Walmart Inc (WMT) — Q4 2023 Earnings Call Transcript

Thank you, and welcome to our Q4 Fiscal '23 Earnings Conference Call. Joining me today from Walmart's home office in Bentonville are CEO, Doug McMillon; and CFO, John David Rainey. We'll follow a similar format to prior calls, where Doug and John David will share their thoughts on the quarter, year, and year ahead. Following, we'll open the call to your questions. For the Q&A portion, we've asked our segment CEOs to join, including John Furner from Walmart U.S., Judith McKenna from Walmart International and Kath McLay from Sam's Club. Today's call is being recorded, and management may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. 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. We are now ready to begin. Doug, over to you.

Good morning, everyone, and thanks for joining us. We're excited about our momentum. The team delivered a strong finish to the year. As our results in the last two quarters show, we acted quickly and aggressively to address the inventory and cost challenges we faced last year. We built momentum in the third quarter, and that continues. We're well positioned to start this fiscal year. For fiscal '23, we added $38 billion in sales globally, and we crossed $600 billion in revenue for the first time in our company's history. Globally, e-commerce now represents more than $80 billion in sales and over 13% of our total sales. Walmart U.S. grew sales by more than $27 billion. International had another strong year with sales and profit growth of about 9%, excluding divestitures, restructuring, and currency. Sam's Club U.S. grew sales by more than $10 billion as we delivered double-digit comp growth for the third consecutive year, with membership count at a record high and strong growth in membership income. All three segments have momentum. We're grateful to John, Judith, Kath, and their teams for how they're leading these businesses and showing results. The holidays were strong for us. From Thanksgiving to Christmas, Diwali to Singles Day, our teams were ready. We had aggressive plans, and we delivered. Around the world, the teams leaned into our food and consumables strength, taking share in places like the U.S. and Canada, and delivered a good experience for customers and members in general merchandise. They drove sales and landed the seasons in a very good inventory position when it was all said and done. We ended the quarter with inventory about flat to last year, which is better than we anticipated, and even better when you consider how inflation lifts that number. And they did it while improving in-stock levels. I'm impressed with how they brought it all together and want to highlight our store, club, and supply chain associates who handled a lot of volume to make this happen. As we navigated the short term, we also advanced our strategic priorities. Big picture, our strategy is simple. It's to bring our purpose to life for those we have the privilege to serve. We're a people-led, tech-powered omnichannel retailer dedicated to helping people save money and live a better life. That's who we are. Why do we exist? It's to help people save money and live better. How do we do it? By being people-led with clear values, a unique culture and tech-powered. We're a people business focused on customers, members and associates. We're constantly adjusting to put the right combination of wages, benefits, and education in place so that our people can build lifelong careers and achieve their full potential. You can start your career assembling bicycles and end up leading all of our U.S. stores. You can start as a cashier and become a truck driver. You can start unloading trucks in a distribution center and grow to oversee an automated system moving freight through that distribution center. We provide opportunities even as we continue to innovate through technology and prepare our business and workforce for the future. One of the things I have always appreciated about this company is that it's naturally hedged. If customers want more of something and less of something else, we shift our inventory. If the economy is strong, our customers have more money, and that's great. If things are tougher, they come to us for value. With today's inflation, we're continuing to see that happen. We're gaining share across income cohorts, including at the higher end, which made up nearly half of the gains we saw in the U.S. again this quarter. Our goal is for the experience they're having in our stores and clubs, combined with our current capabilities for pickup, delivery, and membership, to result in them choosing us even as inflation eventually subsides. As we plan this new fiscal year, we've anticipated stubborn inflation in dry grocery and consumables, in particular, which will have some mix impact. We'll stay focused on general merchandise and earn sales in those categories to offset that impact as much as possible. When we think about our business today compared to what it was during prior economic downturns, we now have a more compelling offer, a true omnichannel experience that makes us optimistic that more higher-income families will continue shopping with us across categories because we have pickup, delivery, and membership. We're improving in categories like apparel and home. Our recently remodeled U.S. stores have a focus in those areas, and the early response from customers is promising. We're also improving our e-commerce assortment and presentation in those categories. We've always been known for great prices. And because of the work we've done around pickup and delivery from stores, clubs, and expanded assortment through fulfillment centers, we're increasingly known for the convenience we offer. In fact, our U.S. customer feedback showed strength in price and convenience. Our reputation for price remains strong, and our score for convenience has risen to nearly the same level. Our Walmart+ members recognize our strength for convenience even more than the average customer. As it relates to our customer or member value proposition, we continue to have a strength with respect to value, while we're expanding choice by growing our assortment on Walmart.com, and we're improving as it relates to experience. Being an at-scale omnichannel retailer creates unique opportunities to innovate in the area of experience. That includes products like Scan and Go at Sam's Club and a newer in-house conversational AI platform enabling a voice and chat capability being used by more than 50 million customers and an average of 1 million associates across the U.S., Mexico, Canada, and Chile. We're driving a lot of change inside our company. We know where to tap the brakes on cost and inventory, but our focus is more on the gas pedal with respect to our strategic improvements related to assortment growth and our customer and member experience. We'll keep shaping the business model by scaling our newer mutually reinforcing businesses in areas like marketplace, fulfillment services, and advertising. It's exciting to see our global advertising business grow to $2.7 billion for the year we just completed. That's nearly 30% growth. Over the last three years, while our frontline focus was on navigating the pandemic and inflation, we still launched and started scaling new complementary businesses using the technology and expertise we developed over time. You can see this in some of our recent announcements. The partnership we announced with Salesforce to help scale local fulfillment and delivery solutions for customers on their e-commerce platform is a good example; or our new Walmart business e-commerce site is another, where we're helping small and medium-sized businesses and nonprofits save money and spend less on purchasing the items they need every day. Our fast-growing businesses in India, Flipkart and PhonePe, announced a full separation, which will allow both companies to focus on their own growth paths independently and help unlock value for shareholders. Flipkart has continued to strengthen its market leadership position in e-commerce and is entering this year with good momentum. PhonePe also announced the closing in January of the initial tranche of a fund raise that values the business at $12 billion pre-money. This is more than double the previous valuation just two years ago. And our Sam's Club U.S. team announced expansion plans that will have us opening more than 30 new clubs across the country over the next several years in addition to a multiyear plan to invest in and modernize our supply chain, especially in the U.S. I'll wrap up my comments today by saying thank you to our associates. I'm grateful for how they continue to step up for our customers and members, and I'm impressed by their creativity and resilience. We've worked through a lot of the operational stress in our business from last year, and we made progress on strategic initiatives as we did it, and we're doing it in a way that's uniquely Walmart. John David, over to you.

Thanks, Doug. I'd like to start by thanking our customers, associates, and partners for helping us deliver a strong quarter to wrap up the year. We're pleased with how we finished the year. Our team demonstrated our agility and responsiveness to overcome the operational challenges, from supply chain disruptions, excess inventory, and the shift in our merchandise mix. For the full year, enterprise sales on a constant currency basis grew more than 7%, and we surpassed $600 billion in annual sales for the first time. Adjusted EPS declined 2.6% for the year. Our performance in Q4 was better than our expectations due to sales upside and good expense leverage. Constant currency sales grew 8% with strength across all segments, including strong performance throughout the holiday season. Walmart U.S. comps increased 8.3%, including 17% growth in e-commerce, with a combination of pricing due in part to inflation and share gains. Sam's Club U.S. delivered its 12th consecutive quarter of double-digit comps with growth of 12.6% excluding fuel and tobacco. Constant currency sales in Walmart International increased 5.5%, led by Walmex. As I discuss our profitability, it's important to note that the reorganization and restructuring charges within the International segment affect year-over-year comparisons. So my comments regarding Q4 results will focus on the business excluding adjusted items. Gross margins were down 83 basis points, largely resulting from additional markdowns taken to address carryover inventory balances, mix headwinds, and underlying inflation in our cost structure. With strong sales growth in the quarter, we levered SG&A expenses by 89 basis points. Taking all this together, adjusted operating income grew nearly 7%. Adjusted EPS of $1.71 was better than we expected going into the quarter. GAAP EPS was $2.32. The difference between adjusted and GAAP EPS reflects a $1.16 benefit from unrealized gains on equity investments partially offset by a $0.55 charge related to business reorganization and restructuring in International. Inventory at quarter end was relatively flat to last year. This includes a nearly 3% decrease from Walmart U.S. I'm pleased with how our teams responded to the challenge early in the year to aggressively rebalance inventory for the current environment, and it sets us up in a really good position going into the year. Let me briefly reference key highlights for Q4 by segment. For Walmart U.S., comp sales were strong throughout the quarter, and December was the largest sales month in Walmart U.S. history. This was led by strength in food sales, which increased high teens, partially offset by a mid-single-digit decline in general merchandise sales with softness in toys, electronics, home, and apparel. The effects of product mix shifts have negatively impacted our margins. Over the last year, grocery and health and wellness sales, which have a lower margin than general merchandise, have increased by 330 basis points as a portion of our mix. We continue to see strong share gains in grocery with nearly half coming from higher-income households, and private brand penetration increased over 160 basis points as customers prioritized value. Inflation remained high, up mid-teens in food categories, which was similar to Q3 levels. E-commerce sales were led by continued strong growth in store-fulfilled pickup and delivery in Q4. Over the last two years, store-fulfilled delivery sales have nearly tripled, and we're now doing over $1 billion a month, which gives you an indication of why we're so excited about the progress here. Advertising sales were also strong this quarter, up 41%. Higher sales and lower COVID costs contributed to SG&A expense leverage, which offset gross profit pressure, resulting in operating income growth of 3.8%. In International, strong sales trends continued with growth of 5.5% on a constant currency basis led by double-digit growth in Walmex and China. Currency negatively affected reported sales results by about $900 million or an approximate 340 basis point headwind to growth. Q4 sales benefited from successful festive events across our markets. Year-over-year comparisons were negatively impacted by the timing shift of Flipkart's Big Billion Days event to Q3 this year versus Q4 last year. Looking at the second half of the year in total, International sales grew more than 9% in constant currency. E-commerce sales were strong with penetration at 21%, with China leading the way at 48% penetration for the quarter. Walmex had another great quarter with sales strength in Bodega stores, Sam's Clubs and 14% growth in e-commerce. Segment adjusted operating income grew faster than sales, up nearly 17% in constant currency, helped by effective cost management across markets. In India, Flipkart continued its strong momentum through Diwali and other seasonal events. We are particularly pleased to see Flipkart's positive contribution margin expanding. PhonePe's recent valuation that Doug talked about was supported by annualized TPV reaching more than $950 billion, about 50% higher than just one year ago, while also exceeding more than 4 billion monthly transactions. Turning to Sam's Club. Our strong momentum continued, with comps up 12.6% in Q4 and up 23.4% on a 2-year stack. The segment delivered another quarter of record member counts, and membership income growth was above 7%. In addition to solid increases in both transaction and ticket, Sam's e-commerce sales were up 21% year-over-year with contributions from both curbside and ship to home. Operating income was pressured in the quarter by elevated markdowns, lapping higher co-branded credit card income last year and an inflation-related LIFO charge of $14 million. With the strong trends at Sam's over the past several years, we're excited to expand our physical footprint through a multiyear investment in new clubs and supply chain optimization. Turning to guidance. As we sit here today, we find ourselves in a similar position to each of the last three years, where there is a great deal of uncertainty looking out over the balance of the year. While the supply chain issues have largely abated, prices are still high, and there is considerable pressure on the consumer. Attempting to predict with precision these swings in macroeconomic conditions and their effect on consumer behavior is challenging. As such, our guidance reflects a cautious outlook on the macro environment, but at the same time, our excitement about our recent results, momentum in all segments, and progress on our strategy both for this year and the years that follow. We are positioned well and convicted about our plan. In FY '24, we expect operating income growth to outpace sales growth. Given the persistence of high prices and the potential for further macro pressures, we are taking a cautious outlook for the year. We are guiding enterprise sales growth of 2.5% to 3% in constant currency and operating income growth of approximately 3%. This guidance assumes product mix pressures persist, but that our business mix continues to improve.

One of the things I have always appreciated about this company is that it's naturally hedged. If customers want more of something and less of something else, we shift our inventory. If the economy is strong, our customers have more money, and that's great. If things are tougher, they come to us for value. With today's inflation, we're continuing to see that happen. We're gaining share across income cohorts, including at the higher end, which made up nearly half of the gains we saw in the U.S. again this quarter. Our goal is, for the experience they're having in our stores and clubs combined with our current capabilities for pickup, delivery, and membership to result in them choosing us even as inflation eventually subsides.

As we look at where we are today, with a much better position around inventory, I feel like this year will be more of a normal environment for markdowns. We expect some mix impact, which is appreciably less than the 300 basis points last year. We are committed to remaining open and flexible for the customer given any environment that we find ourselves in.

Thank you all for your interest in the company. I think the three headlines are strong results, great team, bright future. On the results side, we have momentum. The fourth quarter was really good. We got the inventory into a good place. We're on our front foot as we start the year. As it relates to having a great team, just look at what they did last year. When the world changed, they moved quickly at scale to deal with issues. They got them resolved. Q3 was better. Q4 even stronger. And as it relates to our future, we're now positioned to serve the customer how they like to be served, stronger on convenience as well as being known for value. If they want to pick up, we can do that. If they want delivery, we can do that in various forms. And obviously, we've got great stores and clubs.