Walmart Inc (WMT) — Q4 2022 Earnings Call Transcript

Thank you, Rob. Good morning and welcome to Walmart’s Fourth Quarter Fiscal 2022 Earnings Call. I'm joined by members of our executive team, including Doug McMillon, Walmart's President and CEO, Brett Biggs, Executive Vice President and Chief Financial Officer and John Furner, President and CEO of Walmart U.S. In a few moments, Doug and Brett will provide an update on the business and discuss fourth quarter and full year results that will be followed by our question-and-answer session. Before I turn the call over to Doug, let me remind you that today's call is being recorded, and will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include but are not limited to the factors identified in our filings with the SEC. Please review our press release and accompanying slide presentation for a cautionary statement regarding forward-looking statements, as well as our entire safe harbor statement and non-GAAP reconciliations on our website at stock.walmart.com. It's now my pleasure to turn the call over to Doug McMillon.

Good morning and thanks for joining us to hear about our fourth quarter results. Let's jump right in. Our team delivered net sales growth of 7.6% and adjusted EPS growth of 9.3%, excluding divestitures. We continued to gain market share in food and consumables in the U.S. and comp transactions were positive. Consumer demand during the quarter was strong. And the team overcame a number of challenges in the U.S. and around the world to deliver these strong results. Going into the quarter, we were confident that we had the people, the products and the prices to deliver. And we did. Our inventory position improved and we delivered high sell-throughs in seasonal categories across markets. Food, consumables and apparel were also strong globally. We comped low single digits in general merchandise in the U.S. against strong results last year. And Sam's Club saw broad-based strength across categories in the U.S. and in China. Our merchants are doing a nice job of navigating the pressure from cost of goods inflation with our customers and shareholders in mind. I like how we're mixing out the business. Consolidated gross profit rate increased 10 basis points for the quarter, including more than 50 basis points in Walmart U.S. We’re working closely with our suppliers to manage inflation, finding a few places where we can roll back prices. And we're paying close attention to how we manage our opening price point items. Q4 and the full year are proof points that we can keep our price gaps in the range where we want them, grow market share and deliver against our top and bottom line growth algorithm. Our associates did an amazing job of serving customers and members during this busy season even as we faced Omicron and supply chain challenges. This quarter’s COVID peak was larger than anything we'd experienced in 2020 or previously in 2021. We hired more associates and our plan to fill that gap negatively impacted expenses, but it was clearly needed. I'm grateful to our associates and store and club management teams for how they set priorities on behalf of our customers and members during the quarter. As I visit stores and clubs, it's inspiring to see how our team is navigating such a fluid environment. They're delivering tremendous growth while making significant progress against our longer-term strategy. During the fiscal year just ended excluding divestitures, we grew net sales by 9%, grew operating profit by 18%, invested $13 billion in CapEx to grow our business, returned $16 billion to shareholders via share buybacks and dividends, grew our advertising business globally to $2.1 billion and took important steps to build our U.S. financial services capabilities with agreements to make two key acquisitions. Sometimes it feels like 2020 and 2021 were just one long year. If you look at growth since the beginning of fiscal ‘21, through the end of fiscal ‘22, excluding divestitures, our company is about 17% larger in terms of revenue, 31% larger in terms of operating income, and globally our percentage of digital sales grew from 6% to 13%. As the company grows, we're fueled by the new business model and flywheel we outlined last year. Our strategy is coming to life. Ensuring that we deliver our strategy is where I invest the majority of my time. It starts with the customer and earning primary destination. The big basket stock-up trip is important. It's foundational to our relationship with families. We earn that shopping occasion by running great stores and clubs and offering seamless pickup and delivery experiences, including for our Walmart+ and InHome members in the U.S. Our membership offering Walmart+ continues to be an important piece of what we're building. We're adding capacity for pickup and delivery. We increased capacity by nearly 20% last year, and we expect to increase capacity by another 35% this year. For Walmart InHome, we recently announced an expansion of this membership service to make it available to about 30 million homes in the U.S., up from 6 million. To enable the expansion, we're creating roles for more than 3000 associate delivery drivers. The majority of these roles will be filled by existing experienced associates. We'll be building out a fleet of all-electric delivery vans to support our delivery services, and our goal of a zero emissions logistics fleet by 2040. Our flywheel is designed to serve families more broadly, deepening our relationship with them and creating a healthy mix of merchandise and services for our business. Recently, we shared some news about our fintech startup in the U.S. that will operate under the ONE brand going forward. The combined talent of our JV leadership team and out of the pending acquisitions of ONE Finance and Even is impressive, and our plans are aggressive. We can help our customers and Walmart+ members save money, have an experience with less friction and help strengthen the financial position for millions of families. As with our advertising business, our financial services capabilities cross borders. Our PhonePe business in India is growing incredibly fast and we have strong capabilities in Mexico, which is such an important market for us. As we look to improve the customer experience and strengthen the mix of our business, expanding our marketplace is important. We added more than 20,000 new sellers to the platform in the U.S. last year, and expect to add nearly 40,000 more this year. We're now up to nearly 170 million SKUs. And we're adding more every day. We opened up our U.S. marketplace to sellers from India and created a dedicated team there to help sellers onboard and grow. Many sellers are looking to diversify their business and they're pushing us to add capabilities including the expansion of our fulfillment services. We grew our U.S. GMV delivered by our fulfillment services by 500% last year, and we expect robust growth to continue this year as we add more capacity. For Q4, our fulfillment services represented 44% of total marketplace orders in India, and 22% in Mexico. Growing our marketplace expands choice for our customers, helps our sellers grow and enhances our profit margins. Our plan for this year includes strengthening the experience for sellers and adding fulfillment capacity so customers have access to more items faster. It's clear to me that we have years of profitable marketplace and fulfillment services growth ahead of us. Staying on the theme of fulfillment and scaling new businesses, we recently launched Walmart GoLocal, a last-mile delivery solution using our Spark Driver platform to help businesses of all sizes reach more customers. GoLocal is making deliveries for The Home Depot and other large retailers. But I'm most excited about serving small local retailers. We have nearly 1000 GoLocal service pickup points and we expect to end this year closer to 5,000. This is good for customers, our clients and for us as we lower the cost per order by increasing the combined order size and the route density. As we bring more customers, sellers and suppliers into our ecosystem, it expands our ability to monetize those relationships. A great example is our advertising business. Globally, it's been growing at a high rate with high margins and is now a $2.1 billion business in only a few years, and we expect this strong growth to continue. As our e-commerce business, including the marketplace, continues to grow, so will our advertising business. We're taking the learnings from the U.S. and India and growing in places like Mexico, Canada, and Chile. Importantly, we're beginning to build tech platforms that can be leveraged in multiple countries. Our strong team of technologists and our digital transformation enable global synergies. We see traction in our core business as well as in our newer businesses. There's real power in the ability to make these pieces mutually reinforcing. To design them such that one portion of a customer relationship leads them to another because it's easy and intuitive, connecting B2B opportunities like advertising enables us to grow earnings and make key investments at the same time. Because of how the flywheels are coming together, I feel great about our ability to deliver against the growth algorithm we discussed last year, about 4% top-line growth, and operating income growth rates higher than sales. We've highlighted the increased costs we had in Q4 from COVID, supply chain, and wages. Some of these costs are likely to continue through part of this year. But I feel confident in the underlying strength of the business and our ability to deliver the growth we expect. The Walmart we're building is becoming more impactful for our customers and members. More digital, more automated, and more diversified on the top and bottom lines. Now let's move on to our performance by operating segment. I'll begin with Walmart U.S. The team had a great holiday season. They drove comp sales of 5.6%. You know about our strength in food and consumables. But despite the supply chain challenges, the seasonal hardlines execution for the holiday looked good in stores. We’re continuing to navigate cost pressures and in-stock challenges. But overall, I'm really proud of the team for delivering during the holiday season. And I believe we'll work our way to an improved in-stock level through the course of the year. Building a seamless omni-channel experience for customers and prioritizing convenience for them is critical. Our stores have become hybrid. They're both stores and fulfillment centers. Last year, we increased the number of orders coming from our stores by 170% versus the previous year. And that's on top of more than 500% from the year before. Having inventory so close to many customers is a competitive advantage. In some cases, we're getting items to customers in hours rather than days. In Sam's Club U.S., the momentum continues. Sales and membership were strong, excluding fuel and tobacco, comps were 10.8% for the quarter and nearly 26% on a two-year stack. Membership income grew 9.1% driven by membership count, which reached another record high during the quarter. The team leveraged operating expenses and grew operating income 24% excluding fuel. They had another fantastic quarter and year. Sam’s continues to drive digital innovation and add capabilities. Our Bold & Blue Club remodels and strengthened pickup and delivery services will drive growth. At Walmart International, we had another strong year with good progress in all aspects of the flywheel. Overall sales were strong again in Q4 with growth of 9.8% in constant currency excluding divestitures. China, Mexico, and Flipkart led the way. Our 21% e-commerce penetration is a new record and up nearly 400 basis points from last year. We get to serve a spectrum of holidays and festivals during the holiday quarter from Diwali and Big Billion Days in India through to preparation for Chinese New Year. During Big Billion Days, 40% of sellers were first-time sellers on the marketplace, and more than 100,000 kiranas participated by making last-mile deliveries. This shows strong inclusive growth. While our omnichannel model gives the gift of time, access and affordability remain important. We're expanding our ecosystem and we've made investments in areas such as health care, marketplace telecommunications, and our online food business. A few great examples include the launch of Flipkart Health Plus that aims to increase access to affordable care in India. The acquisition of Foodmaestro in Canada to build more personalized shopping experiences for customers. And BAIT, our value-based internet and telephone service, enables customers in Mexico to enjoy digital connectivity, surpassing 2 million members. It's great to see all three of our operating segments doing so well. I'm grateful to our strong and capable leadership team and to all of our associates. We've had an incredible couple of years during these challenging times. We have momentum in the business. We have aggressive plans, and we're executing on the strategy. It still feels like we're just getting started.

Thanks, Doug. We wrapped up another great year with a strong fourth quarter and good momentum as we start the New Year. Over the last couple of years, each quarter has presented unique challenges, but I'm proud of how we've navigated each one of those. The fourth quarter was no different as we faced the rise of Omicron with its impact on the supply chain and our associates. This resulted in some significant unexpected expenses. But despite that, we delivered the top and bottom line results we expected. We continue to execute on our strategic initiatives to fulfill the vision we outlined last February. The U.S. flywheel is accelerating and is evident through initiatives like our pending fintech JV acquisitions, the launch of a new data business and acceleration of last-mile delivery. Sam’s growth and membership income has been strong throughout the year as we expand Omni options including club pickup. These and other key initiatives represent large revenue and profit opportunities over the next few years. For the full year, we had record sales of $568 billion with increased traffic to stores and clubs. While e-commerce penetration approached 13%, Walmart U.S. grew sales by more than $23 billion and saw strong market share gains in food and consumables. Over the past two years, our U.S. segments have grown sales by $67 billion, or 17%, and operating income by 25%. Now let's discuss Q4 results. As a reminder, the previously announced international divestitures significantly affect year-over-year comparisons. So my comments today will exclude the effect of divestitures. Total constant currency revenue grew 7.9% to over $153 billion and reached another important milestone with quarterly net sales exceeding $150 billion. Consolidated gross margin rate increased 5 basis points with Walmart U.S. gross margin rate increasing by a healthy 54 basis points, reflecting primarily price management resulting from cost increases in mix along with benefits from a growing advertising business partially offset by higher supply chain costs. Supply chain costs were over $400 million higher than expected, but we expect some of those costs to abate over time. International gross margin rates were lower due primarily to format mix. SG&A expenses deleveraged 19 basis points as increased U.S. wage costs were partially offset by strong sales and lower COVID costs versus last year. Although COVID costs were lower than last year, we have significantly higher associate lead costs in the U.S. than anticipated. In the first three quarters combined, COVID lead costs were about $600 million but increased over $450 million just in Q4, presenting an unexpected headwind of over $300 million. Despite these expense challenges, adjusted operating income increased more than 6% and EPS increased more than 9%. We're in a great financial position, enabling us to allocate capital towards both growth and shareholder returns. Free cash flow was $11.1 billion for the year, down versus last year due primarily to inventory build throughout the year, higher CapEx and cost increases. We increased share repurchases significantly this year with buybacks of just under $10 billion, a pace we plan to continue or increase in the coming year given our view of the long-term value of the company. In addition, we announced the 49th consecutive annual dividend increase this morning. ROI increased 90 basis points to just under 15%, the best level in 5 years due primarily to growth in operating income. Now let's discuss the quarterly results for each segment. Walmart U.S. had its first-ever $100 billion-plus sales quarter with sales of $105 billion. Comp sales grew 5.6%, up more than 14% on a two-year stack. We continue to grow grocery market share as food comps increased high-single digits, while Health & Wellness, apparel, seasonal, and automotive categories were also strong. Transactions were up more than 3% despite COVID pressures. E-commerce sales grew 1% against strong gains last year, resulting in a 70% two-year stack. We continue to see elevated levels of cost inflation and have taken prudent steps to manage pricing while having slightly wider price gaps than pre-pandemic. We have a good balance of growing market share while managing price with both customers and shareholders in mind. We continue to make strong progress in some of our newer higher-margin initiatives. Walmart Connect advertising experienced robust sales growth this year with a strong pipeline of new advertisers and large growth opportunities ahead. In fact, the number of active advertisers using Walmart Connect grew more than 130% year-over-year. And about half of the ad sales came from automated channels in Q4, more than double last year. We expect Walmart Connect to continue to scale over the next few years with plans to become a top-10 ad business in the midterm. Growing eCommerce marketplace at WFS has been a priority over the past couple of years as we've invested to expand fulfillment capacity, introduce new services for sellers and double the number of items available for customers. In fact, we expect to have over 200 million items in our e-commerce assortment by the end of the year. The expansion of WFS has also been a key unlock in bringing more sellers to Walmart's marketplace. Customers increasingly want home delivery, and we had a six-fold increase in delivery in the fourth quarter versus pre-pandemic levels. We continue to expand capabilities, including announcing the acceleration of in-home delivery to 30 million households by year-end. We also announced our new fintech business ONE in January, with the pending acquisitions of fintech platforms ONE Finance and Even. SG&A expenses deleveraged 95 basis points as increased wage costs were partially offset by strong sales and lower total COVID-related expenses year-over-year. Still, as I mentioned earlier, COVID leave costs were much higher than expected. Operating income grew slightly, aided by strong margins as well as solid growth in membership and other income. Inventory increased about 28% overall, including higher cost of goods due to inflation, mix, and higher-than-normal in-transit shipments, reflecting continued efforts to improve in-stock. International sales were strong, up nearly 10%, led by China, Mexico, and Flipkart as seasonal events, omni growth, and good inventory position contributed to results. E-commerce sales in constant currency grew 21% on top of strong gains last year with growth of more than 75% on a two-year stack. China comps increased nearly 20% in constant currency with continued strength from Sam's Clubs as well as more than 90% growth in e-commerce sales. Comp sales in Mexico increased nearly 8% and grew faster than the market according to ANTAD. Flipkart had another good sales quarter, aided by strong holiday events and favorable trends in monthly active customers and users. We're also pleased with the strong growth of PhonePe with TPV of more than 130% versus last year with a current run-rate of $650 billion. In Canada, comp sales were up 4.6%, led by in-store shopping and comps increased more than 13% on a two-year stack. International adjusted operating income in constant currency increased nearly 3%, reflecting lower COVID costs, partly offset by gross margin rate decrease related to higher sales penetration from Sam's China and eCommerce. For the full year, International adjusted operating income grew 12.7%. And we feel confident about our international business as we head into the New Year. Sam's Club had another impressive quarter with comps up 10.8%, excluding fuel and tobacco, an increase of nearly 26% on a two-year stack. Transactions increased 7% and ticket was up 3.2%. E-commerce sales grew 21%, and we expanded the rollout of delivery capabilities of digital orders to nearly all clubs during the quarter. Sam's is leveraging Walmart's GoLocal last-mile delivery service to provide more convenience to members. Membership income was up more than 9% with another record in member counts and strong Plus penetration. Operating income was up 41% as higher fuel and membership income as well as strong expense leverage were partially offset by gross margin pressure from inflation and supply chain costs. Now let's turn to guidance. We feel very good about the underlying strength of the business and believe we can deliver full-year growth in FY '23 that aligns with the growth algorithm we discussed last year. As you saw in Q4, we're still challenged with increased costs related to COVID and supply chain disruptions. Our guidance assumes that we will see some relief from that as the year progresses and that the U.S. consumer remains in a generally favorable economic position throughout the year. The comparisons against last year are unique, primarily due to the timing of international divestitures and U.S. stimulus in FY '22. As a reminder, the divestitures of our businesses in the UK and Japan were completed near the end of the first quarter last year, contributing about $5 billion in sales and about $0.07 of EPS in Q1, FY '22. Our guidance will be ex-divestitures. We expect total company sales to increase about 4% with Walmart U.S. comp sales slightly above 3% for the year. Given the timing of stimulus overlaps, we expect about a 1% to 2% comp sales increase from Walmart U.S. in the first quarter, followed by somewhat higher comp sales growth throughout the remainder of the year. We expect FY '23 total company operating income to increase at a rate slightly higher than sales growth and EPS to grow 5% to 6% versus FY '22 adjusted EPS due in part to our aggressive share repurchase program. The quarterly profit growth cadence is expected to be quite variable due to last year's U.S. stimulus as well as lapping wage investments initiated in February and September 2021. As you would expect, the variability of the quarters looks less extreme when viewed on a two-year stack. We expect Q1 operating income and EPS to be down low-double digits to low-teens as we cycle the stimulus effects from last year that resulted in nearly 30% operating income growth, as well as increased wages this year. On a two-year stack, Q1 operating income would still be up a mid-teens percentage. Q2 and Q3 operating income and EPS are expected to increase at low to mid-single digit rates as year-over-year comparisons ease due in part to the moderation of stimulus benefits last year. We expect higher growth rates in the back half of the year, as we fully cycle wage investments resulting in fourth quarter operating income and EPS increasing by a high-teens percentage. Q4 operating income will also benefit from some timing versus FY '22, particularly in international as well as cycling elevated COVID leave costs in FY '22. Our effective tax rate is expected to increase to 25% to 26% due primarily to earnings mix. For the year, we expect gross margin rates to increase due to pricing, mix, and new business initiatives. Although there will be variability quarter-to-quarter as is usually the case. For the first time in a while, we expect some expense deleveraging as we continue to see elevated supply chain, wage, and tech costs. We'll continue the multi-year journey of accelerated capital investment focused on increasing fulfillment capacity, automation, and technology to enhance productivity. FY '22 CapEx was about $13.1 billion, lower than anticipated due to timing of projects impacted by supply chain challenges. Due to that and continued investment in strategic priorities, we anticipate this year's CapEx being at the upper end of the guidance we gave last year of 2.5% to 3% of sales. In closing, I'm really pleased with our FY '22 results. I'm very confident as I look to this year and to the future. The company is in an enviable position to serve customers and members and also to achieve our financial goals, benefiting shareholders. Now we'd be happy to take your questions.

Thank you. Good morning, everyone. I'd like to double-click on one of the comments you made in your remarks regarding elevated levels of inflation. And I think you signaled that you are seeing slightly wider price gaps versus pre-pandemic. Can you maybe give us some sense of how much inflation you're observing real-time? How much those price gaps have widened and then what your expectations are for the quarters as the year progresses?

Hey, Steph. Good morning. This is John with Walmart U.S. Now, the first, I just want to appreciate our teams for all they delivered in the last quarter, the $105 billion sales number has been impressive given all the challenges they have. And I just want to thank the teams for everything they've been through the last couple of years. When it comes to pricing, we really take a long-term view on this. And we manage pricing for both customers and shareholders. We're constantly monitoring our share, our price gaps to competitors. And we'll continue to do that as we move forward. And then what we're seeing right now is not only gaps that we're proud of that are valuable for our customers, but we're also seeing the opportunity to increase some of our rollbacks in stores. And we're really proud of the team. We're seeing about the same number of rollbacks now that we had at the end of Q1 last year. So while we have supply chain challenges and other costs coming through, the teams are doing a nice job managing mix and pricing and looking after both our customers and our shareholders.

Hi, good morning. Just a couple of quick questions. The first really thanks for giving us the advertising piece. Can you just elaborate a little bit more just on the growth that you've experienced to get to the $2 billion number? And just how quickly do you expect that to ramp? And given the fact that you gave us the $2 billion number, Doug, would you be willing to give us how many people have signed up for the Walmart+ membership?

Bob, you got one and you want both. That doesn't surprise me. I'll start with the advertising number, and John can add here. The business model is changing. I think that's the headline. We've got a business that's becoming increasingly digital, the e-commerce business, first-party, third-party is growing. It gives us the opportunity to grow advertising income. It's grown at a fast rate, and it's growing across markets. The U.S. is important in that number. But India, Mexico and other markets are going to have growth there too. And the margins are helpful. They help us keep prices low for customers and they help us deliver the operating income number percentage. So we're excited about what the future looks like as it relates to the growth of the advertising business. We're not going to share Walmart+ yet. I don't really want to have the company defined by one metric. And with subscriptions being such a topic these days. Everybody gets really focused on that. Walmart is always going to be a business where you need to look across and see how the omnichannel business is playing out. There are going to be times when e-commerce grows faster than stores. And as we've seen recently, stores are attractive during certain periods of time. Walmart+ is important. It helps us grow our e-commerce business. It helps us deepen the relationship with customers and have more data. And at some point, we'll probably talk about that number. And by the way, there are other types of memberships, not just in Sam's Club across the world, but in some of our other businesses too, that are growing. So I think there will probably be a number of membership-type metrics over time that you'll want to keep an eye on. But I don't think it would be good if we're going to get overly focused on Walmart+. Our ability to serve people with pickup and delivery has improved as we've made these investments. It's one of the reasons why we continue to tell you how much capacity we're growing to do that.

Yeah, Bob, this is John. And then a couple of things. First, I think the advertising business is a reflection of the momentum we have in total Walmart U.S. And I'm really proud of the way the team has helped position us to serve customers any way they want to be served, whether that's at home, in the refrigerator, at their front door, at the curb, or in store. The Walmart Connect business, specifically the reason we named it Connect, is we're connecting buyers, sellers, suppliers, and customers. And we have a unique opportunity to be able to help sellers and suppliers reach customers in a way that's effective for them, grow their business and do it in a way that is positioned on top of an omni-retail platform. So certainly, excited about the growth, I'm excited about the capacity additions in store and in Walmart Fulfillment Services. Those enable sellers to be able to transact more frequently with our customers. And that's really the key to the growth of advertising is to have the large seller and supplier base that can reach our customer base.

Hi. Thanks very much. So Doug, I wanted to ask you a question. You've made the plane analogy in the past with respect to knowing when and where you want to land the plane, but there are moving parts to getting to the destination. So I wanted to just ask bigger picture when you think about '23 specifically well calendar '22, where you think the biggest source of upside could be to landing the plane. And then also where you'd put the biggest sources of risk on landing?

Thanks, Karen. I think the biggest sources of risk are external. It's been an unusual last year or two and figuring out how you lap stimulus, what happens with inflation, both on the cost of goods side as well as on the operating side will cause us to have to be good managers. But I think we've demonstrated over time that we have a lot of really good managers at Walmart. In terms of upside, I'm excited about what's happening in our stores and clubs. We've got great momentum in Sam's. There's a lot to be excited about in international. India continues to be really exciting. Walmex is kind of going from strength to strength, and Sam's business in China is good. So I think that Sam's International can contribute. And then the Walmart U.S. side, John, you can jump in here too. I think we've got an opportunity to continue to improve both stores and e-commerce. And the fact that we're now up to 170 million items for customers is exciting, and the way sellers are responding to fulfillment and seller services. And that relationship is really encouraging. So I think the marketplace is one of those areas where we can see growth, including that last-mile component that we're building out. I think that's exciting too.

Add too, Karen, I mentioned just a second ago, proud of the momentum and the positioning being an omni-retailer. But also excited about the shape of the business model and how it's changing. Brett laid out last year, early the growth algorithm and the way that the business model could change over time. And the services that Doug just referenced for sellers including fulfillment and marketplace, last mile, GoLocal, all these things help so many businesses reach customers in addition to just the Walmart business. And they all have an impact on the operating model, which I'm really quite excited about. And these are components that will help customers, number one, they'll help shareholders, and they'll help us position the way that we offer value to customers all across the country. So at GoLocal, we talked about the number of points that we have today. That's expanding. Our last-mile business is expanding. We'll have a fleet of electric vehicles coming online over the next couple of years. So there’s just a lot going on that is going to take a lot of friction out of customers' lives, help them stay in stock at home.

Good morning, everyone. I have a question regarding guidance. In 2022, you exceeded your comparable guidance and EBIT guidance by significant margins. If 2023 ends up better than your recent projections, will that be primarily due to sales, or is there a possibility for the margins to improve given the current circumstances? Also, Brett mentioned the Q4 EBIT growth for fiscal 2023. Could you provide more detail on that? It represents a substantial increase, but it seems like you'll be offsetting it with considerable SG&A growth, and you mentioned international comparisons. It would be helpful to clarify that it may not be as steep as it appears when we break down the components.

Hey, Simeon. It's Brett. I'll start off by saying that much of what Doug and John just mentioned will hold true if we exceed our guidance by the end of this year. Our higher-margin new businesses continue to grow, and we are seeing positive sales momentum. We expect this to persist with a 4% sales growth, which is significant on top of our previous achievements. This growth can be driven by sales and also fueled by improved margins as these new businesses evolve and our general merchandise segment strengthens, which enhances our product mix. There are various strategies we can use at different times to maintain our progress, and I feel confident about the business's momentum. As I mentioned earlier, I have never been more optimistic about our business and its model. Regarding Q4, there are a few factors to consider. There will be holiday timing impacts internationally, as well as some impairments affecting this quarter, which have been adjusted accordingly. We should also take into account the changes in supply chain costs and COVID-related expenses in Q4. We anticipate a reduction in costs over the year, but how and when that occurs remains to be seen. These factors will influence the operating income for Q4.

Good morning. Thanks a lot for taking my question. Your customer base looks a lot like the overall U.S. consumer. There is a lot of concern around the low to mid-income consumer. The outlook for that consumer this year, given the stimulus lap, the inflation, and other uncertainties. How did you factor all of that in as you were planning the year ahead? You probably could have gotten away with guiding to something less than your algorithm excluding divestitures. So is there a risk that you have a recently bias where the business in January was good. And hopefully, this doesn't come across as snarky, but do you think you have more visibility into the macro than the investment community or others? There's just a lot of uncertainty out there right now.

Michael, this is Doug. I'll start. Regarding the numbers of 4 and over 4, we communicated a year ago that we believe we can achieve or surpass this over time. As Brett mentioned, while we shared those figures, there will be periods of variability with some being higher and others lower. However, we think this is a solid range to refer to in the long run, and we wanted to reiterate that because we remain confident. This confidence stems from all the elements we've discussed. Our strategy is taking shape, and our business model is evolving. For this particular year, we see opportunities to enhance inventory levels and improve store and club standards due to the impacts from COVID leave. There’s potential for growth, along with certain challenges that we are aware of. Nonetheless, we have various opportunities to make decisions that will drive results. Thus, we felt it was essential to repeat these figures.

Something that Doug said is really important about improvement. One of the most fun parts of working at Walmart is having such a large team just every day get up and try to be better than they've been and run a better business. And I've enjoyed that for almost 30 years. But one of the things that's really important in your question is, as we serve really all income groups across all geographies in the U.S. and last year, we saw growth amongst income groups and geographies. So I think that's a clear reflection of the number of choices that we offer customers. We offer customers experience through Walmart.com and e-commerce. We offer customers pickup experiences, we offer in-store and just about everything in between, including home delivery, which will expand to a significant number of households up to 30 million households this year. So I think our ability to serve all across is quite important going forward. And for the team this year, we'll be really focused on execution. I know Sam's would say exactly the same thing, but across the geographies and income, we're well represented. And we're going to fight really hard to deliver great execution for customers all across the year.

And Michael, you started by saying that the Walmart U.S. customer looks like the U.S. population, and it does to a really large degree. And so we'll serve everybody. During periods of inflation like this, middle-income families, lower middle-income families, even wealthier families become more price sensitive. And that's to our advantage. So we've been through this before. And we run with inflation around the world all the time. Inflation is a different environment in the U.S. right now than it has been in recent times for sure, but we’ve been dealing with inflation in South America, Mexico, and other places and just to kind of understand what that looks like.

Hi, good morning. Thanks for taking our question. You had mentioned improving in-stocks throughout the year. We were just wondering how you would categorize how Q4 ended up from an in-stock level and what areas could still benefit from improved inventory. And can you talk about any sequential improvements you made in the supply chain and how you view the cadence of the supply and challenges throughout the rest of '22.

Good morning, Kate. This is John. Let me discuss Q4 first, then I'll address the supply chain. Overall, we saw significant improvements in in-stock levels late in Q3 and early Q4. We are pleased with the results of the holiday season, including our success in delivering seasonal and hard lines throughout the quarter. Key strengths included our apparel business and Health & Wellness, both performing strongly during the quarter, leading to solid sell-throughs. In January, the impact of Omicron caused a slight decline in in-store in-stock levels and availability. However, we are currently experiencing better flow across the supply chain. The increase in inventory is largely representative of what is on the way. We are anticipating a quick recovery. Some categories may still experience out-of-stock issues due to national challenges. Regarding the supply chain, we've previously discussed improvements in port flow, reduced lead times, and more efficient movement of containers into the country, all contributing to our progress. It's important to note that about two-thirds of our products are manufactured or assembled in the United States. We're also seeing growth in these categories. We expect increased flow in the coming weeks and months, positioning us well as we approach the first and second quarters.

Hey, good morning. Congrats on a great year and hats off Brett on a wonderful career at Walmart. My question is on the consumer again. And I guess I'm curious if you're seeing any noticeable changes in spending patterns by income cohorts in light of inflation, a lap of the stimulus. You talked about January being the best on a two-year basis, but just wondering if you could unpack it a little bit by income level.

Hey, Chuck. This is John. I also echo congrats to Brett on a great career. Thanks for mentioning that. But definitely he has made a nice impact. Chuck, a couple of things. We said a second ago, we do serve the country broadly, we see the ability to serve all income groups. And things like private brand versus brand, we don't really see this point. We see really strong demand. Private brand penetration is about flat. So at this point, we see really strong demand and the customer who's in good shape with a strong balance sheet. So we're optimistic that the inventory pull-throughs that we have done and have in transit will get us in great position to be able to serve customers as we get into this fiscal year.

Thanks for the sentiment, Chuck. Appreciate it.

Hi, good morning. Thanks for taking our question. And I'll add my congratulations to you, Brett. Just two questions. One, I guess, similar question, maybe that's been tried to ask. But there are some concerns going into the quarter about whether or not you could maintain this kind of earnings growth algorithm against strong results in 2021. And so maybe just can you help us understand the underlying factors that enable you to grow on this higher base. You talked a little bit about Connect and the advertising business. Is there just underlying progress in eCommerce profitability? I know we don't talk about it the same way anymore, but just what do you think are those underlying drivers that helped you maintain this level of growth?

Certainly. The business model and income statement are evolving. The company is increasingly moving towards a digital and automated approach, with expectations for further automation over time. When examining the gross margin, we have the ability to manage it. Some may monitor gross margin closely on a quarterly basis, but, as Brett pointed out, that can be overwhelming. Historically, we have been successful in managing gross margin. Beyond that, there are opportunities for productivity improvements through technology, such as apps for associates on the sales floor and robotics in distribution centers, which enhance productivity over time. Additionally, we have other businesses, including advertising, last-mile delivery, e-commerce fulfillment services, and our marketplace, that positively impact margins. As these areas grow relative to our total business, the income statement's shape will shift accordingly. Our confidence in these developments, both in the U.S. and globally, remains strong, which is reflected in our outlook. Brett, would you like to take the next question?

You said it well. John, do you want to address that?

I want to add a couple of points. First, having digital relationships with customers is crucial. Increasingly, we fulfill orders from one store to another, and our stores also serve as fulfillment centers. This capability to engage with customers digitally is essential. Our workforce is becoming more digital as well, with over a million associates using devices from the moment they arrive until they leave, which saves them time. Additionally, I want to emphasize what Doug mentioned about automation in the supply chain. We're leveraging automation to take over tasks that associates prefer not to spend much time on, allowing them to focus on high-value activities like ensuring products are in stock and available. In conclusion, we are optimistic about the improvements this year, as there is significant potential for enhancement in product availability that we’ve observed over the past few years. We’re proud of our growth and believe we could have achieved much more if we had the right inventory in the right locations at the right time. Therefore, I am very optimistic about the potential for revenue growth.

You mentioned e-commerce. We're continuing to manage contribution profit with the e-commerce business as a standalone vertical. Apparel and home are important, and we've seen growth there over the last couple of years. And then the marketplace helps. The marketplace has been scaling faster, as you can see in the $170 million number.

Hi, thank you. I would like to hear your thoughts on the future shopping experiences in Walmart's investment ecosystem, especially as we observe changes in consumer behavior. In your prepared remarks, you mentioned fintech several times, so I am interested in understanding how that fits into your overall strategy and shopping experience, along with the consumerization of health care, where you provide various services across communities. Thank you.

Oliver, you covered a lot there, and your voice was breaking up a bit. But we think we got it. On the future of shopping, it's really exciting. I mean there are so many things that we can imagine. One of our challenges is just setting priorities and not trying to do too much. But we've got, obviously, a great strength in stores, and I think that that's clear. The pickup business has been terrific in the U.S. for many years now. Delivery is growing around the world. This delivery that's happening that's unattended is exciting and this Walmart InHome business, which leads towards just keeping people in stock and they don't have to really think about buying the items they buy all the time and we then use that data to serve up impulse items will be part of that future. We do think that social commerce around the world and what happens with wearables and AR and mixed reality will be part of our future. And we're obviously thinking about that and working on that. And this key, as I mentioned in my remarks, of stitching it together whether it's fintech or healthcare. John, you should jump in on future shopping, fintech, and healthcare too. The way you stitch that together so that one business becomes a default for the other is the magic of it. I mean if we can really become great from a financial services point of view, we can take out friction and cost for customers, make it more delightful to transact with us. Not even really think about transacting, John, as we've changed the shopping experience as it relates to checkouts in the future as well as on our app and in other digital forms.

Yeah. Oliver, on the consumer, I'll just start there. I see the way Doug is very excited to see some of the changes because the consumer, which historically in the past, you might have thought of as the consumer fits in the segment, consumers segment, depending on the day or the week or the hour of the day. Consumers sometimes need things right away, which we can do in under two hours of express delivery. They may need a pickup order in a couple of days, and they may need something for our kids’ birthday party this weekend. And we can work with all of those. And that's really exciting. On fintech and healthcare, specifically those are on our flywheel for important reasons. One, in fintech, we're excited about the potential acquisitions that we mentioned pending regulatory approval. But we're looking for modern innovative ways to offer customers the ability to access affordable financial solutions and financial products. Because considerable number of customers, including middle-income customers, are underserved when it comes to financial services. We believe that we have a role that can help there and we get it in a way that's digital. Then just going on to Health & Wellness, it's a big question with all these things that you have in there. But the health business was our fastest-growing comp business in Q4. We are excited about continuing to be able to serve customers at the pharmacy. Our pharmacists and pharmacy techs have done a tremendous job this last year in serving customers. We're seeing with the addition of things like our telehealth company and other services, the ability for our pharmacists and techs to practice at the top of their licenses and really help customers live better. So you put all this together, all of these opportunities really do position the company to live through its purpose. That’s to help customers save money so they can live better in the combination of retail, financial services, and health and wellness do that really well.

Thanks. Good morning. There's been a lot of great questions asked, so I want to ask a more specific one. You mentioned some places to roll back prices. I'm curious, is that because you see less inflation in those categories? I suspect not. Or is it because you see the opportunity for that to really resonate with the consumer? And within that idea, are there categories or places where you're seeing a change in consumer behavior, whether it's trading down or a unique opportunity for you all?

Hey, Ben. It's John. Thanks for the question. The rollback is focused on ensuring customers see value. During a time when prices are increasing in many areas of the economy, offering value and addressing inflation is our priority, as it is for our merchants, and that commitment will persist. The number of counter rollbacks has increased significantly since the end of the third quarter, approaching the level we saw at the end of the first quarter last year. I was in the store across the street earlier today, and we have rollbacks in consumer electronics and some dry grocery items. These values are important as customers are increasingly aware of and concerned about inflation. We will continue to be a retailer that offers everyday low prices. That’s our core strategy. We aim to provide excellent values with price gaps to benefit our shareholders every day we operate, while ensuring customers recognize value in key categories as we move further into this year.

Good morning, everyone. I guess a bit of a follow-up on that question. As you guys hold down prices despite higher procurement costs to drive price gaps, are you seeing any kind of competitive response? Or do you find you're almost competing against yourself because other companies just can't hold down prices the way you can?

Around the world, Scot, retailers are all having to manage this. We talk about price gaps, our price leadership position for a reason because prices are relative and it's more fluid in an inflationary environment like this. So we have to spend more of our time paying attention to that. We do mix across categories. We think about things like opening price points and protecting for lower-income families some of the things that they need from a staples point of view. And then as John mentioned, we use rollbacks to communicate not only the reality of prices coming down at some places, but the emotion or perception we want customers to have about us being there for them and earning their trust during a period of time like this. So I wouldn't say that we're unique in having to work through that. Of course, everybody is. But we are likely a bit unique with the depth of experience that we have and the talent of our team to be able to manage it and our longstanding supplier relationships and the way we work with them to try and help them get through the situation as well. The amount of communication between us and suppliers is always high. It's particularly high right now.

I want to refer back to what we mentioned previously. A merchant has various options regarding the product mix in different categories and what they display on the homepage. For instance, this morning, there was a section on rollbacks at the top of the homepage. They have the ability to modify that, change modes, and update features. There are numerous ways they can manage the product mix over time, which puts our team in a strong position to execute this. We have experienced personnel who understand how to navigate these changes, along with several associates in the U.S. who have experience in markets where inflation is prevalent. This expertise has been extremely beneficial over the past year.

Thanks. Good morning, everyone. I wanted to address some of the comp questions that have come up earlier. You mentioned 1% and 2% growth in the U.S. for the first quarter, and about 3% in the second and third quarters. This indicates an expected acceleration to roughly 4% in the fourth quarter. My question is about your approach towards achieving this. Are you anticipating any deflation or expecting grocery share gains to increase as some customers look for better value? Additionally, is there an expectation for accelerated growth in general merchandise as you expand the assortment and fulfillment options?

Hey, Christopher. I want to say a couple of things regarding the question. A lot of the timeline reflected in the forecast definitely includes strong customer demand and improved inventory levels. We mentioned that overall inventory is up 28%, with a significant amount in transit, which includes general merchandise. It also indicates our expectation for better in-stock positions in food and consumables. The quarterly timeline also considers the effect of stimulus from last year. In the current month, we experienced a large ice storm last year in Texas, and in March and April, we had significant stimulus. This is reflected across the quarters. I don't think I have anything else to add to that, Brett, unless you want to chime in.

No, I'd say, Chris, as you can imagine, the quarterly phasing is more challenging than normal just given the comparisons that we're up against. But I think, as John said, there are a number of different things during the year that make us feel confident in the total year. And we've given you as good as we feel like we can today and where we think it will stack up for the quarters. But there's going to be some quarterly variability certainly during the year.

Thanks again for your time and attention. I'd just summarize by saying it's great to have momentum in all three segments as we start this year. I think it's clear that we're changing to serve customers and members in the way that they want to be served and having stores and eCommerce business, pick up, delivery, fulfillment centers and marketplace, all of those things are helpful as it relates to that. The great thing about it is the way that we’re building these and designing them is that the company can grow earnings and grow the bottom line while we’re doing it. The business model changes and it enables the customer, a member to benefit and our business to benefit at the same time. So I’m excited about the short-term momentum and looking forward to the year. Thank you, all.