Walmart Inc (WMT) — Q3 2024 Earnings Call Transcript

Thank you and happy holidays, everyone. Joining me today at our home office in Bentonville are Walmart's CEO, Doug McMillon, and CFO, John David Rainey. Doug will begin with his reflections on the quarter and year. John David will follow with his view of enterprise results and segment highlights using our financial framework of growth, margins, and returns before speaking to our updated guidance for the year. For specific segment-level results, please see our earnings release and accompanying presentation on our website. Following prepared remarks, we'll take your questions. At that time, we will be joined by our segment CEOs, John Furner from Walmart U.S.; Kath McLay from Walmart International; and Chris Nicholas from Sam's Club. In order to address as many questions as we can, please limit yourself to one question. 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. Thank you for your interest in Walmart. Doug, over to you.

Good morning, everyone, and thanks for joining us to talk about our third-quarter results and how we're seeing the rest of the year. Our value proposition continues to resonate with customers, helping us gain share and drive e-commerce growth. We're on track to grow adjusted operating income at a faster rate than sales for the year, consistent with what we discussed at our investor meeting earlier this year. We had strong revenue growth for the quarter across each of our segments. Comp sales for Walmart U.S. were 4.9% and 3.8% for Sam's Club U.S. Sales for Walmart International were up 5.4% in constant currency, led by Walmex and China. Sam's Club continues to perform well both in Mexico and China, and while strength was broad-based for Walmex. Our Bodega Aurrera business is worth calling out as it continues to deliver outstanding growth. E-commerce sales were up 24% in Walmart U.S., 16% in Sam's Club U.S., and 15% globally. Timing of our Flipkart Big Billion Days event, which moved from Q3 last year to Q4 this year, affected comparisons in our International segment, leading to a decline of 3%. So we'll see the benefit from the timing shift as we report next quarter. Across markets, the team did a nice job driving our seasonal events. Our in-stock and inventory levels are in good shape. We finished down 1.2% in inventory for the total company, including down 5% for Walmart U.S. Both our top line and adjusted EPS came in better than what we projected at the beginning of the quarter, but we could have done a better job on expenses, which is reflected in adjusted operating income growing less than we expected. We had a couple of unexpected expense increases in SG&A, and you'll hear more about those when John David walks through the numbers. In the U.S., pricing levels in many food categories continue to be a concern. Overall, our product costs are up versus last year, and they remain up even more on a two-year stack, which is putting pressure on our customers. Beef prices are high, but we're happy to see lower pricing in dairy, on eggs, and with chicken and seafood. The pockets of disinflation we are seeing are helping, but we'd like to see more, faster, especially in the dry grocery and consumables categories. The other good news is that general merchandise prices continue to come down, GM is down low to mid-single digits versus last year. That enables us to rollback pricing which will help our customers during this holiday season when general merchandise is so important for gift-giving. We still see pressure from mix including outside the U.S., which we expected, but I like the market-share gains we're seeing in this category. In the U.S., we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it because it's better for our customers. When I look at our P&L, it's continuing to change shape. Mentally, break it down as a combination of a traditional retail P&L and a newer version that starts with our digital businesses. It flows from first and third-party e-commerce pickup and delivery to businesses like membership, advertising, and fulfillment as a service. It includes some faster growing, higher margin components that combined with the more traditional P&L gives us a business model that's more profitable in percentage terms as it grows. We saw strong growth in all these areas for the quarter. And when you put it together with the supply-chain automation work we're doing, you get a more sustainable business that can grow more effectively over time and create a better mix along the way. Marketplace is one of our engines for these mutually reinforcing businesses, meaning that marketplace growth pulls other businesses like fulfillment through. Back in September, we held our first Marketplace Seller Summit. We hosted thousands of current and potential sellers to let them see firsthand our commitment to this business and how we will grow it together. Since the beginning of last year, we've more than doubled the number of items available to customers on our U.S. marketplace. It's an important piece of what we're building, and it's growing fast and not just in the U.S. We have a unique opportunity to grow in India, Mexico, Canada, and Chile. We love the opportunity to grow our assortment in this way, so customers can get what they want, when and how they want it. We're making shopping easier and more convenient. Our net promoter scores for pickup and delivery in Walmart U.S. are improving and we've started using generative AI to improve our search and chat experience. We've released an improved beta version of search to some of our customers who are using our app on iOS. In the coming weeks and months, we will enhance this experience and roll it out to more customers. When I step back and look at the company overall, I love what we're building and how we're building it. We've got a good hand at play and a strong team making things happen. It's our recipe for growth and improved margin and returns we've been discussing with you. Everyday low prices are a foundational component of us fulfilling our purpose. We bring EDLP to life on a year-round basis by doing things like offering a Thanksgiving meal in the U.S. and Canada that costs less than last year. We're offering tremendous value for things like fashion, electronics, and seasonal decorations and helping remind people that when they're looking to buy toys, we're the place to come because we have the right product at the right price. The same focus on purpose and execution came through when I was visiting Chile, Canada, and China earlier this quarter. It was my first time back in China since before the pandemic. Our team there runs some of the most incredible Sam's Clubs in the world, and they continue to be a leader for us in terms of digital penetration and innovation. As I wrap up, I know we're all concerned about events across the world: war, acts of terror, political unrest, impacts from storms like those in Mexico from Hurricane Otis, the pressure we're feeling from stubborn inflation in some categories and other challenges beyond our control. As for our company, we care about everyone. We want to be a place where literally everyone feels comfortable and welcomed to shop or work. We want to live our values and create a warm, safe, and fun place for the hundreds of millions of people that will shop with us in the days and weeks ahead. I'm grateful to be part of this big team, grateful to work alongside our associates. Now, I'll turn it over to John David.

I'd like to start by thanking our customers, members, associates, and partners for helping us deliver a good quarter. We're pleased overall with how the team executed and how our strong value proposition and omnichannel strategy continue to resonate with customers. We're gaining share, seeing strong e-commerce growth, and excited about the contributions from higher margin businesses like advertising. Sales grew more than 4%, gross profit was better than expected, and we exceeded our guidance for EPS. These results reinforce the benefits of our highly diversified business with broad-based contributions across segments and markets, channels, formats, and strategic growth areas. While we're pleased with our topline results, operating income was below our guidance due to higher than anticipated expenses largely certain legal accruals. I'll provide more details on guidance shortly. But the key takeaway is that we're raising our full-year sales and EPS guide while reiterating our prior operating income guidance. We expect the relationship between profit and sales growth to favor profitability in Q4 and for the full year to align with our goal of operating income growing faster than sales. Now let me review the key financial highlights for Q3 using our financial framework of growth, margins, and returns. First, growth. Constant currency sales increased 4.4% or nearly $7 billion. Importantly, we saw traffic growth across both in-store and digital channels. All three operating segments experienced mid-single digit sales growth with comp sales for Walmart U.S. up 4.9%, in Sam's Club U.S. up 3.8% excluding fuel. International grew sales 5.4% in constant currency with Walmex sales up more than 9%, and China up 25% with strong performance in Sam's Club and e-commerce. The timing of Flipkart's Big Billion Days pressured international sales growth as the event moved from Q3 last year to Q4 this year. So we expect the timing to be a benefit to Q4's growth rate for the segment. PhonePe also continued its strong momentum with annualized TPV or total payment volume reaching 1.2 trillion on nearly 5.8 billion monthly transactions. And PhonePe recently achieved an impressive milestone eclipsing 500 million registered users. We continue to grow share in key categories, particularly in Walmart U.S. grocery where we delivered positive comps and saw strong share gains in both units and dollars. Grocery inflation moderated nearly 300 basis points from Q2 levels to a mid-single-digit increase versus last year. But on a two-year stack, it was still elevated at a high teens percentage. We see our customers showing ongoing discretion in seeking value to manage within their household budget, while general merchandise sales were down low-single digits year-over-year in Q3. The rate of change was stable to Q2 levels, and we gained share across categories. As we enter the holiday season, we're working hard to lower grocery prices to ease the pressure for customers, giving them more capacity for general merchandise spent. Our business is rooted in a timeless purpose to save customers money so they can live better. Against any economic backdrop, we're there for customers, how and where they need us, and we're making shopping with Walmart and Sam's Club more convenient. Omni services including pickup and store-fulfilled delivery continue to drive strong growth, leading to a 24% increase in Walmart U.S. e-commerce sales and 16% growth at Sam's Club. Multi-channel shoppers are more valuable, engaging more often and spending more with us. Pickup and delivery for Walmart U.S. has been a key source of growth and share gains among upper-income households and has become the most productive channel for acquiring Walmart Plus members. In International, Walmex's expansion of omni offerings led to 1.5 million Bodega store-fulfilled digital orders in Q3. In Canada, we continue to roll out our unlimited next-day store delivery subscription called Delivery Pass, which is now available from two-thirds of our Canada stores. And I was in China recently where our business is nearly a 50-50 split of physical and digital. I was impressed with how we're serving omni customers with speed and accuracy through new engagement and delivery models. Turning to margins, gross margins expanded 32 basis points, reflecting the timing shift of Big Billion Days in India and lapping last year's LIFO charge at Sam's Club U.S. Walmart U.S. gross margins increased to 5 basis points reflecting lower markdowns and supply chain costs. But we're still seeing an ongoing category mix pressure as health and wellness and grocery sales outperformed general merchandise. Continued disinflation, along with the success of our merchants at Sam's Club and bringing down the cost of inventory resulted in us not taking the expected $50 million LIFO charge in Q3. We no longer expect any further LIFO charges in Sam's Club this year. As we've said previously, over the next several years, we expect margins to move higher as we modernize our supply chain and scale higher-margin growth initiatives. We made good progress on both during the quarter. We continue to deploy capital to build technologies and optimize our next-generation supply chain with automation and productivity benefits starting to appear in our results. We now operate nine regional distribution centers servicing U.S. stores with varying levels of automation with six more centers in active stages of construction. Currently, more than 15% of stores receive merchandise from these facilities, helping to get product to shelves faster and more efficiently. During the quarter, we opened our third next-generation e-commerce fulfillment center. These 1.5 million square feet facilities are expected to more than double the storage capacity, enable 2X the number of customer orders fulfilled daily, and will expand next and two-day shipping to nearly 90% of the U.S. including marketplace items shipped by Walmart Fulfillment Services. They also unlock new opportunities for our associates to transition into higher-skilled tech-focused positions. To support the store-fulfilled digital business, we're on track to have seven stores with automated market fulfillment centers or MFCs operational by the end of this month. These MFCs store thousands of the most sought-after items and are expected to increase order capacity and productivity, while also increasing inventory accuracy, which helps us deliver perfect orders for customers. As we focus on improving e-commerce margins, we're making good progress in lowering digital fulfillment costs and densifying the last mile by tapping our broad store and club network. Over the past year, Walmart U.S. has increased the percentage of digital orders fulfilled by stores by 800 basis points and Sam's Club fulfills nearly 60% of online orders from its clubs. With the growth of our Spark Driver platform, we've lowered store-to-home delivery costs by 15% even as we shorten delivery times the same day for more than 80% of our stores and in some cases as quick as 30 minutes. As we scale Walmart GoLocal, we are densifying the last mile, and we're approaching the milestone of 12 million deliveries for other retailers with this service. I'd like to touch on our portfolio of higher growth initiatives. These businesses reinforce our core omni-retail model in our key to driving operating income growth ahead of sales over time. In Q3, this portfolio positively contributed to gross margins. Global advertising grew approximately 20% in Q3 with Sam's Map growing over 27% and Walmart Connect, up 26%. As an illustration of the omnichannel benefits of our ad platforms, more than 75% of Sam's Map active advertisers are investing in search and sponsored ads as in-club sales attribution has improved returns of digital ad spend by over 30%. International's ad revenue growth was impacted by the timing of Big Billion Days, but we're on track to deliver strong growth of approximately 45% for the full year. Moving to marketplace and fulfillment services. Customer engagement continues to validate our strategy to invest in ways to grow this business on a global basis. As Doug mentioned, we held the inaugural Marketplace Seller Summit to help accelerate our marketplace growth. For cross-border sellers in the U.S., we're expanding access to more customers beyond the U.S., Canada, and Mexico by opening our e-commerce marketplace in Chile to cross-border products next year. Over the past year, we've increased marketplace sellers by more than 20%, and the number of sellers utilizing Walmart Fulfillment Services is up over 55%. Next, membership remains a compelling way we deepen engagement with our customers. Sam's Club membership income grew over 7%, reflecting record member counts and Plus Member penetration. During Q3, we held events that were focused on member acquisition and digital engagement. We'll take a similar approach again during Q4 offering discounted access to Walmart Plus memberships while providing members early access to the best savings event throughout the holiday season. Turning back to the middle of the P&L. SG&A expenses deleveraged 37 basis points on an adjusted basis, impacted by higher year-over-year wage-related costs in Walmart U.S., including higher variable pay expenses relative to last year when we were below our planned performance. Store remodel costs were also higher as we rolled out 117 of our flagship design stores earlier this month and legal expenses increased. Lastly, the timing shift of Big Billion Days pressured international expense leverage in Q3, and we'll see the benefit come through in Q4. Third-quarter adjusted operating income grew 3%, including 270 basis points of currency tailwind, while adjusted EPS of $1.53 increased 2% and compared favorably to guidance of $1.45 to $1.50. Relative to our guidance, Q3 EPS benefited by $0.01 from releasing the LIFO reserve we had earmarked for Sam's Club. Moving to returns, over the last 12 months, sales have grown more than 6% and operating income increased about 22%, and when combined with a disciplined capital approach, return on investment improved 130 basis points to 14.1%. The primary driver was lapping last year's Q3 charge related to the opioid legal settlement framework. ROI also reflects some benefits from productivity initiatives that we initially expected to realize in FY '25. We continue to expect our ROI to increase over the coming years. In addition to our strategy, our financial position is an advantage and enables us to compete in an increasingly dynamic retail environment. Turning to guidance. We're confident in our agility and our ability to execute, and we're focusing our investment in areas where we can widen our omni advantage, deepen engagement and drive sustained growth in new revenue streams. We like our position relative to competitors as we've maintained strong price gaps and increased share while preserving flexibility to respond to competitive dynamics. But we're not immune from the vagaries of the economy. We see our customers showing ongoing discretion in making trade-offs to be able to afford the things they want given the sustained high cost of the things they need. Recently, we've experienced a higher degree of variability in weekly performance in between holiday events in the U.S., including seeing a softening in the back half of October that was off-trend to the rest of the quarter. Sales during November have turned higher as unseasonal weather abated, and we kicked-off holiday events. So, sales have been somewhat uneven, and this gives us reason to think slightly more cautiously about the consumer versus 90 days ago. We still expect sales growth to moderate in Q4 versus prior quarters as grocery inflation further normalizes towards historic levels. So we're encouraged by the increased traffic and share gains we've seen and expect them to continue. As such, we are modestly raising our full-year sales guidance to 5% to 5.5% from 4% to 4.5% previously, primarily to reflect Q3's outperformance. For operating income, we're maintaining the guidance range of 7% to 7.5% growth. In addition to the 40 basis points of unexpected legal expenses in Q3, we also expect to record charges in Q4 totaling approximately 20 basis points to 30 basis points related to unplanned store closures and recovery costs associated with the recent hurricane near Acapulco, Mexico. This impacted 28 of our stores and less than half of them have been reopened at this time. Partially offsetting these costs is the approximate 40 basis point benefit from lower than expected LIFO charges compared to our prior guide. The net effect is a 20 basis point to 30 basis point headwind to our prior guide, and as such, we currently expect to be in the lower end of the operating income growth range for the year. We expect merchandise mix pressure to continue in Q4 with grocery and health and wellness sales rates outpacing general merchandise and potentially be a bit more pronounced given the uncertain consumer environment. Based on Q3 results and less of an increase in interest cost for the year than we previously expected, we're raising our full-year EPS guidance range to $6.40 to $6.48. In closing, let me reiterate what I said previously, aligned with our financial framework, we expect the relationship between profit and sales growth to favor profitability in Q4 and for the full year operating income to grow faster than sales. We like our competitive position. Our financial results clearly demonstrate that our omnichannel strategy is winning. We're growing our share across categories, deepening customer engagement across channels, while investing in areas to widen our competitive advantage. The holidays are here, and our value proposition resonates with customers looking to save money as they celebrate.

Hi. Good morning, everyone. I have a question that I would like to break into two parts. First, regarding the legal expense, could you provide some clarity on whether or not we should continue to account for it? It seems like you’re planning to keep it in, but if you could share any details about its unexpected nature, that would be helpful. Secondly, I’d like to know about alternative revenue and profit. Was there anything particularly concealed in this quarter? Are we expecting a shift going into next year? This appears to be a key investment concern. Will we see an increase, and will it occur within a specific timeframe, or will it gradually continue to grow? Thank you.

I’ll begin, and others may want to add to this. The legal expenses were primarily associated with prior periods and were not anticipated for this quarter. They total around $70 million to $75 million, and we do not expect this to occur again in the fourth quarter. Regarding alternative revenue, our plan shared at Investor Day depends on our investment levels and the improvement of unit economics, as well as the growth of higher-margin aspects of our business. We've discussed the growth in advertising across all segments, and although it was slower this quarter, we expect strong growth for the year. As these segments become a larger part of our overall business, they will greatly enhance our margin performance. Reflecting on what we mentioned at Investor Day, we anticipate a 4% growth in sales and operating income over the next several years, with a substantial contribution from these higher-margin profit streams improving our margins each year.

Simeon, this is Doug. I would just add that I think you should have it in the continue to build category rather than in inflection.

Good morning. Thanks for taking my questions. Just another follow-up, I guess on the legal expense. Assuming that impacted the U.S. EBIT number, but maybe you can clarify that. And just anything in particular that impacted the U.S. EBIT beyond maybe some unexpected expenses, did that come in relatively in line with your expectations? And I guess that's sort of my first question. And then longer-term, as you think about this plan to grow EBIT faster than sales in coming years, anything you're seeing with the consumer? And it sounds like it's still choppy that maybe leaves you to reconsider how much you might flow through to the bottom-line?

Sure, I'll start and then John will likely want to add. The legal expenses affected the U.S. segment. Additionally, we spent more on remodels, reaching an all-time high level in the quarter. This investment is crucial for our business, and we are enthusiastic about the returns we are seeing from it. We are also pleased with the e-commerce returns, though some investments contributed to the difference between our guidance and actual results, predominantly due to the legal accrual. Regarding our long-term plan and potential changes in consumer behavior, our value proposition is resonating more than ever during challenging times for consumers. This year, customers are choosing us not only for the value we offer but also for convenience, which we are investing in. We are confident in our current strategy and our execution capabilities. We should differentiate this from any potential weakness among consumers we noticed in late October. Overall, we are very excited about our plan moving forward.

Hi, Kelly. It's John. Good morning. First, I'm also excited about the topline results at 49% and then e-commerce at 24%. The team has made a lot of improvements; they should get the credit for that. You heard a couple of things there, one about remodels. As John David mentioned, we had 117 remodels complete all on November 3. We think that's the largest number of remodels we've ever had complete in a single day. And then if you add together late October and November, it was 197 remodels, and those remodels have improved apparel, home, they have wider aisles. We're really happy with the way the signing layout, and they also have more investment for our online pickup and delivery business, which is a key catalyst for e-commerce growth and help us with being flexible for customers in any type of situation, they want to shop in. So there are some costs associated with that in the quarter, but we feel great about those being investments for the long term.

Kelly, this is Doug. And related to the last part of what you asked about, I don't think there's anything that causes us to think operating income won't grow faster than sales. We've had really strong sales performance now for a few years. Obviously, we were impacted by what happens in our environment, but we expect to grow share. We expect to have a healthy topline, and as it relates to operating income, we've got a really good multiyear plan with two primary dimensions. One is the automation investments that drive productivity improvements, and the other dimension is related to how the digital business has changed the shape of the income statement. Both of those things will be true, and it's a multi-year plan that shows progress along the way. So you guys from quarter to quarter, year to year will see us make progress, and not every quarter, maybe up into the right in every category, but if you look at what happens from a trend point-of-view, those are the things we expect to deliver, and because operating income is growing faster than sales, our plan requires that we grow return on investment at a higher rate over time. That's the plan.

Thank you.

Hey, thanks, guys. You have a really big e-com business that continues to grow at a rapid pace. I'm curious if you could talk about what's driving that growth from a traffic versus ticket perspective and how the growth in the marketplace sellers that you've seen are contributing to that growth. Also, curious if you could talk a little bit about general merchandise performance online. I think you threw out some numbers last quarter about certain categories on the general merchandise side; would love to hear how they performed online this quarter. Thanks.

Hi. Good morning, Paul. It's John. I'll begin with Walmart U.S. and then hand it over to Kath and Chris for details on the other segments. Looking at our growth, we're pleased with our online pickup and delivery business from stores, and we have strong performance in food. The team has worked over the past few years to enhance our capacity and has notably improved key metrics such as Perfect Order, which ensures customers receive what they want when they want it. This improvement reflects better food stock levels and has contributed to our share gains in the food category. Regarding the marketplace, we're happy with the progress the team has made, especially during Tom Ward and Manish's First Summit. In this quarter, we are seeing more sellers coming online, and our product assortment has increased significantly. Just this week, I visited one of our new fulfillment centers in Lancaster, Texas, managed by a capable team. It was encouraging to see the amount of marketplace inventory and the number of sellers trusting us with their fulfillment, which is promising. In November, we held our first event as we approach the holiday season, and there's still much to go before the holidays conclude. We're very pleased with the results in the marketplace, which also reflects performance in categories like art, apparel, and gifting, aligning with your inquiry about general merchandise. These businesses are important as they allow customers to shop in their preferred way and time. The marketplace will be a key driver for other businesses, such as advertising, as more sellers connect with customers, leading them to utilize our fulfillment and advertising services. Now, I'll pass it over to Kath to discuss international.

Thank you for that question. If we look at our e-commerce outlook, it's down 3%, which I believe is affected by Baby Day. When examining the underlying growth across the businesses, Walmex saw a 16% increase in e-commerce; Canada also experienced a 16% growth partly due to the rollout of Delivery Pass to numerous stores. In China, their e-commerce business grew by 38%. The teams are focused on ensuring a perfect order and providing a delightful customer experience. We continue to learn from each business. The Flipkart team was with us yesterday, and it's impressive to see what they're discovering through the use of generative AI during the Big Billion Days. They have developed clever capabilities that make online shopping effortless. Additionally, from a marketplace standpoint, we've launched our marketplace in Mexico, Canada, Chile, and South Africa in the last 12 months. Flipkart remains our largest and most established marketplace, but we are also witnessing accelerated growth in the marketplace through our cross-border trade, which we recently opened between Mexico and Canada for U.S. cross-border sellers. Finally, we've introduced Walmart Fulfillment Services in Mexico, Canada, and South Africa over the past year. Overall, we are seeing positive results and are optimistic about the growth potential of both Marketplace and Walmart Fulfillment Services.

So, it's an exciting time. Paul, thanks for the question. I think what's really interesting for all of us, but definitely for Sam's is that members want this, and so we're giving them what they want, and we are at 13% of sales, 16% growth in the quarter. But we think it's a really huge opportunity, and as I think about e-commerce for and omnichannel sales for Sam's, I think about a digitally connected member. So Scan and Go teaches our members that we are a digitally relevant business, and they look to shop online and on whether on the web or on the apps, and we feel really good about that. We've got all-time highs in that space. The other thing is really interesting is, as we look at the new members; we got an all-time high number of membership in Sam's, and a lot of those people that are coming in now with digitally engaged members that are coming in and they're buying new memberships digitally. So we're feeling good. In terms of mix, GM and Club Pick are strong grocery, pantry; they're all strong, which we're feeling good about. We don't have a marketplace in Sam's yet; we're very focused on items and on curation of great items, and I think that's going to be really important for the Sam's business as we go forward. The thing that I finished with there is great items drive the organic traffic. So we'll continue to focus on those great items, and I think we'll continue to get a lot of organic traffic there.

On U.S., so also asked about general merchandise. Would you repeat that part of the question?

I was just curious how general merchandise performed online within the U.S. business. I think, last time, you said there were several categories that were up double-digits; curious how some of those general merch categories performed.

We are seeing strong performance in areas like hardlines. Our auto care center is operating well, and as I mentioned earlier, it's fantastic to see momentum with popular toy items. Customers are responding positively to great gifts such as the Barbie Malibu House, which is now priced at $69, down from $89 after we reduced the price. These types of products are performing excellently. It's also encouraging to see how the team has enhanced the merchandising of general merchandise, especially in line with seasonal themes. The site was well-prepared for Halloween and previously for Labor Day. The team is effectively adapting their strategies across various categories, and while we've noted strengths in some areas, we recognize that there's still a considerable time before the holidays. We have a solid plan in place, our team is prepared, and our inventory is positioned well to meet customer needs.

Hi. Thank you. Good morning. We are wondering if you could go into any more detail as to what would explain a softening in late October. Do you think it could partially be due to student loans or is it more of a function of being a shoulder period or a low before the holiday? And just the variability you're seeing week-to-week that you noted increase the risk of being more promotional than maybe was originally planned and expected in Q4.

Kate, this is John David, I'll take this. You're right to mention some of the economic factors that may be influencing this situation. We're experiencing credit tightening following a year since the Fed started increasing rates. Consumer balance sheets are approaching pre-pandemic levels, and the repayment of student loans impacts around 27 million Americans. All of these factors could be contributing to the changes we're seeing. I want to highlight that John mentioned how weather can affect our business, and I've learned that it can significantly alter consumer shopping behaviors. We experienced unusual weather in the latter half of October. There are several reasons for this change, and we can't pinpoint it exactly. That's why we're adopting a more cautious approach as we enter the fourth quarter, acknowledging more variability since some trends have differed from what we observed in the first 11 weeks of the quarter. I'm not trying to sound alarmist; our business is still performing well, which is why we've noted our observations in November. Particularly, during our events, Walmart U.S. and some of the festive events internationally received a strong response from our customers. However, the trend we noticed in the latter half of October was unlike anything else we've encountered this year, and we want to highlight that. Regarding promotions, perhaps the segment CEOs could share their insights, but I believe we are in a good position concerning overall inventory levels. I don't anticipate a more promotional holiday season than what we had initially planned.

This is John. Kate, good morning. I think what's encouraging is that our traffic, our transaction counts, remained strong and consistent throughout the quarter. The end of October, we did grow our Halloween business a little less than we expected. I'm sure there's something to do with weather and it being on a Tuesday, which is different than prior years. And then as we got into November with the cold weather, we saw cold weather categories respond right away. Our event was strong, so John David said it right. We're just cautious of the shift that we did see. But overall seeing the number of customers who shopped continue to grow. We've seen new customers all year across a wide variety of income groups. We'll be ready for all those customers, and we'll be ready for anything that they need at the time. I really like the flexibility the team has built-in. We delivered Halloween up until 06:00 PM on the date of the holiday, which is something we haven't been able to do before. So our Express and same-day delivery service continues to grow, which is helping us right up until the point customers need product.

Good morning. Thank you so much for taking my question. Looking towards next year, how linear will the relationship be between Walmart's overall comp and the operating income growth? So if you only comp 2%, let's say, could you still grow operating income at the higher end of your range, call it 7% to 8%? And how does the prospect of broad-based deflation impact that, especially, as some of the naysayers say that Walmart's comp in recent quarters has just been driven by the impact of inflation? Thank you.

Well, Michael, it's good to speak with you. One of the things that we're looking at closely in our business is units, and we've seen good growth in units, so it has not been entirely driven by just higher prices. We think we're positioned well as we go into the end of this year and into next year. To answer your question, it would depend upon what's driving the 2% comp. And so it's hard to extrapolate trends from this year into that. The team here, though, is very focused on what could happen in a more deflationary environment and making sure that we have a cost structure that supports the revenue environment that we operate in. So when you think about the relationship between operating income and sales on a multi-year basis, we actually feel like we're in a really strong position given what's happening in the business from one quarter to the next. That may not always be the case as we manage through certain headwinds, but we feel like we're positioned well for virtually any economic environment. I'll remind you, like I know there's maybe trepidation or concern among consumer health. This is when we shine. This is when Walmart is at its best when we can deliver value for our members and customers. And so we look forward to being able to put up financial results in any economic environment.

Michael, we want to make sure we're doing everything we can to keep prices as low as possible for our customers. I'm really pleased in the U.S. business that our rollback count is up significantly over last year. It was a lot of fun to be able to tell all of our customers that Thanksgiving at Walmart this year will be a lower price than what it was a year ago. We worked really hard the last two years to keep it flat, and it's coming down, and that's great for customers. You had really stubborn inflation in categories like dry grocery. So I'm excited when I'm in stores. And I was in Uvalde, Texas the other day, the number of rollbacks that we have out on feature in front of customers right up front in categories like dry grocery. A lot of our fresh categories have come in line. Eggs and dairy have come back in line from a year ago. That's great for customers. And as John David said, that's the time that we win. We deliver value, and our team's ready to do that in any condition.

Thank you for allowing me to ask my question. I would like to follow up on the topic of deflation. Can Doug or anyone else elaborate on what is causing the favorable LIFO tailwinds? Is it primarily related to general merchandise, or does it also include grocery items? Doug, you mentioned a reduction in grocery prices, but you also noted that there is still some stubborn inflation present. Could you provide further insight into whether dry grocery is expected to deflate? Additionally, how do wage pressures factor into this situation? Do you believe wage pressures are decreasing as well?

Robbie, good to speak with you. This is John David. I'll start and address the LIFO part of the question and maybe hand it over to Doug and others. On the improvements that we've made there. That is, as you know, dependent upon the cost of goods that we're buying. And we've seen the pricing level come down overall broadly. But I don't want to miss the point to mention that our teams have actually done a really good job of working with suppliers to help affect that outcome. So this is not something that just happens to us. The team has worked to actually have this outcome, so it's far better than what we expected when we went into the beginning of the year, and we're actually pleased to see this outcome.

Generally across markets, we are facing an inflationary environment. The situation in the U.S. has been more dramatic in recent years compared to other places like Brazil and Argentina, which I have also experienced. China stands out as an exception in this conversation, as it is not experiencing inflation. Specifically in the U.S., in fresh categories, we see an increase in beef prices, while dairy, eggs, chicken, and seafood are declining. Commodities will fluctuate as they always do. General merchandise has been declining, with a more pronounced drop in recent weeks compared to earlier trends, which we see as a positive development. However, this has implications for revenue when unit sales do not rise enough to counterbalance the deflationary effects. The key question regarding dry grocery and consumables is whether those categories will also decrease in price. We hope for that outcome. In the U.S. Walmart, we are still seeing a mid-double-digit increase over a two-year period, slightly up from a year ago. However, we anticipate that dry grocery and consumables may experience deflation in the coming weeks and months. Looking ahead to next year, we could find ourselves in a deflationary environment in U.S. Walmart.

As we've said previously, over the next several years, we expect margins to move higher as we modernize our supply chain and scale higher-margin growth initiatives. We made good progress on both during the quarter. We continue to deploy capital to build technologies and optimize our next-generation supply chain with automation and productivity benefits starting to appear in our results. We now operate nine regional distribution centers servicing U.S. stores with varying levels of automation with six more centers in active stages of construction. Currently, more than 15% of stores receive merchandise from these facilities, helping to get product to shelves faster and more efficiently.

Great. Thank you.

Good morning, guys. So another question, actually, on remodels. I know you had a lot over the last couple of months, as you referred to, but given the strong returns on the remodels, does it make sense to continue to accelerate that process even if it holds back earnings flow through a bit in the near term? And then related to that, if you do accelerate the process, where do you have to go on the timeline to where you start to see more benefit than incremental expense on a net basis? Thanks.

It makes sense to accelerate our remodel efforts, and we are doing just that. This year, we plan to complete several hundred more remodels than in recent years. The number of remodels has increased, and our team has become more adept at managing the process, including the new fixtures and changes. As a result, the remodels are progressing more quickly and smoothly than in the past. Additionally, our supply chain has improved. In 2021 and 2022, we faced challenges in acquiring fixtures, parts, and equipment on schedule, but now we are feeling more optimistic about how everything is coming together. We are satisfied with the performance of the remodels regarding sales and customer satisfaction. The response to our new product assortments, especially in categories like apparel, pets, beauty, and home, has been very positive. I recently visited a newly remodeled store in Uvalde, Texas, and it truly represents a great investment in the community. The renovations have revitalized the store, creating a noticeable difference in the atmosphere, with both customers and associates expressing excitement about the results. As the holiday season approaches, I believe customers will appreciate having access to a wider variety of products in these remodeled locations. It is essential that customers observe improvements not just in the store but also in the product offerings, and we are successfully providing both. We will continue to implement an aggressive remodel plan for next year.

And so is there a headwind to profit flow through as that process continues at that pace?

No, it's in the plan. What happened in Q3 is that a few projects that were in progress slipped into late October, and having 117 on one day was quite significant. Going forward, you'll see a more balanced completion of remodels by quarter. Ideally, we would have preferred not to have those close to the holiday. I believe the teams have done a great job finishing the remodels and then quickly transitioning back to merchandising for the holiday. The goal is to have a more even distribution across quarters, and that's all incorporated into our plan.

Hi. Good morning, everyone. Thank you for taking my question. I have a question on the gross margin in the US; the margin was not touched year over year. I think the expectation was that it maybe could have been better than that. I was hoping that you could provide some of the puts and takes around that. I'm not sure if GLP-1 is maybe having a bigger impact there. So just thoughts on the gross margin this quarter and then maybe how we should think about that in Q4; and then a clarification around the legal charge. I think you said $75 million, but then 40 basis points. So I'm not really sure I'm a little bit confused about that. Thank you.

The legal charge is 40 basis points; let's go with that figure. Regarding our guidance for the year, I want to highlight that 7% to 7.5% operating income for our business translates to $125 million. This is quite a precise figure given our size. Factors like the hurricane and the legal charges are driving us toward the lower end of that range for the year. In terms of general merchandise, we did experience some impact from the business mix this quarter, which was beneficial for us. I believe the U.S. was up by about 5 basis points. As Doug mentioned, we're actively working to lower prices for our customers to ensure we’re delivering the value they need, and that balance is influencing those numbers.

Hi, guys. Good morning. Thanks for taking the question. Just GLP-1 just came up here in that last question; just curious. We hear it's a thing, maybe expand on maybe what you're seeing there, how it's impacting your business currently and what you see for that going forward. Thank you.

Hey, Peter. Good morning. Thanks for the question. It's still early to determine how this will impact the customers and the business. We are noticing some shifts in categories, but at this moment, we don't have anything new to add beyond what we've previously discussed.

Hey, good morning, everyone. I wanted to follow up on the consumer. I know it was discussed quite a few times today, but you guys, throughout the year have discussed a number of different signals of sensitivity, buying more around paycheck cycles, seeking more value, coming up with a promotional event. So just curious if you could provide a little bit more perspective on that and maybe more specifically what you are seeing in terms of market share across income cohorts. Thank you.

Yeah for Walmart U.S. specifically, John, as it relates to share.

Yeah. Good. Thanks for asking, Seth. We've been pleased to see share growth all year, and we've talked about that across income groups. And what's been encouraging as of late is a bit higher share growth in general merchandise categories. We saw that month by month throughout the third quarter.

I don't know that we have a lot more to add on the consumer than what we've already said. I think we covered it. We're well positioned, and I think our value proposition across categories and the way we're serving people, which helps them save time as well as save money, causes us to feel good about our position for the quarter. We get a lot of questions about what's happening in the U.S. economy and other economies and what's happening with the consumer, and we feel compelled sometimes to try and help explain what we're seeing. But to be clear from our point of view, we are front-footed, offensive, and feeling good about our opportunities. Stores and clubs look good. So that's the way we're thinking about the quarter. I'll just wrap up here. We've gone a little over time. I'm as excited as I have been. We're executing our plan. We've got a good plan. Customers and members are choosing us, and I think they have been choosing us not only because of price leadership, which they can count on and we will continue but also because we're making it easier to shop with us. Our MPS scores in stores and clubs are encouraging. Our MPS scores as they're improving across pickup and delivery, are encouraging. We just want to save people money and time and make this easy and help them have a great holiday season. And I think as it relates to the top line, we can continue to expect that we will outperform and do well. And as it relates to operating income growth, we'll grow it faster than sales over time because we've got this really good automation plan. The metrics that John David outlined when we started the call are really encouraging. We continue to feel very good about what that's going to mean for our business. And then as it relates to the business mix, having e-commerce grow so much across our segments is awesome and encouraging. And as a reminder, that's a combination of first and third party. And as we grow with our suppliers and also with our marketplace sellers, we get those opportunities to serve them with ads, to serve them through fulfillment services, to monetize our data in different ways. So the business model change will continue, which will enable that operating income growth to help us improve returns over time. So we're antsy about Christmas every year. This is my 33rd year, and I feel like it's a bit of a rerun in that it seems like we're always talking about customers being price-conscious, and we always will be. And they're always looking for the hot toy and the right gift for Christmas. And they'll come buy food for us for Thanksgiving and for the Christmas meal. And then New Year's will come, and we'll have clearance prices after Christmas, and we'll have a strong January because customers will react to clearance at least the first couple of weeks when that's happening. And we'll update you on the fourth quarter and tell you how it went. But we feel really good about our position and excited about executing this plan and appreciate your ongoing support and interest in our company.