresh and his team, along with Marc and others, are really focused on that. And again, we will talk about that a little bit more later. I don't want to steal their thunder.

Peter Benedict at Baird. Just back to the online grocery discussion. Can you give us a little more detail on maybe how many more stores you think you'll be able to add this year? And is this the last year of rollout from that initiative?

Yes, I don't think we've quantified the number on comps for grocery pickup and delivery, but they are really strong. And now we're to the point, Peter, where we can see some stores that are in their second and third years. So that's also really encouraging to see. In a little bit, we'll talk about the expansion of store numbers with the specific numbers for pickup and delivery. But it's a combination of adding some stores and driving that comp growth and then putting everything together with the membership fee that's on our mind.

Kate McShane, Goldman Sachs. I just wondered if you could talk a little bit about apparel, how much of the gross margin pressure during the quarter was due to some of the weakness in that category and how we should think about apparel's contribution to both comp and gross margin in 2021?

Yes. It was, as we mentioned earlier, one of the areas where we fell short. And what we think happened is we got really focused, maybe even more so, on opening price points inside the stores and also very focused on Christmas seasonal apparel. We looked like red and green and could have been more basic and could have had some kind of middle price points as opposed to opening price points. And so we're focused on that. There's a ton of work on SKU count and presentation that's been underway for a while now, and we're optimistic that we'll be able to improve the in-store assortment of apparel, and in parallel grow our apparel business online. We have a really big opportunity to sell a lot more apparel online. And we're adding brands. We've had some success this last year with some of the brands that we've launched, including Scoop. But there's a lot of upside for apparel online as well. We need them both. It's really an important category, not only from the customer experience, but from a margin mix point of view.

And Kate, I mentioned about contribution margin increasing in eCommerce. Some of that is because of increased apparel sales, and we're doing better at apparel online.

Yes. We should say, for just walmart.com, apparel is growing faster than the total. Apparel and home are both performing well; we just need even more from them.

You guys mentioned a $50 billion eCommerce number, that's for -- that's what you think for fiscal '21.

That's sales. Net sales.

Yes, it was good. But we don't think that we've done everything we must do and should do to support marketplace sellers in terms of the tools and services that we have available. And we've grown a marketplace business over the last few years to a pretty good size, and it's helped us a lot with the assortment and being top of mind for customers as they're looking for items. There's a lot of upside for us and Marc's going to talk a little bit more about that later. So let me let him elaborate on it.

Can you tell us how big the U.S. 3P basis is?

Not big enough.

Greg Melich with Evercore ISI. Brett, just to make sure I got the numbers right. Given the EBIT dollar growth in the U.S., should we assume that gross margin rate is down 15, 25 bps, that would be the corollary?

Yes, I think the way we've guided, you can see that we expect operating margins to be fairly flat with what we've had here. And so when you look at the expense leverage of around 20, that's a pretty good algorithm.

And where is that gross margin pressure? If you were to put it, it's either price investment or eCommerce investment or mix? Like, what’s your strength? Where is that coming from?

Yes, it's a little bit of both. So we'll continue to invest in price globally. We've made -- and John, again, will talk about this a little more in the U.S. We've invested quite a bit in food and consumables. You'll see a little more price investment coming in general merchandise over time. And then globally, we're making price investments as well. I think I like how we're doing. I think we're smart about, we're strategic about it. So I feel good about the pace of price investments. But there is a mix shift. As eCommerce becomes bigger, you do see some mix shift, and you saw it some in the fourth quarter.

Yes, I think it was 5 years ago, we had an Analyst Day here where you talked about the imperative of investing in margin to get traffic growing again. And clearly, that's worked, right? So traffic is consistently positive, et cetera. As we take away from today, where do you think we'll be 3, 4, 5 years from now? Is this the trend we should learn to expect, that hopefully, EBIT margins stay flattish and the goal is to keep driving traffic up 1 or 2? How do you think about that balance as you think about the business out a few years? Yes. I think growing traffic in that range would be a good accomplishment, but I'd like to see more than that, especially when you think about it in an omnichannel fashion. And the combination of choices that we make, we'll manage from quarter to quarter and year to year, we can make investments at store level in price to help drive the productivity loop. We can make investments in eCommerce to help drive eCommerce. And as we see eCommerce losses improve, it gives us some room to make choices to do things like this year, the choice that we're making to accelerate our modernization of technology, which we'll talk more about in a moment. So the team works together in a really fluid way to set these priorities to make sure we're balancing all these things, including driving traffic growth. But overall, I would expect that we can transform the company while maintaining a level of profitability that is in the range of what we're talking about for this year. But we only set guidance 1 year at a time.

Sure. It's Mike Baker from Nomura. One bigger-picture question then a couple of quick-hit ones, if I could. But so it seems like eCommerce was a little bit better in the fourth quarter, store is not quite as good. Is that a function of the shorter selling period, do you think? Or is there something bigger going on to think about into next year? And then I'll just trot off the quick ones, if I could, real quick. How much is Chile going to cost you next year in the guidance? Layaway, what happened there? And then finally, I'll give this excuse to you, even though you didn't use it. Did the weather hurt your apparel at all in the fourth quarter?

This reminds me of Dan Binder's old questions that were four-parters.

You may go first.

Let me start with Chile. So what we've assumed for Chile has clearly had a big impact to the business last year. And certainly, our associates and our customers have gone through a lot in that market. We're assuming in our guidance that the market remains relatively stable. We don't expect the business to come back in full because of the unrest and the damage that we had. But we assume basically how we came out of the year is how we're going to go into next year.

So yes, eCommerce was ahead of plan and stores were behind plan; and some combination of 6 fewer days, channel shift to eCommerce, maybe even that weather word you mentioned, all those things factored into what happened. And we wish we could tell you precisely how it weighted out. I don't think we're going to be able to tell you exactly what happened. But we do know that we've got room to improve in terms of store merchandising and assortment, not to say that there aren't a lot of strengths there. I mean, we've called out the specific categories. I can't remember a year where there wasn't a hot toy. The hottest toy this year was under $5. Many brands, these miniature mayonnaise jars and ketchup bottles, which I still don't completely understand. But it didn't really drive a lot of volume. There's not really another hot item. That's unusual. The calendars, every few years, this happens. And I didn't feel very good the last time this happened. I'm getting old enough to remember several cycles now. So I'm not sure how to weight all that out for you. But we do know we've got to keep getting better at eCommerce and we've got to run great stores, and that's where our focus is on tactically.

Mike Lasser from UBS. Thank you for having this day. I mean, we should get together for all your earnings releases, we appreciate it. Formulating guidance for this year is probably particularly tricky. You have an election, coronavirus, all these uncertainties, and you just came off a period where sales didn't necessarily meet your expectations. So how did you factor all that in as you were coming up with your Walmart U.S. sales plan for the year? And as part of that, did you assume that you're going to have to invest more in price in order to drive the traffic, recognizing that you already said that more of the price investments will go to general merchandise versus consumables this year.

Yes. So we put a lot of thought into it, as you can imagine. And it's really the result of a lot of work that goes on with this team over here and how we think about trade-offs around the company. When you look at -- we talked about sales through Cyber Monday were good. Sales in January were good. We started off the year well. The food business around the world continues to be strong. Traffic was up nearly 1% in the U.S. So the underlying part of the business is in good shape. And I think that gave us confidence to give what I think is really the guidance for next year. There's a lot of pieces to the guidance; there are a lot of things that go into that. And will the year end up, will every piece work exactly like we think it will? We know it won't. But within all those moving pieces, we felt good about the guidance that we're giving.

And low unemployment, relatively low fuel prices, really no inflation in the business, which is interesting. The comps that we're driving result in a lot of tonnage. And so that's great. I think there's room to make the price investments that we need to make across the box, not just in general merchandise in the plan to drive this kind of comp. But we assume that the customer is going to be somewhat in the same place that they're in right now.

Just on longer-term eCommerce profitability and main drivers as you think about mix and shipping, as well as consumer pressures around shipping speed and the need for speed.

We'll wrap up this morning talking about technology and giving you some examples of things that we're thinking about as it relates to automation. But we do have an opportunity inside the box, grocery picking on the side of the box, as well as back in our distribution centers, to add even more types of software and hardware to make ourselves more productive. And I'm excited about that.

On the eCommerce losses, we're giving this guidance for this year. But we're encouraged, as I said, by what we're seeing in variable fulfillment costs. We're encouraged by what we're seeing in contribution margin as we see the mix change a little bit in that business. We're going to continue to invest in eCommerce. And again, it's up to us as a management team to make sure all the pieces fit together in a way that makes sense for investors.

Those pieces include first-party, third-party services that support marketplace sellers, the way we manage stores, and some of the other areas that we'll mention today. If we're thinking about the whole system, do we think that eCommerce losses will subside in time incrementally as we drive CP improvement and learn how to run an eCommerce business better? Yes. But it'll be a mix of things that will drive the profitability of the company.

And you've heard me say this before, I'll say it again, which is it gets more and more challenging to try to break these businesses apart and report it that way. I mean, the business is just becoming more and more omni as the customer becomes more and more omni.

Right.

Scott Mushkin at R5 Capital. So I wanted to poke a little bit more at the U.S. grocery business. In particular, it looks like store sales -- well, I'll just say this. It looks like almost all the growth is being driven by omnichannel, which puts some pressure on your business. So how do you resist the temptation to let prices creep up a little bit, maybe take some store-specific labor out? Things that got you guys in trouble a little bit before kind of the reset 5 years ago when, Doug, you took over?

We just won't let it happen. I mean, we've lived through what that looks like, and we're in the stores all the time and paying attention to what hours and structure look like. I think that we would say that over the last year or so, our focus on grocery shifted the store managers' focus and others' focus to really executing in-stock and grocery pick and deliver on the food and consumable side. And it may have contributed some to apparel presentation and general merchandise. So in this business, you got to run the whole box, and we're focused on that and thinking about our staffing that way as we head into next year. As we build new products, I think this is kind of embedded in your question, Scott, launch grocery delivery, charge a membership for it and do other things, we've got to keep an eye on a pure store P&L and make sure that it's not inappropriately subsidizing new businesses. And we do think about that and keep an eye on it as we manage all these variables. I hope that answers your question.

Yes, just quickly. And you guys were really committed to certain price gaps in the consumables business, which have been strong, and we've seen continued investment on that side of the business. Is that still to be expected or not?

We've made a lot of progress on those things, but maintaining gaps and staying aggressive is in our plan, just not exclusively.

All right. Chuck Grom from Gordon Haskett. On the coronavirus, we're getting a lot of questions from investors and what's going on over there, and I know a lot of the factories are just starting to reopen. Just how are you -- what are you seeing over there? How big of an impact do you think it could be to your business in the back half of the year, if there are backlogs? And I guess, Brett, just on the $0.02 of potential hit in the first quarter, I guess just to clarify, that's not in your guidance? And I guess, where would that be within the P&L, in the top line or the margin comping?

Let me start there. Why don't you start? Yes, let's start with store operations. I mean, when Judith and her team wake up and maybe you are getting some sleep, they are thinking, first and foremost, about what's happening with our associates? What do they need? Are the stores being run well? Are we taking care of customers to the extent that we can? And we do currently have a majority of our stores with reduced hours. Looking back over the last few weeks, there have been a few times when we've closed a store for a little while. But we like to keep stores open. Customers need us. We do it with hurricanes in the U.S., we're doing it in this situation in China. There's collaboration going on with the appropriate government officials to make sure that we're doing all the things that they would expect us to do. And our team on the ground is doing a great job managing that. The mix shift happened. So if you could imagine yourself in that situation, you're focused on fresh food, you're focused on the staples that you need to have in your apartment or your home all the time, you're not thinking about toys or apparel. So that's occurred. And then another dimension that's changed is delivery's gone up even higher, as you would guess. And so this relationship that we've got with Dada for the last-mile delivery or last-few-steps delivery from the store up to the apartment, those kinds of things, that's enabled us to pick from our stores and do delivery and fuel some of that growth. But it will create a mix change to the P&L, and we don't know what's going to happen next. I mean, one of the reasons why we couldn't put it in our guidance is because there's so many moving parts right now, including sourcing coming out of China, not only into the U.S., but into other markets as well. It's important for everybody to remember, in the U.S., we do about 2/3 of our volume with goods made in the United States. That other third comes from a combination of countries, especially China, Canada, Mexico, a little bit from India, Southeast Asia. So how long would those shipments be delayed? What can we do to buy goods that are already in the U.S. or made in the U.S. to supplement some of that so we don't feel as much of it? All of that work is happening, which makes it really difficult to call how it's going to play out in the quarter. We're not even through the first month yet. So that's why we've made the decision we've made.

Chris Horvers, JPMorgan. First, a sort of year question, then the longer-term question. So first on the year, you talked about mid-20s to mid-30s on the eCommerce growth rate. Around 2.5% or 2.5% or more, pretty consistent over the year. What drives the variability around the eCommerce growth rate over the quarters? And then I have a follow-up on general merchandise.

Yes, sometimes on -- any time we have variability for -- in eCommerce or anything we have, it can be something that happened this year. More times than not, where we had, it can be weather. It can be a week or 2 that were better than some. And so it just creates this little bit of timing difference. And it doesn't take much of a change to move something from 25% to 30%. So we want to give you as much guidance as we can along that, but it just doesn't take much impact to make a change. So it's not as variable as it seems when you just look at it mid-20s to mid-30s.

Got it. And then, Doug, I think it was 5 years ago, we had an Analyst Day here where you talked about the imperative of investing in margin to get traffic growing again. And clearly, that's worked, right? So traffic is consistently positive, et cetera. As we take away from today, where do you think we'll be in 3, 4, and 5 years from now? Is this the trend we should learn to expect, that hopefully EBIT margins stay flattish, and the goal is to keep driving traffic up 1 or 2? How do you think about that balance as you think about the business out a few years?

Yes. I think growing traffic in that range would be a good accomplishment, but I'd like to see more than that, especially when you think about it in an omnichannel fashion. And the combination of choices that we make, we'll manage from quarter to quarter and year to year. We can make investments at the store level in price to help drive the productivity loop. We can make investments in eCommerce to help drive eCommerce. And as we see eCommerce losses improve, it gives us some room to make choices to do things like this year, the choice that we're making to accelerate our modernization of technology, which we'll talk more about in a moment. So the team works together in a really fluid way to set these priorities to make sure we're balancing all these things, including driving traffic growth. But overall, I would expect that we can transform the company while maintaining a level of profitability that is in the range of what we're talking about for this year. But we only set guidance 1 year at a time.

Sure. It's Mike Baker from Nomura. One bigger-picture question then a couple of quick-hit ones, if I could. But so it seems like eCommerce was a little bit better in the fourth quarter, store is not quite as good. Is that a function of the shorter selling period, do you think? Or is there something bigger going on to think about into next year? And then I'll just trot off the quick ones, if I could, real quick. How much is Chile going to cost you next year in the guidance? Layaway, what happened there? And then finally, I'll give this excuse to you, even though you didn't use it. Did the weather hurt your apparel at all in the fourth quarter?

This reminds me of Dan Binder's old questions that were four-parters.

You may go first.

Let me start with Chile. So what we've assumed for Chile has clearly had a big impact to the business last year. And certainly, our associates and our customers have gone through a lot in that market. We're assuming in our guidance that the market remains relatively stable. We don't expect the business to come back in full because of the unrest and the damage that we had. But we assume basically how we came out of the year is how we're going to go into next year.

So yes, eCommerce was ahead of plan and stores were behind plan; and some combination of 6 fewer days, channel shift to eCommerce, maybe even that weather word you mentioned, all those things factored into what happened. And we wish we could tell you precisely how it weighted out. I don't think we're going to be able to tell you exactly what happened. But we do know that we've got room to improve in terms of store merchandising and assortment, not to say that there aren't a lot of strengths there. I mean, we've called out the specific categories. I can't remember a year where there wasn't a hot toy. The hottest toy this year was under $5. Many brands, these miniature mayonnaise jars and ketchup bottles, which I still don't completely understand. But it didn't really drive a lot of volume. There's not really another hot item. That's unusual. The calendars, every few years, this happens. And I didn't feel very good the last time this happened. I'm getting old enough to remember several cycles now. So I'm not sure how to weight all that out for you. But we do know we've got to keep getting better at eCommerce and we've got to run great stores, and that's where our focus is on tactically.

Mike Lasser from UBS. Thank you for having this day. I mean, we should get together for all your earnings releases, we appreciate it. Formulating guidance for this year is probably particularly tricky. You have an election, coronavirus, all these uncertainties, and you just came off a period where sales didn't necessarily meet your expectations. So how did you factor all that in as you were coming up with your Walmart U.S. sales plan for the year? And as part of that, did you assume that you're going to have to invest more in price in order to drive the traffic, recognizing that you already said that more of the price investments will go to general merchandise versus consumables this year.

Yes. So we put a lot of thought into it, as you can imagine. And it's really the result of a lot of work that goes on with this team over here and how we think about trade-offs around the company. When you look at -- we talked about sales through Cyber Monday were good. Sales in January were good. We started off the year well. The food business around the world continues to be strong. Traffic was up nearly 1% in the U.S. So the underlying part of the business is in good shape. And I think that gave us confidence to give what I think is really the guidance for next year. There's a lot of pieces to the guidance; there are a lot of things that go into that. And will the year end up, will every piece work exactly like we think it will? We know it won't. But within all those moving pieces, we felt good about the guidance that we're giving.

And low unemployment, relatively low fuel prices, really no inflation in the business, which is interesting. The comps that we're driving result in a lot of tonnage. And so that's great. I think there's room to make the price investments that we need to make across the box, not just in general merchandise in the plan to drive this kind of comp. But we assume that the customer is going to be somewhat in the same place that they're in right now.

Just on longer-term eCommerce profitability and main drivers as you think about mix and shipping, as well as consumer pressures around shipping speed and the need for speed.

We'll wrap up this morning talking about technology and giving you some examples of things that we're thinking about as it relates to automation. But we do have an opportunity inside the box, grocery picking on the side of the box, as well as back in our distribution centers, to add even more types of software and hardware to make ourselves more productive. And I'm excited about that.