Walmart Inc (WMT) — Q1 2024 Earnings Call Transcript

Thank you and welcome everyone. We are excited to discuss the results of a strong first quarter and our upwardly revised outlook for the year. Joining me on the call are Walmart's CEO, Doug McMillon; and CFO, John David Rainey. Following prepared remarks from Doug and John David, we will take your questions. 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.

Good morning and thanks for joining us to discuss our Q1 results. We had a strong first quarter. Sales growth was strong globally, including growth of 26% in e-commerce. Profit grew much faster than sales, and we made further progress on inventory levels. The omnichannel model we're building continues to resonate with customers and members. As expected, a higher mix of sales in the food and consumables categories negatively affected gross profit, but strong expense management and progress with our newer mutually reinforcing businesses helped us grow profit ahead of sales at 17.3%. The business model we outlined at our recent investor conference is taking shape. International had a great quarter, continuing our momentum from last year. Sales grew 12.9% in constant currency, and profit grew even faster at 41%. China, Walmex, and Flipkart all saw double-digit top line growth. The reopening of the economy in China coincided with the Chinese New Year season and drove traffic to our clubs and stores. Sam's Club China continues its strong performance. For India, a group of us were there last week, and we left even more excited about our opportunities. Flipkart and PhonePe are doing well. Our Walmart tech team there is strong, and we have a big opportunity to increase our exports from India across several merchandise categories. In the U.S., both Walmart and Sam's Club performed well with good transaction growth, positive units in food, and strong e-commerce growth. We continue to gain market share in the grocery category, including with higher income and younger shoppers, and we saw good growth in membership income in both businesses. At Sam's Club, U.S. member count and plus member penetration hit all-time highs in the quarter. Our growth is now being driven by convenience in addition to price. We see it across formats and income and age cohorts. In terms of inventory, we're in good shape, and stock is improving as excess inventory keeps coming down. Globally, customers continue to seek value given the impact of inflation. We see it in the U.S. and in other markets like Mexico, Canada, and Chile. Private brand penetration is up about 110 basis points versus last year for Walmart U.S. and 50 basis points for Walmex. We continue to manage our price gaps and deliver value for our customers. In Walmart U.S., general merchandise costs are now lower than a year ago, which is great, but they're still higher than two years ago on like items. In dry grocery and consumables categories, like paper goods, we continue to see high single-digit to low double-digit cost inflation. We all need those prices to come down. The persistently high rates of inflation in these categories lasting for so long are weighing on some families we serve. This stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year because of the cumulative impact on discretionary spending and other categories, specifically general merchandise. We think we've got guidance where it should be reflecting the appropriate amount of conservatism given the external environment. We feel very good about our performance, our multi-year momentum, and our ability to serve people however they want to shop and do it at a value. We're executing well and performing well in all three segments. John David will say more about how we're thinking about guidance in a minute. As we look ahead to Q2 and the rest of the year, we're focused on getting our merchandise costs and retails down to fight inflation for our customers and members, which will help us with mix, pick-up and delivery execution, whether that comes from a store or an FC, expense management, and inventory management by item and category. There are places to play offense, and there are places to be more conservative. We shouldn't be treating every category the same way, and we aren't. We hosted our investor meeting in Florida last month, where we visited a DC store and a Sam's Club. Thank you to those who made that trip; we really enjoyed it and hope you did too. We had three takeaways: first, we're positioned to grow because we can serve customers and members however they want to be served; second, we expect to grow profit faster than sales and improve operating margin due to productivity improvements and the mix of businesses; and third, we will be disciplined with capital to improve ROI as we grow operating income. I hope you can see how the investments we've made in recent years are driving results. We added nearly $11 billion in sales in Q1, delivered 58 basis points of expense leverage, and expanded operating margin by 34 basis points. As for returns, we want operating profit growing faster than sales, and we expect to see an inflection in ROI in the coming quarters as we begin to lap large one-time items from past quarters. The investor meeting also gave us an opportunity to show off a piece of the automation we're working on in an ambient DC. While it's an important piece of what we're building, our overall set of capabilities goes far beyond that. We're adding market fulfillment centers (MFCs), which utilize automated storage and retrieval systems, and we expect to add thousands of electric vehicles to support our last-mile delivery capabilities. It's about creating a supply chain that's better, not just bigger. We're excited about how our new capabilities will help our associates by turning some of our more physically demanding jobs into more rewarding, higher-skilled career paths. We're hosting our annual shareholder’s week events in a couple of weeks here in Northwest Arkansas. Part of the experience will include a tour of an MFC we've just opened. It'll be a good chance to see another piece of what we're building. I'll close by saying thank you. Thank you to our associates for helping us deliver another strong quarter. We're proud of them and pleased that both Walmart and Sam's Club in the U.S. were recently certified as a great place to work by the industry leader in workplace excellence. Thank you for your interest in our company. Now over to John David.

Thanks, Doug. I'd like to start by thanking our customers, associates, and partners for helping us deliver a strong quarter to start the year. Despite a challenging macro environment, the team executed, and we've made progress advancing our various strategic initiatives. I'll begin by reviewing highlights for the quarter using the framework of growth, margins, and returns. Then I'll spend a couple of minutes reviewing key themes from our recent Investor Day before detailing our updated guidance. Starting with growth, for the first quarter, constant currency sales increased nearly 8% or about $11 billion with strength across all segments. Walmart U.S. comp sales, excluding fuel, increased 7.4%, including 27% growth in e-commerce. After a strong start, sales growth moderated as the quarter progressed. We continue to gain share and grow unit volume in grocery. This was consistent with our expectations on how we built our plan. At the headline level, consumer spending has proven resilient, but below the surface, we continue to see signs that customers remain selective, particularly in discretionary categories. In Q1 we saw a nearly 360 basis point shift in U.S. sales mix from general merchandise to grocery and health and wellness. To benchmark the magnitude of this shift, it exceeds the 330 basis points of category mix shift we experienced in all of last year. In addition to the persistence of inflation in food and consumables, customers were also impacted by a reduction of SNAP benefits and lower tax refunds. These impacts were partially offset by higher spending tied to an increase in the cost of living adjustment for Social Security Benefits. In our international segment, sales were strong, up nearly 13% on a constant currency basis led by double-digit growth in China, Walmex, and Flipkart. Many of the same impacts on consumer spending in the U.S. affected our international markets too. And Sam's Club U.S. comp sales increased 7% with member fee income up 6.3%. Average spend per member increased mid-single digits. Now on margins, consolidated gross margins decreased 18 basis points with ongoing pressure from category sales mix globally. This headwind was partially offset by a reduction in supply chain and freight costs relative to last year's heightened levels. Category mix was a notable headwind across geographies and formats. Walmart U.S. general merchandise sales declined mid-single digits, while food and consumable sales increased low double digits. Headline inflation in food and consumables came down over 400 basis points from the start of Q1 to the end of the quarter. But prices remain high, and customers are being cautious with their spending in discretionary categories. And while we make attractive margins in food and consumables, they have a lower margin than general merchandise. We expect category mix to remain a gross margin headwind for the balance of FY 2024. The higher margin initiatives that are connected to our core omni retail business, including marketplace, advertising, and membership continue to meaningfully outgrow the base. I'll discuss each of these. First, marketplace and fulfillment services. We're growing our marketplace with new items and sellers and an improved experience. We've increased seller counts in the U.S. by more than 40% year-over-year, and the number using Walmart fulfillment services has more than doubled. We're adding higher profile in-demand brands that our customers are searching for but not typically distributed at Walmart, elevating our profile as a digital shopping destination. And in India, Flipkart's e-commerce platform continues to scale, growing first-time e-commerce customers and expanding its reach in tier 2 and tier 3 cities. Moving to advertising, our global advertising business delivered strong growth of over 30% in Q1. In the U.S., Walmart Connect advertising sales increased nearly 40% as we experience strong momentum and new advertisers, particularly from marketplace sellers. The number of three-piece sellers utilizing our ad capabilities has doubled over the past 12 months. Sam's Club ad business, called Member Access Platform, grew double digits with the number of active advertisers up more than 50% versus last year. Advertisers are responding to our recently launched in-club sales attribution feature, which provides advertisers with clear insights on the returns of digital ads both online and in clubs while enhancing member experience. And in international, the advertising business continued to show strength, led by Flipkart ads, which was up over 50%. Lastly, Sam's Club member counts have had a multi-year run of robust growth with another record high achieved in Q1. Member counts have grown nearly 30% over the past three years, and we're increasingly attracting greater numbers of millennials and Gen Z. We like the trends we're seeing from Walmart Plus members. Nearly 50% of our Walmart Plus members are coming from the online pickup and delivery channel. Members spend more than non-members. They shop with us more frequently, and the membership deepens engagement, helps enable personalization, and allows us to offer more services and to provide more offers on things that are important to our customers. Turning back to the middle of the P&L, SG&A expenses leveraged 58 basis points aided by strong sales growth across the enterprise, a continued focus on managing cost into moderating sales growth as inflation lessens, and lapping some COVID-related wage costs in the U.S. last year. Taking all this together, our operating income grew more than 17%, relative to sales growth of nearly 8%, which resulted in operating margin expansion of 34 basis points, reinforcing the financial framework we laid out at our Investor Day. Adjusted EPS of $1.47 was better than we expected as sales outpaced our plan and cost leverage exceeded plan. GAAP EPS was $0.62; the difference between adjusted and GAAP EPS reflects an $0.85 impact from unrealized gains and losses on equity investments. The team continued to do a good job managing inventory, and we ended the quarter down 7%, including a more than 9% decline in Walmart U.S. Managing cost and inventory are two of the key controllables as we navigate an uncertain macro environment. Let me take a moment to discuss our returns or specifically return on investment (ROI), which declined by 120 basis points this quarter. We calculate ROI on a trailing 12-month basis. As such, the decline in Q1 is a result of nearly 4.2 billion in charges we incurred in Q3 and Q4 last year related primarily to the opioid legal settlement framework and the separation of Flipkart and PhonePe. Let me briefly reference key segment highlights for Q1. For Walmart U.S., comp sales were strong, up 7.4%, reflecting higher store traffic trends as well as strong growth in store fulfilled pickup and delivery. From a category perspective, comp sales were driven by strong growth in food and health and wellness, partially offset by a decline in general merchandise sales. Unseasonably cooler spring weather negatively impacted sales in certain seasonal hardline categories, including lawn and garden. Gross margins decreased 41 basis points primarily due to ongoing pressure from category mix shifts. Supply chain costs and transportation were lower as we lapped last year's elevated levels. Inflation remained high, up low double digits in food categories. It's important to remember that while year-over-year inflation started to moderate as the quarter progressed, this is largely due to lapping higher levels from last year. On a two-year stack basis, food inflation remains over 20%, continuing to pressure discretionary wallets. Share gains in grocery continued, including from higher income households, as our strong price gaps resonate with customers who are increasingly prioritizing value and convenience. We're also seeing market share gains in general merchandise where we've invested to improve customer experience, such as entertainment and automotive. In this environment, as customers manage household budgets more tightly and bias spending toward everyday essentials, we're reinforcing our value proposition across the merchandise offering, including seasonal event savings, featuring high-quality owned brands, and leaning into opening price points. For the Easter holiday, we offered customers a curated Easter meal along with a traditional Easter basket for the same price as last year. Private brand penetration in grocery categories increased nearly 110 basis points in Q1 following a 160 basis points increase in Q4 and a 130 basis point increase in Q3. E-commerce sales were led by continued double-digit growth in store fulfilled pickup and delivery. Customers increasingly value convenience and speed of delivery. We have an advantage here as we leverage the proximity of our stores to fulfill and deliver digital orders to customer homes. Strong flow-through on higher sales contributed to SG&A expense leverage, which offset gross profit pressure, resulting in strong operating income growth of 11.7% relative to comp sales growth of 7.4%. Our international segment delivered an outstanding quarter with strong growth in both sales and profit, continuing the momentum built in the back half of last year. International grew both top and bottom line faster than the enterprise. Sales grew nearly 13% on a constant currency basis, led by double-digit growth in China, Walmex, and Flipkart. Impressively, operating income grew more than three times faster than sales, up 41%, with each market delivering year-over-year improvement. The strong profit flow-through is particularly encouraging as the team has been delivering operating efficiencies on top of strong sales growth. In China, sales increased 28% as the team executed well during the Chinese New Year season and also saw increased traffic as the Chinese economy reopens. Results were strong across formats and channels with continued member growth and higher member retention at Sam's Club, improved trends in hypermarkets, and more than 50% sales growth in e-commerce. Walmex had another good quarter with sales strength in Bodega stores, Sam's Clubs, and e-commerce. We continue to take advantage of opportunities to expand our physical footprint, opening more than 120 stores over the past 12 months while also scaling our omnichannel capabilities. As customers’ desire for convenience increases, the team has rolled out a 60-minute delivery option to 80% of Walmart Supercenter and Express stores in Mexico. In India, Flipkart had strong top line results and improved its contribution profit. The team continues to expand their products and services. As an example, Flipkart Travel added to its portfolio of offerings by launching bus reservation services during the quarter through its Cleartrip platform and is already capable of offering one million bus connections to customers. We continue to be pleased with PhonePe's great performance. During the quarter, we reached an important milestone with annualized total payment volume (TPV) eclipsing the 1 trillion level for the first time. For Sam's Club, U.S. comp sales were strong, up 7% in Q1. In addition to solid increases in both transaction and ticket, Sam's e-commerce sales were up 19%, led by strong growth in curbside. Sam's delivered another quarter of record member counts, and membership income growth was 6.3%. Plus member penetration also hit an all-time high during the quarter. It was terrific to celebrate the 40th birthday of Sam's Club during the quarter with member promotions and events. At our investment community meeting in April, I outlined our plan to grow operating income faster than sales centered on three strategic building blocks of our financial objectives. First, we're focused on driving organic sales growth from our omnichannel business model. It's clear that our omni model is resonating with customers across income demographics who are seeking out Walmart digitally, in stores, curbside, and via delivery, and we're growing mindshare for our convenience. The second component of our financial model is to diversify our earnings streams through improved product and business mix. To improve product mix, we're focused on increasing sales penetration in higher-margin categories like apparel and home through the expansion of our e-commerce marketplace assortment and an upgraded presentation and experience in our remodeled stores. Our e-commerce assortment has grown to include over 200 million SKUs in apparel and nearly 60 million in home categories. In our newest remodeled supercenters, we take a differentiated approach to showcasing general merchandise with more brand shops, digital displays, mannequins, wider aisles, and updated fixtures. We're very encouraged by the early reads on customer response to these initiatives, and we plan to update 300 stores with these features this year. In addition, as I mentioned earlier, we're making progress in improving our business mix as we scale a portfolio of highly attractive growth initiatives that reinforce our core retail model and will directly reshape our e-commerce and enterprise profit trajectory. This set of initiatives drives stronger returns and includes advertising, data, and membership in many markets. Collectively, these initiatives generate operating margins that are appreciably higher than our core business, and we expect they'll begin to positively influence operating profit growth relative to sales growth this year. The third building block of the model includes improving returns by scaling proven high-return investments in our supply chain that drive operating leverage and improve incremental margins. We're investing capital to optimize our distribution and fulfillment nodes with automation that we expect will drive a significant improvement in unit economics in the coming years. Our capital structure and cash flow generation are advantages, and we're allocating capital responsibly with a bias towards increasing returns. I reiterate what I said at our Investor Day; we like our strategic position. Over time, we expect revenue growth across a diversified set of drivers, improved category mix, and increasingly accretive business mix, coupled with improved unit economics. This is all fueled by supply chain investments with attractive payback cycles. We expect the outcome will be operating income growing faster than sales. Turning to guidance, there continues to be a great deal of uncertainty looking out over the balance of this year as macro pressures on the consumer have gradually intensified. As such, we continue to maintain a prudent approach to our outlook while, at the same time, having a high level of confidence in what we can control. It's also not our historic practice to always update guidance exiting Q1, and we don't necessarily want to establish precedent. But we think in this unique environment, it's important to provide an ongoing framework as our views evolve. We're raising our full-year guidance to reflect Q1 performance and our expectations for Q2. We now expect net sales in constant currency to grow approximately 3.5%. Our expectations are for Walmart U.S. and International to grow slightly faster than our prior view, and for Sam's Club growth to be consistent with our February guidance. We expect operating income in constant currency to increase approximately 4% to 4.5%, including an expected 100 basis point impact from LIFO charges. We estimate adjusted EPS to be in a range of $6.10 to $6.20, including an expected $0.14 impact from LIFO. Our recent debt issuance yielded a more favorable interest rate than estimated, and as such, our net interest expense is expected to grow $600 million versus last year. NCI, or non-controlling interest, is expected to be closer to a $0.20 drag to EPS year-over-year, including strength in Walmex. Our tax expectations have moved toward the upper end of our prior range at approximately 26.5%. Looking at Q2, we're offering the following view: net sales growth in constant currency of approximately 4%. Operating income in constant currency is expected to decline approximately 2% versus last year. Excluding the $173 million benefit from Walmart Chile insurance proceeds last year, operating income growth in constant currency is expected to be flat to up slightly. As you compare EPS versus the prior year, we're lapping the $0.05 benefit from Chile insurance proceeds and other income and $0.05 from JD's dividend and other gains and losses, resulting in a total of $0.10 of comparable EPS headwinds. We expect adjusted EPS of $1.63 to $1.68 in Q2 this year. In closing, the year is off to a good start. We're positioning our business to succeed with an expanding omni ecosystem that allows us to grow our top and bottom line throughout any economic environment. If the consumer environment tightens further, we have a compelling value proposition with everyday low prices and a suite of conveniences to continue to gain wallet share. If the macro environment improves, we have the opportunity to sell more general merchandise and improve our margin mix through both our first-party stores and e-commerce and third-party marketplace businesses. The transformation of our business mix towards higher-margin streams of value is underway, helping to protect our profits today and drive better profit growth in the future. I look forward to seeing many of you at our shareholders' meeting activities next month here in Northwest Arkansas. And with that, let me turn it over to the operator for questions.

Good morning, thank you for taking my questions. Considering the current inflation and the challenging traffic comparisons and consumer environment for the remainder of the year, how much do you anticipate needing to invest in pricing and other initiatives to maintain stable same-store sales in the U.S. in the upcoming quarters? Additionally, how have you incorporated these investments into your updated guidance?

Hey, good morning Michael, it's John Furner. I want to start first by thanking our entire team for delivering a strong quarter and investing in the future. At the same time, it was great to see both of those things happen. First, let me just reiterate our purpose as a company: to help people save money and live better. In the last few quarters, we have seen new shoppers. As John David mentioned, many are higher income and younger, and those shoppers are coming to us looking for value. Price is really important to the Walmart shopper. We are pleased with the price gaps that we see in the market. Those are consistent with where they have been the last few quarters. We've seen quite a few customers shift to pickup and delivery. Our transaction count has been strong. As far as our plan for the rest of the year, we have built into the plan some room for adjustments should the consumer change or the macro environment change. We think the weather and other factors have played into some of our mix shifts. So we have a plan that will enable us to deliver value across the entire year.

Michael, this is Doug. I'll just add to what John said to remind everybody when we were together in Florida, we talked about this being a bit of a pivot where our investments are more focused on capital investments than income statement investments. We'll continue to invest in the supply chain and also our remodel investments. So when I think of the word investment, I think more about those things than just income statement investments. The other thing I would say is it's a great time to be a really good merchant. In our stores, when I think about general merchandise, whether that's apparel or hard lines, we're focusing our store leadership and our store associates on standing tall in those areas. Because inventory is in a better spot than it was last summer, for example, they can focus more on that rather than just dealing with the flow of inventory that was coming in.

Hi, good morning. Thanks for taking our questions. We wondered if we could ask around quarter-to-date trends for sales and if the moderation from Q1 has continued? And can you remind us when the mix lap starts to get easier with consumables?

Sure, Kate. This is John David. The first quarter progressed with moderation as we went through the quarter. February was stronger and March and April were a bit of a tick down. This quarter has started off basically how the last quarter ended. In terms of mix, mix is going to continue to impact us this year. We began to see the effects midpoint of last year. The thing that I will say that's different this year is, it's not just a shift to food and consumables; we've also seen a shift to health and wellness more. Part of that is related to these GLP-1 drugs that are to treat diabetes. We're seeing an uptick in that for us that comes at a lower margin, and it has some impact on our business as well.

The persistent inflation in dry grocery and consumables is the biggest issue. We started to see inflation occur in the back half of 2021. It accelerated in early 2022 faster than we expected. Since then, you've seen general merchandise start to come back down, but dry grocery and consumables have held. If a customer is living paycheck to paycheck, they now have a two-year stack that becomes a problem. We are focused on working with suppliers that are on the prepared foods and consumable categories to get costs down more quickly.

Hi, thank you. The tech-enabled retail ecosystem continues to scale impressively. What are some of the key priorities for advertising in the marketplace, and how may they intersect with artificial intelligence as well as help the margin mix? And a follow-up for Judith: China continues to be impressive on sustained momentum as well as better margins. Just highlights about how that reopening has gone relative to your expectations and any thoughts on India as well.

Oliver, it's John. I'm really proud of the team for the performance in e-commerce in the first quarter. The 27% growth is something they should be proud of. That's a combination of several factors. We noted the growth in pickup and delivery and the significant growth in marketplace sellers. What is encouraging is that the number of sellers who are using the services we offer is improving, which leads to growth in the advertising business. The ability of the team to develop ways for sellers and suppliers to reach targeted groups of customers is a real positive and contributes to our overall mix. Meanwhile, we have some mix challenges, but strong performance of the supply chain overall is a real positive.

On that first point regarding tech-enabled ecosystem and marketplace, we've seen strong progress internationally, leveraging U.S. learnings, particularly from a marketplace perspective. We've just launched Walmart fulfillment services in several markets, enabling our global marketplace capability. India is a key example, and Walmex has also been an example of building out that ecosystem. We focus on putting the customer at the center and using our digital capabilities to serve them effectively. Regarding China, they had a strong quarter, which was an important driver of the quarter performance for international, alongside strength from most of our markets. The reopening of Chinese New Year influenced our results significantly, and our team executed well by pivoting inventory to the required areas. Consumer sentiment is improving but not fully back to pre-COVID levels, yet both of our businesses are benefiting from the reopening. On India, as Doug mentioned, we were there recently and we are impressed by Flipkart and PhonePe, which continue to perform well and meet our expectations. The ecosystem is strengthening due to our tech capabilities, sourcing capabilities, and the significant growth of Flipkart and PhonePe.

Good morning. I have a question for John David. The Q2 outlook, can you share if expectations have changed at all since you guided the full year? Also, you talked about how the second half spread with EBIT for sales growth should be stronger than the first half. Can you talk about whether that spread changes or remains the same?

Great to speak with you. In our last earnings call, we briefly mentioned Q2 performance due to specific issues from the same period last year. We anticipated it would remain about the same. Currently, we are projecting a decline of 2% in operating income. This is primarily influenced by the insurance proceeds we received last year. The mix will continue to be a concern in Q2. We see some improvement in supply chain costs and freight costs that we're benefiting from. But this is an anomalous quarter for us as you think about this year. As we get into the back half of the year, we see a more pronounced impact from our higher-margin initiatives discussed at our Investor Day. Overall, our expectation for that inflection has not changed.

Good morning. Thanks for taking our questions. John David, you mentioned the 360 basis point mix shift between food and general merchandise. Should we expect Q1 to be the peak of that mix pressure, or should we expect that trend to moderate throughout the year? Also, on general merchandise, can you help us understand what you're seeing in terms of units versus net pricing at this point? Additionally, could you share the lift that you're seeing from the 300 stores receiving the new general merchandise initiative?

On the mix shift, I don't think it's fair to assert that Q1 is necessarily the peak. The full year guidance assumes a cautious outlook, and you might recall that we spoke to an additional incremental impact relative to the 330 basis points we saw last year. It's difficult to predict how this will unfold dependent on consumer behavior. On units, in Q1, Sam's was flat while international was up around 6% inflation adjusted. We're seeing the impact of higher prices as it relates to consumer behavior on purchasing. Regarding the remodels, we've seen a sizable increase of a couple of percentage points in uplift of sales. We're early on in the remodeling process, but we are excited about the results. If you manage to go into one of these stores, you will certainly recognize the difference compared to the rest of the network. We're optimistic moving forward.

How many stores have been done so far?

Well, we have a couple dozen now across the country. We piloted in Arkansas, then we went to the Northeast, and we have them in several markets now. What's encouraging, beyond the merchandising, we're seeing success in various markets, so we believe this has broader appeal than we believed when we executed the first one. We see several hundred of these in construction and on the way this year, which we're optimistic about. As it relates to the GM versus food and consumables mix, general merchandise is certainly stronger in e-commerce and the marketplace. Looking forward, some of the factors affecting sales include tax refunds, weather, and customer behavior; however, I expect the trends in food and consumables, as well as health and wellness, to persist over the next few quarters.

Good morning and thanks for taking my question. I wanted to revisit your U.S. e-commerce acceleration during the quarter. What are you seeing from a category perspective, and for the balance of the year, do you expect to continue significant contribution to your U.S. comp from e-commerce?

Hi Rupesh, I'm definitely excited about the quarter. The team has done a lot of work in the last year to improve overall customer experience. We measure something called CX scores, looking at our assortment, the number of sellers, and product page quality, and these details matter a lot. E-commerce accelerated across the board with strong performance in pickup and delivery. We view this business as part of the total omnichannel offering. Categories that have been strong include food and consumables, along with increases in marketplace and certain home categories. We're optimistic this will continue as the seller and item counts continue to expand.

Thanks guys for taking my questions. I was wondering how you see brand partnerships and exclusive partnerships evolving in categories like electronics and pet? Secondly, does Walmart Plus adding benefits drive high-income consumers? Lastly, in the grocery climate, you’ve taken a lot of share from traditional grocery competitors. Do you think they'll respond?

First, regarding brands, we're really excited about the brand shops we set up physically in remodeled stores. The results are encouraging. In apparel, we’ve integrated everything together so customers can see all options, like shoes, accessories, and clothing, in one place. Pets are also an exciting area where we see opportunities. For Walmart Plus, we are making significant progress. It's an important aspect of our offerings, and we are encouraged by the growth of new members. We help them understand the path to all the benefits we offer; this is integral to our strategy. We focus on ensuring our stores are in stock each day. I see improvements in supply chain in grocery that affect both stock availability and customer experience with Walmart Plus increasingly doing better. We’re always looking for ways to attract customers without losing sight of our pricing.

Hey, everybody, good morning. My question is really on advertising. It has been a relatively small quarter for this, but the 40% growth is impressive. Can you elaborate on that and what you're doing to drive that? And for Sam's, is there an advertising opportunity there as you've seen strong growth in sellers?

Regarding advertising, there's been notable momentum that started last year when we launched our second-price auction capability. The objective is to connect sellers and suppliers with customers. The increase in our capacity to handle those transactions effectively has been pivotal to our growth.

Conversely, our advertising businesses are outperforming across the board. Flipkart's advertising is up about 50%, and Walmex has seen strong growth at about 64%. We're continually learning about how to best serve advertisers, and that strengthens our capabilities everywhere.

We have a different model at Sam's. We are stitching together e-commerce growth and our Scan and Go growth to advertise and nudge sales both online and in-club. We're focused on ensuring our advertisers see tangible benefits from their spend.

I wanted to inquire about gross margin. Can you provide insights into gross margin progression through the year, especially concerning freight markdowns? Also, regarding shrink, we’ve heard about it being an industry issue. How is it impacting you?

In the first quarter, we felt a tailwind from supply chain improvements across the business. It will become more of an issue as we lap Q2 last year, which was the peak of inventories. We're also focused on taking markdowns on time, which impacts gross margin. As we look forward, we always leave room for seasonal markdowns to avoid liabilities from excess inventory. On shrink, it continues to be a challenge, similar to issues across the retail space. We're actively managing this issue and taking reasonable steps to protect our customers, associates, and assets. This requires support from communities to effectively handle this complex challenge.

I had one clarification and then a question. John David, you mentioned alternative investments protecting profits; I believe this contrasts with the stance from the Analyst Day where it was stated that these would be additive. Additionally, can you share insights regarding spending patterns of higher-income demographics and quantify their share now versus before the pandemic?

To clarify, all parts of our business — retail, advertising, membership — work together and are mutually reinforcing. This makes those new businesses attractive to us, allowing profits to inflect relative to sales growth. For higher income demographics, we saw this shift particularly in the second quarter of last year, with a more balanced share among various income cohorts emerging in the third and fourth quarters. Our value proposition focuses on convenience appealing to all income groups. We've expanded e-commerce capabilities, online pickup, and delivery, drawing in new shoppers, particularly high-income customers across grocery and general merchandise, and we aim to retain them with better experiences.

We monitor flexible options for all customers, with higher income consumers showing greater e-commerce and pickup usage. We're seeing trade-ups in categories where quality and value align.

I want to follow up on inflation as it seemed to be a theme in your prepared comments. What’s the outlook from your merchants regarding inflation in grocery and across the store? What can Walmart do to alleviate this, and is the industry being rational in terms of pricing and promotions?

When reflecting on inflation, it's essential to compare it to the previous years. We began seeing price increases in late 2021 that picked up sharply in early 2022. Going forward, while we continue to see high single-digit rates in some categories, we aim to find value through comparing market prices and maintaining our price positioning. We’ve kept essential items priced consistently for key holidays, avoiding increases from Easter to Thanksgiving, even amidst rising prices in dry grocery. It's important also to remind our suppliers that our top-line focus must remain consistent, particularly in dry grocery segments.

We can be effective in managing mixes across various product lines, and as general merchandise prices come down, we have an opportunity to encourage discretionary spending while ensuring strong value through private brands.

Last year, you provided numbers regarding SKU count increases in the marketplace. Can you provide an update on total SKU count currently and how you expect that to change in 2023/2024? Additionally, how many marketplace customers also use advertising and fulfillment services?

We've experienced growth in the marketplace in the U.S., with SKU counts that were in the $400 million range. We expect growth, but perhaps not at the rate we observed last year. We've made significant strides in both SKU and seller counts, with continued acceleration in those utilizing both fulfillment and advertising services. Fulfillment services can aid in timely deliveries, and when sellers use those services, customer delivery expectations improve significantly. The combination aids significantly in driving conversion rates.

From an international perspective, we continue to see SKU growth in Mexico and Canada, though both marketplaces are at nascent stages, providing much room for growth. Flipkart remains a solid example of extensive SKU offerings and is increasingly building better connectivity between advertising and service delivery.

I’d like to wrap up here. We've run a little over, so I appreciate your understanding. I'm grateful to work with such a strong team here, and I think you can see in our results the capability and adaptability they bring. We're optimistic about our ability to grow top-line revenue and continue performing well in this environment. We feel assured we can outperform while managing challenges. Thank you for your attention today.