Walmart WMT Q2 2021 Earnings Call Transcript

Rob: (00:17) Welcome to Walmart's fiscal year, 2021, second quarter earnings call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. [inaudible 00:00:27] questions to as many participants as possible, we ask that you limit yourself to one question. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Rob: (00:38) Please note that this conference is being recorded. At this time, I'll turn the conference over to Dan Bender. Please go ahead, Dan. Dan Bender: (00:47) Thank you, Rob. Good morning. And welcome to Walmart's second quarter fiscal 2021 earnings call. I'm joined by a few members of our executive team, including Douglas McMillon, Walmart's president and CEO, Brett Biggs, Executive Vice President and Chief Financial Officer, and John Furner, President and CEO of Walmart US. Dan Bender: (01:08) In a few moments, Doug and Brett will provide you an update on the business and discuss second quarter results. That will be followed by our question and answer session. Before I turn the call over to Doug, let me remind you that today's call is being recorded and will include forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include, but are not limited to the factors identified in our filings with the SEC, as well as risks and uncertainties resulting from the ongoing COVID-19 pandemic. Dan Bender: (01:43) Please review our press release and accompanying slide presentation for a cautionary statement regarding forward looking statements, as well as our entire Safe Harbor statement, and non-GAAP reconciliations on our website at stock.walmart.com. It is now my pleasure to turn the call over to Doug McMillon. Doug McMillon: (02:09) [inaudible 00:02:09] unusual, and I want to thank our associates for rising to the occasion. They're adapting to changing customer needs and tackling new challenges while positioning our business for the future, and we're grateful. As I shared last quarter, we're operating with a clear set of priorities to guide our decision making through these crises. Those priorities are one, supporting our associates on the front lines in terms of their physical and financial wellbeing. Two, serving our customers as safely as possible and keeping our supply chain operating. Three, helping others, which includes hiring so many that need work, supporting our suppliers and marketplace sellers, and serving the communities where we operate. Doug McMillon: (02:46) Including accelerating our efforts to increase fairness, racial equity and justice. Four, managing the business well operationally and financially in the short term. And five, driving our strategy to strengthen our business for the long term. First, our associates; they continue to be inspiring. And it has been a pleasure to visit with so many of them as I've made my way around the country, visiting stores, clubs, and distribution centers. During this call last quarter, we outlined a number of measures we have in place to support them, and those continue. Doug McMillon: (03:18) Globally, we've hired more than 500,000 new associates since the beginning of the year. We've continued our COVID-19 emergency lead policy, which includes the removal of our attendance requirements related to our quarterly cash bonus program called My Share. That enables people to stay home if they're diagnosed with the virus or feeling sick, need to care for others, or feeling uncomfortable working. Doug McMillon: (03:41) And globally this year we paid or announced $1.6 billion in My Share and special cash bonuses to support our associates financially. After supporting our associates, our next priority is serving our customers. Consistent with our purpose, we remain committed to EDLP ensuring the lowest prices on a basket of goods. During the second quarter, our customers were spending so much more time at home that we experienced strong sales in categories like TVs, computing, and connected home. Customers also took advantage of time for outdoor entertainment and sports, which led to strength in those categories. Doug McMillon: (04:18) With significant operating restrictions for restaurants across the country, families continue to prepare more meals at home and our business has benefited from that trend. As you would expect, there continues to be extremely high demand for disinfectants, cleaning supplies, and paper goods. At times, we saw a return of stock-up behaviors in certain food and consumable categories and specific geographies where hotspots occurred. While there's volatility in the supply chain levels, we're starting to see some categories recover in terms of in-stock. Doug McMillon: (04:49) From a seasonal standpoint, back to school is negatively impacted by the health crisis in terms of timing and demand. We've been thoughtful in our approach, both in stores and online, and we believe we're well positioned, whether students or teachers work from classrooms or their homes. The third priority for us has been to help others in the communities we serve. I'm proud of the many ways we're supporting communities, including our support for food banks. This quarter, through our Fight Hunger Spark Change Campaign and food donation program, we helped provide access to an estimated 300 million meals for people in need. Doug McMillon: (05:23) We're also continuing our support for communities through COVID-19 testing sites, with more than 420 across 33 States. Communities across America have become rightly focused on racial equity injustice, and so are we. Our work starts inside the company with our diversity inclusion efforts. In addition, we've also established a team to look for places where we can put our core business and the size of our business to work, to influence our nation's financial, healthcare, education, and criminal justice systems for good. Doug McMillon: (05:53) In addition, Walmart and the Walmart foundation have launched a center for racial equity, committing $100 million to fund philanthropic initiatives that compliment the company's efforts to shape the four systems I just mentioned. Even during these crisis, the team is managing our business well and executing our strategy to build omni-channel solutions globally. In the US we continue to expand pickup and delivery services, including express delivery with customers receiving their orders in well under two hours. In Mexico, we've now launched same day delivery from 70% of Sam's clubs. Doug McMillon: (06:27) And in India, we've launched Flipkart wholesale, a business-to-business solution that will leverage our omni-channel capabilities to better serve [inaudible 00:06:35] and other small businesses as our cash and carry business joins Flipkart. There's been a lot of buzz recently about membership at Walmart. We've been testing membership with delivery unlimited subscription since late last year, that customer offer was limited to a grocery and consumables delivery service as the reason to sign up. Doug McMillon: (06:56) Since that launch, we've proven to ourselves that we can pick and deliver a broad set of categories across the super center, not just food and consumables, but a wide assortment of general merchandise. We think that assortment breadth, and our ability to deliver with speed nationally, combined with a few other benefits for customers will result in a compelling proposition. So we've been moving towards a new membership launch. We'll share more about that membership and timing when it's appropriate. Doug McMillon: (07:24) As it relates to our Q2 performance, I'll begin with the Walmart US segment. Comp sales were strong again this quarter at 9.3%, excluding fuel. There were several tailwinds effecting our Q2 performance, including government stimulus, more people eating at home, a focus by customers on entertaining themselves at home, and investing in their homes and yards. Doug McMillon: (07:46) We also had some headwinds including reduced store hours and out of stocks. As the benefits from stimulus waned towards the end of the quarter, we saw comp sales settle into a more normal range. We're pleased with the progress we're making on Walmart.com. We had really strong sales growth and significantly reduced losses. The tailwinds we're experiencing are accelerating our progress to build a healthier eCommerce business as we add new brands, improve product mix, grow the marketplace, and achieve more fixed cost leverage. The stores and online merchant teams are now integrated, and we believe we'll benefit from that change going forward. Doug McMillon: (08:24) The improvements in contribution profit and reduced operating losses are really good to see. We've made several structural changes within Walmart US during the quarter, as we continue on our path to transform into an omni-channel organization. These changes were made to increase innovation, speed and productivity. This is obviously a difficult time for these associates to experience changes like this, so we're providing additional financial support and time to look for another role, along with other forms of support, to make that easier than it would otherwise be. Doug McMillon: (08:55) Turning to Sam's club, where the team delivered comps of 17.2%, excluding fuel and tobacco, and grew membership income 7.8%. We saw improvements in member count, renewal rates, and plus member penetration. The popularity of scanning and go is accelerating, which is great to see. The membership value proposition is strong and the team is executing well. Walmart international sales increased 1.6% in constant currency, and seven of 10 markets had positive comp sales. The team delivered good top line results, given we faced significant headwinds from currency and the government mandated closure of Flipkart for about half the quarter, as well as parts of Africa and central America for portions of the quarter. Doug McMillon: (09:39) Canada, China, and Mexico led the way as customers choose one, stop shopping and omni-channel solutions. In India, Flipkart re-opened in mid May. After which we saw GMV exceeding pre COVID-19 levels, excluding fuel. As this performance demonstrated the resilience of the business with growth in a challenging period profit for international was also better than we expected when you removed the effects of FX and a discreet tax item. Doug McMillon: (10:08) I'll close today. Once again, by thanking our associates for their incredible work. Our integrated omni-channel offering continues to resonate with customers around the globe. It's positioned the company well during this crisis and we remain convinced it'll be the winning strategy going forward. I'd also like to mention that we'll be releasing our ESG report next week. I encourage all of you to spend time with the report to better understand the incredible work our team is doing in this space. I wish you and your family's good house, and I'll now turn it over to Brett. Brett Biggs: (10:38) Thanks Doug. Good morning, everybody. Let me start by thanking our associates for their fantastic work serving customers during this unusual time. Every day, we're navigating through a broad set of challenges while positioning the company to win. I'm so proud of how the team has quickly adapted to new ways of working, and respond to the changing needs of our customers. Brett Biggs: (10:58) The health crisis continued to affect shopping behavior in the second quarter with trip consolidation and larger basket sizes in stores, as well as channel shifts toward eCommerce. Our results are a reminder that customers want multiple ways to shop with us, and we're innovating and leveraging our unique assets to provide solutions for them. Our financial position is very strong and we remain laser focused on operating efficiency, even as we have incremental COVID related costs to support associates and customers. We've maintained our strong cost culture and took recent steps to further streamline the organization to better support our US omni-channel strategy. Brett Biggs: (11:36) So let's get the Q2 results. Total constant currency revenue growth was strong, of 7.5%, to more than $140 billion despite operating limitations in some markets early in the quarter. Walmart US comp sales increased more than 9%, international net sales grew nearly 2% in constant currency, and in Sam's Club grew comp sales more than 17%, excluding fuel and tobacco. Brett Biggs: (11:58) Gross profit margin was strong at each segment and increased 63 basis points for the total company, benefited by strong sales and higher margin general merchandise categories, which in the US is aided by government stimulus, lower markdowns and better fuel margins. This is partially offset by the carry over price investments from last year. SGNA was negatively affected by approximately $1.5 billion in incremental COVID related costs, about 75% of which related to associate bonuses and expanded benefits; including the recently announced third special bonus of the year. The quarter was also impacted by US business restructuring costs of about $380 million into discrete tax item. Brett Biggs: (12:39) In total, these costs negatively affected expense leverage by about 130 basis points. And as a result, expenses de-leveraged by 42 basis points. Adjusted operating income on a constant currency basis was up more than 18%, and adjusted EPS increases about 23%, to $1.56, versus last years Q2 adjusted EPS. Currency fluctuations negatively affected EPS by about 2 cents. Brett Biggs: (13:05) Operating cashflow to date year to date increased nearly $8 billion versus last year. Free cash flow is up more than $9 billion with higher sales, lower inventory levels, continued operating discipline, and lower CapEx, some of which is timing. Inventory was down about 7% year on year, mainly due to heightened demand. While we didn't repurchase any shares in the quarter. Our capital allocation strategy is unchanged, and we continue to feel very good about the position of the company. Brett Biggs: (13:33) Now let's discuss the quarterly results for each operating segment. Walmart US had a strong quarter; comp sales excluding fuel increased 9.3%, with eCommerce sales growth of 97%, eCommerce sales are strong throughout the quarter contributing approximately two thirds of the segment comp growth. We saw significant increases in repeat rates, and weekly active digital customers. And we continue to make progress in assortment expansion of seller tools with eCommerce marketplace sales growing triple digits. Brett Biggs: (14:03) For accelerating investments in omni fulfillment solutions, including the continued roll out of same-day pickup and delivery services to more stores, expanding store pickup and delivery slots by nearly 30% since February, and permanently increasing ship from store capabilities from pre-COVID levels. The second quarter started strong as general merchandise categories had accelerating growth, both in store and online as government stimulus funds were dispersed. Brett Biggs: (14:29) As family spent more time at home, we saw strong increases in categories like home, sporting goods, landscape and electronics. Grocery sales had another strong quarter, including robust growth in Fresh. As stimulus funds taper off toward the end of the quarter, sales started to normalized, but July comp still grew more than 4%. trip consolidation continued throughout the quarter resulting in an average ticket increase of about 27%, and a transaction decrease of about 14%. gross profit rate was strong at 42 basis points due to increase sales and higher margin general merchandise categories and fewer markdowns. Doug: (15:02) ... increased sales and higher margin general merchandise categories and fewer markdowns. We also saw improvements in eCommerce margin rates, reflecting continued progress on product mix and faster growth of marketplace sales. The carry over of last year with price investment and the temporary closures of our auto care centers and vision centers negatively effected the margin rate. Doug: (15:20) The approximate 1.2 billion incremental COVID related costs, as well as the restructuring costs negatively effected expense leverage by about 170 basis points, as a result the US segment de-leveraged 41 basis points. However, underlying productivity is strong, both in physical stores and eCommerce operations. Adjusted operating income was up almost 17% for the quarter, aided by significantly lower eCommerce losses. Doug: (15:45) Inventory declined about 4.6% reflecting strong sales and higher than normal out of some categories. While we continue to make progress in our in stock position, there are some specific areas that are still challenging. Overall, we're in a good position. As noted throughout the market, the back to school season is off to a slower start than usual, given the uncertainty around the timing of students physically returning to school. As a result, we expect the season to be choppy and come later than normal. Items like laptops, tablets, and home office furniture are performing well, while others, like basic school supplies, backpacks, and apparel are understandably soft. Despite the slow start to back to school, overall US [inaudible 00:16:24] fairly rates to start the quarter. Doug: (16:27) Internationals results are better than anticipated coming into the quarter. Despite operational limitations in several markets due to the crisis, including the government mandated closure of Flipkart, net sales increased 1.6% in constant currency, including nearly 40% growth in eCommerce. Seven of 10 markets posted positive comp sales. Sales in Canada and China were exceptionally strong and Mexico showed solid results. Doug: (16:51) Excluding fuel, [inaudible 00:16:52] comps were also solid with online grocery growing faster than the market. Customers are responding favorably to expanded eCommerce and omnichannel offerings driving triple digit eCommerce sales growth in most of these markets year over year. We faced extensive government mandated closures in markets like India, South Africa, and Central America, particularly early in the quarter. Flipkart operations were closed for around half the quarter, but since reopening in mid May, GMV is exceeding [inaudible 00:17:18] levels. Doug: (17:19) In Africa, about one fourth of stores were closed for a portion of the quarter and certain high volume sells items were restricted. Doug: (17:25) In the UK, decreases in travel pressured fuel sales. Currency fluctuations where a significant headwind to sales at approximately $2.4 billion during the quarter. International operating income declined about 9% on a reported basis, but increased 11 and a half percent on an adjusted constant currency basis, excluding the previously announced discrete tax item. Doug: (17:47) During these challenging times, we continued to execute the strategy of building strong local businesses powered by Walmart and announced additional investments in China and India focused on positioning the portfolio for growth. For example, we're excited about the launch of Flipkart Wholesale, creating a B2B marketplace to help small businesses in India source directly from manufacturers and producers. We'll also continue to evaluate opportunities to strengthen our position across the portfolio. Doug: (18:13) Sam's Club had another terrific quarter with strong comp sales growth of 17.2%, excluding fuel in tobacco. With positive contributions from both increased transactions and average ticket. ECommerce sales grew 39%, with strong demand for direct to home delivery. Doug: (18:28) The business showed broad strength across categories including food consumables, which were particularly strong, and our Members Mark brand also performed well. The sales strength reflect the strong member growth and benefits from government stimulus. Doug: (18:42) We're pleased with the strong membership trends at Sam's. Membership income grew 7.8% in Q2, the best quarterly performance in more than five years. New member signups and renewal rates were very strong, and Plus member penetration was at a historically high level. Doug: (18:57) Sam's also incurred incremental COVID related expenses. However, the approximate $100 million of additional cost was more than offset by strong gross margins, which resulted in Sam's operating income increasing more than 24%, excluding fuel. Doug: (19:12) Consistent with our first quarter release, we aren't providing FY21 financial guidance due to continued uncertainty around key external variables related to the health crisis and the potential impact on our business and the global economy. The health crisis has created tailwind, both toe and head winds to our business. Doug: (19:28) In Q2 We saw stronger than expected sales, due in large part to stock up buying a stimulus spending. But the duration extent of future government stimulus remains uncertain. In Q2, stimulus spending improved our sales mix and, in turn, gross margin and operating profit. Doug: (19:43) We've also managed the greater operational complexities and incurred incremental costs to ensure associate and customer safety. Some of those will continue. Currency headwinds also remain quite strong. If rates stay where they are today, the top line impact would be more than $1.1 billion in the third quarter. Despite the various challenges, our strong performance throughout the dynamic and challenging first half of the year reinforces the strength of this business and the omnichannel strategy we're leading Walmart's financial position remains excellent, allowing us to position the company for success now and in the future. Thank you for your interest in Walmart. We would be happy to take your questions. Moderator : (20:25) Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad and a confirmation tone will indicate your line in the question queue. You may press star two if you would like to remove your question from the queue. [inaudible 00:20:41] speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Moderator : (20:47) [inaudible 00:20:47] questions from as many participants as possible we ask you please limit yourself to one question. Our first question is coming from the line of Karen Short with Barclays. Karen Short: (20:57) Hi, thanks very much. I want to focus on eCom growth a little bit. Wondering first, if you could just give an update on the customer mix and where you think you're gaining share. I did ask this last quarter, but I'm obviously very interested in that in terms of the demographics and then wanted to get a little more granularity on the attachment rates on general merchandise, given the consolidation of the app. The last part of that was if you could give any more color on marketplace. Obviously you called out triple digit growth on that. Maybe anything you could provide in terms of number of sellers, number of SKUs, or any more granularity would be helpful. John Bernie: (21:38) Hey, Karen, this is John Bernie. Good morning. Thanks for the question. As we said, eCom is up 97% in the quarter. We're excited by new customers that have joined and retention rates. I think we've also been pleased to see the improvement in mix and categories that are selling online, which ties a bit to your second question. John Bernie: (21:58) We've had stronger growth rates in both home and apparel online, which also home has been strong in the stores as customers moved into their homes in a set of offices, and now beginning to have school from home, those have all been strong businesses. John Bernie: (22:13) The third point that you made, marketplace, which is a very important part of the strategy, also performed well in the quarter. In addition to marketplace, we've been opening up a new supplier, or seller tools I should say, and including which is now a small business, but our Walmart fulfillment service business is up and running and we're excited by the prospect that it brings us as well. John Bernie: (22:36) Again, the team did a nice job in the quarter, reacting to customer changes and trends. More and more customers are buying from Walmart online. And we're happy to see the new customer segments and the retention rates. Moderator : (22:51) The next question comes from the line of Paul Trussell with Deutsche Bank. Paul Trussell: (22:57) Thank you. Good morning. Congrats on a strong second quarter. Bret, you spoke to back to school shopping being negatively impacted by all that's going on, the comps in a normal range. Just any additional color you can provide on what you're seeing is to date, or at least maybe any other puts and takes that we should be factoring in as we think about how to model the third quarter? Doug, most Americans shop at Walmart in some form each year. The company's always had this everyday low price model, so maybe just help us understand, big picture, what a membership program can achieve for with the consumer, as well as for the company. Thank you. Bret: (23:49) Thanks Paul. This is Bret. I'll start. As we pointed out, we're not giving for the rest of the year. As you can imagine, with the various puts and takes that we've seen for the last five months, that certainly led to that decision. There's things that, in the second quarter, some things that helped the business, certainly stimulus is one of those and some things that were headwinds to the business. We know we're going to continue to see headwinds and tailwinds in Q3 and the back half of the year. A. Bret: (24:21) The balance of those and the timing of those makes it really challenging to try to put guidance out for a longer period of time. That's why we didn't do that. As we talked about, back to the schools, it's just slower than would normally be, but that's understandable given what's going on with students and how quickly they'll get back into classrooms. We're just not talking much past that, just given everything that's going on right now. Doug: (24:51) I'll just chime in on back to school and say that it's just one component of the quarter and we'll have to sort out how customers want to shop as we go. But we think our inventory is well positioned and we'll just react location by location. I don't think we've got a lot of liability exposure there. The sales exposure will be mixed as we go through the quarter and manage other parts of our business. Doug: (25:17) As it relates to the question about membership, Paul, I think from a customer point of view, they'll continue to get everyday low price, they'll continue to get the broad assortment that we sell in the stores and increasing assortment online. But the reason that they would want a membership is because of the increased levels of service that we can provide. It starts out with the thread being about pick up and delivery. If you want delivery from Walmart frequently, it's just more efficient for the customer to buy it in bulk, and that takes the form of an annual membership. Doug: (25:48) We'll add some things to it beyond just delivery, so that it's really more of a membership and a relationship building. Repeat is going to be an important aspect for the company to focus on. We'll also get the benefits of data and learn how to serve customers more effectively in time as that membership grows. Doug: (26:06) I think, in a nutshell, for the customer, it relates to experience. Then we keep talking about how omnichannel is a winning strategy and what we really mean by that, I think, is the customer is ultimately in charge. We are going to be flexible. We're going to have multiple ways to serve them. Those families will decide, in that moment, how they want to shop. Sometimes it'll be in the store and sometimes they'll do the pick up. Sometimes they'll do delivery. Many of them will buy a membership, and when they do, they'll get benefits from that. We'll make sure we manage that in a way where we're still able to keep our shelf prices low and offer EDLP to customers that really need that value and are focused on opening price points. We'll manage the P&L in a way that prevents any kind of risk for them. Moderator : (26:54) Next question is from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: (26:59) Good morning. I have two topics. My first, also on membership, and the second on Flipkart. on terms of membership, Doug, I don't know if there's any more detail you can share in terms of how you plan to differentiate the offer. You mentioned that you're going to add some features. Is there any indication of interest from work that you've done, and then how it fits into profitable growth? If that relationship can be maintained. Simeon Gutman: (27:24) On the second topic of Flipkart, there was a valuation on the quarter. I think it was a little less than what the market was expecting. Can you talk about the performance of it and what's the proper read that we should take away from the latest round of financing? Doug: (27:37) This is Doug, Simeon, I'll take Flipkart first, and then John, you can chime in on membership more. Doug: (27:42) As it relates to Flipkart, Simeon, I think we're really pleased with how this whole thing has gone since we made the investment. The teams managed this environment, the COVID-19 environment, in a really effective way. It was nice to see once the government restrictions started to get lifted, how the volume came back. Doug: (28:03) We're staying close to the decisions that they're making and excited about the strategy going forward and with the investment, just wanting to make sure that they've got enough room, enough cash to operate. This is a time when there's so much of an opportunity that the size of the prize in India is significant. We want to make sure that we're on our front foot being aggressive. We're not really getting hung up on the valuation in the short term, over time I think everybody will understand just how valuable that businesses in India is, whether it's the Flipkart portion or the phone pay portion. John: (28:36) Simeon, first good morning. Thanks for the question on membership. It's important that we first acknowledge our strength in the entire businesses offering a wide assortment of everyday low price products across multiple channels. That won't change. What we're thinking through with membership, as Doug said, is how to remove friction from customer's lives and make it easier to access those assortments at everyday low prices throughout the multiple channels. John: (29:07) We don't have too much else to offer this morning, other than to say that in addition to the delivery component, which we've tested now since last year with a program called delivery unlimited, we're confident that that's a great base of an offer and we'll have more to offer when we're ready to come out and talk about it. Moderator : (29:28) Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: (29:33) Good morning. Thanks a lot for taking my question. Recognizing that you have an everyday low price strategy and some of your competitors within the grocery category have a high lower promotional strategy and the promotions were less intense for them this quarter, you're grocery sales were up high single digits, fresh was probably better, but a lot of your competitors reported mid-teens or better comps during the period. Do you think you lost market share in this important category? Micheal : (30:02) You lost market share in this important category on a unit basis. And why was that the case? John: (30:09) Hey, Michael. It's John. First, I'd say we were high single digits for the quarter. And that equates to sales growth of about three billion dollars. And, for the year, we're somewhere around just over eight billion dollars of sales growth in grocery for the year. So, pretty big dollar gains for the year. John: (30:28) We did keep our prices at the levels they were throughout the entire quarter. So, being an everyday low price retailer, we have seen average unit retails that have resulted in wide price gaps and even wider price gaps in the second quarter than we saw in the first quarter. So, that's probably an important point determining the two differences. John: (30:48) Then a couple of things that we're focused on that were in headwinds that are ours to deal with. And one is we've had a significant level of in-stock issues that happened late in the first quarter and early in the second quarter. But we do think that our inventory levels are now normalizing. We do still have pockets of in-stock issues that are both related to the supply chain and then other factors that have been caused by the pandemic. John: (31:13) Then the last thing that we're doing, we now have 4,100 stores that have shifted from 8:30 P.M. closing to 10:00 P.M. closing. And we do think that was a factor, especially during the summer months as the days got later. But, if you look at the entire business, the real positive is, in total, we believe Walmart did gain share. General merchandise was very strong and looked like the share gains there did make up for anything that could have been lost in food. But the data, it's a lot to work through. And we'll be reacting to this situation as time goes. And we'll be able to tell a little bit farther out how this really turns out. John: (31:48) But overall just really proud of the way the team has responded to such an intense change in the way people have been shopping. We had big sale spikes late in Q1 and early Q2. And the team have done a great job reacting to that. Speaker 1: (32:01) Our next question comes from the line of Kate McShane of Goldman Sachs. Kate McShane: (32:10) Hi. Thanks. Good morning. I wondered if we could get a little bit more detail behind your commentary around the E-commerce losses improving during the quarter. Was the biggest driver of that mixed driven? And what other improvements did you see within those losses that you would expect to continue into the second half of this year? John: (32:33) Hey, Kate. This is John. There are a few things that affected the business. First, the sales growth is always helpful because you gain leverage on fixed cost anytime you have growth rates of really any meaningful percentage, but 97%, effectively doubling the business helps with leverage. John: (32:48) The second thing that has helped is what we call contributed profit rates, CP. Our CP benefits have come from a number of factors, one factor being the mix of sales. We've been in home and apparel than we are in the rest of the business, which are higher CP categories. The second, our marketplace business has been strong, which is also a creative category in relation to the rest of the business. John: (33:10) And then, the third thing, we're excited about the way of working. The two merchandise and supply chain teams have come together. And now, we have merchants and people in supply chain who are responsible for businesses across all of the channels. So, Walmart as a business should be able to gain continued leverage from those. But leveraging affixed, improved CP rates, and CP rates coming from both leverage and from mix all contributed to lower losses in the quarter. Speaker 1: (33:35) Our next question is from the line of Seth Sigman with [inaudible 00:03:42]. Seth Sigman: (33:44) Hey, guys. Good morning. Congrats on the quarter. I do want to follow up on online business. Two parts here. One, I think somebody mentioned repeat rates. If you could just elaborate on that, whether you're seeing that more in online grocery, or general merchandise, or possibly both online, just let's get a little more color on that. And then, the second part of it around the profitability, the improvement in losses you just talked about, is there anything that you mentioned there that's unique to this quarter, whether it's the volume, or the mix, or the marketplace growth? Or should we be thinking about for this trend of improving losses to continue? Thank you. John: (34:19) Yep. Hey, Seth. A few things on repeat rates, first, online grocery you asked about we've traditionally had a high repeat rate and a high number of customers who are loyal in the channel. And that hasn't changed. And the ended the first quarter we had to reduce the number of slots due to inventory level. And then, over the second quarter, we got slots, not only back to where they were, but pickup slots up about 30%. So, that's a strong part of the business and continues to grow. Online in your very traditional, direct to home orders we have new customers and we have customers who are buying more. So, there are positives there. John: (34:55) As far as if there's anything related to the second quarter that's an anomaly, I think it's too early to tell. As we said, we're not able to forecast or provide guidance beyond what has already happened in second quarter. Certainly strong businesses and home where people were moving home and building home offices and buying office equipment. Yet to be determined of how long that trend could continue, but there are other areas within the econ business that are also strong. And everywhere that we see headwinds we also see tailwinds. So, we'll just have to sort those out over the next couple of quarters. Speaker 1: (35:31) Next question is from the line of Peter Benedict with Baird. Peter Benedict: (35:36) Hey, guys. Thanks for taking the question. Just wondering if you could maybe expand a little bit on the healthcare strategy, kind of where that sits right now is. I know there's been some changes. Just maybe help us understand where you are today and where you're taking that effort. Thanks. John: (35:53) Hey, Peter. This is John. We're really committed to healthcare. I don't think we'd have any change in strategy that we would talk about at this point other than to say that we were appreciative of the work that Sean did while he was here at Walmart. He was here about two years and he wanted to get some clinics open and get us started, which he did and did a great job. We now have clinics in Georgia, Arkansas, moving into the Florida market. And then, later in the year, we've also announced a couple of clinics that will go into Chicago. So, for Americans who are looking for access to high quality care at an affordable, very transparent price, Walmart will be a great solution for consumers. And we remain committed to the healthcare space. Doug: (36:35) And, Peter, this is Doug. I'll just add that we recently opened another clinic not far from Bentonville and Elm Springs. And it's a smaller clinic than the one that some of you have seen in Dallas, Georgia. And I think it's an example of us trying to figure out how many sizes we need, what the square footage needs to be, the equipment investment, all those kinds of things. So, we're playing around with it, as you would expect. And it's been interesting to watch how customers are interacting with that experience during the COVID-19 environment. The team is doing a great job. And the medical doctor and the other professionals in the clinic of keeping people safe. And demand is still strong in an environment where people are not necessarily taking advantage of a lot of preventative care. So, it's really, I think, interesting and exciting for us to try and figure this out. And, even during this COVID-19 period of time, we're learning and figuring it out. Speaker 1: (37:40) The next question is from the line of Bob Drbul with Guggenheim. Bob Drbul: (37:45) Good morning. I guess just you've given some commentary around back to school being a little slow right now. Just wondering if you could maybe take a step back and give us some thoughts on where you think the consumer is, where you think the economy is? And I guess most importantly, when you think about the holiday season, you have to plan a little early. If you might give us some, excuse me, some color about the holiday season and sort of how you're really thinking about it at this point in time. Thanks. Doug: (38:16) Bob, I'll go first. This is Doug. It's obvious to say this, but there's just a lot of uncertainty right now and so much variance in how customers are feeling about their situation. And this decision that the government's got to make about phase four investments is an important one. And I think it's really important as it relates to small business. And this economy and this country are driven so much by small and medium sized businesses that we want to see something happen there that'll help support those folks. I think that the larger companies are getting things sorted out and the government is paying attention to the larger companies that need some sort of financial support. But it's that small business group that, in particular, I think we all need to keep our eye on and will probably determine just what this economy looks like on the other side of the phase four stimulus. John: (39:08) And I think, Bob, I'd also add definitely we see a number of consumers who are feeling better about their personal finances, but the sentiment is a little lower than what it would have been a year ago. And then, we are also thinking about the number of consumers who are thinking about job security and other opportunities. I think, in general, people perceive they're spending more money on food, despite eating out less. And so, I think, with the consumer, we'll be thoughtful about the way we plan the rest of the year. And we'll be very adaptive and react to changes in the trends that we see from our shoppers. Speaker 1: (39:50) Our next question is coming from the line of Greg Melich with Evercore ISI. Greg Melich: (39:53) Hi. Thanks, guys. One key question on the costs. I think that, in the first quarter, you said it was 900 million of incremental Covid costs. Is that right number for this quarter the 1.2? And anything you could give us in terms of the breakdown of that on sanitation versus labor costs and what you think might persist into the third quarter and fourth quarter. Thanks. John: (40:20) Yeah. Thanks, Greg. So, the 900 million we had on the first quarter would be equivalent to the 1.5 million in the second quarter... or billion. Sorry. The 1. 2 billion was just Walmart U.S. only. About 75% of those costs are related to bonuses, payroll benefits, and the like for associates. So, it was about quarter of that that's related to cleaning and sanitation and other things inside the store. John: (40:47) There's certainly going to be some part of that that continues the rest of the year and, potentially, I would think, into next year as well. So, our ability to continue to be thoughtful about it, but safety of our customers, our associates are just number one on our mind as we take on those costs. So, it's obviously something that we're going to do going forward. John: (41:14) The bonus, the number in total was a little higher than last quarter. The second quarter, or the last bonus, the third bonus that we announced was accrued for in the second quarter. So, that got picked up. So, that would be one additional bonus versus what you would have seen in Q1. And that's the main difference. Speaker 1: (41:34) Thank you. Our next question comes from the line of Oliver Chen with Cowen. Oliver Chen: (41:39) Hi. Thank you. All the momentum and curbside, would love your thoughts and what you see ahead with automation and profitability. And also, as you look at your customer insights and data, what are your thoughts about the customer type that would use curbside versus delivery, and how that may manifest over time? John: (42:01) Hey, Oliver. The question on the automation is where I'll start with. First, we have been working on a couple of pilots where we're able to... I'd say automate, but really increase the amount of picks we're able to deliver from a store. We've got a store in New Hampshire with a system called Alert that does our grocery picking and assists with everything right up to dispensing. And we'll be expanding that pilot into Texas over the next few months. So, I think mostly we're optimistic about the number of orders we'll be able to fill from these sorts of installation going forward. John: (42:40) And then, as far as the customer who is picking up today and whether they're interested in delivery or not, I think what we learned from delivery unlimited is that there are a wide range of people who appreciate delivery and are looking for ways to be able to buy delivery and pay for it in a way, as Doug said, that's in bulk. So, I think it's largely the same customer. Now, we'll of course learn more as time goes on. But Americans all over the country are looking for convenience. And, with Walmart's everyday low price plus a convenient delivery fee, we see a lot of customers who are interested in this type of service. Doug: (43:14) It's also been nice to see the Sam's Club team get curbside rolled out so quickly. And I think, when small business comes back online, we're well suited to serve bigger transactions from them that currently, with restaurants being closed, aren't happening as much as they will after the pandemic is over. Speaker 1: (43:29) Our next question comes from the line of Kelly Bania with BMO Capital. Kelly Bania: (43:40) Hi. Good morning. Thanks for taking our questions. Just wanted to ask, with so much discussion about membership and the potential there with Walmart, with delivery unlimited or down the road with what may evolve into Walmart Plus, I was just surprised to see the headlines about the test with Instacart. So, I was wondering if you could just help elaborate on the thought process there. John: (44:06) Yes. Hi, Kelly. Good morning. We are excited about the prospect of customers being able to access products and prices at Walmart any way they choose, and including delivery, as you said. And then, the specific question on Instacart, it is a test in California and then one market in Oklahoma. And what we're hoping to learn is does a combination of those to reinforce the value proposition that Walmart has to offer? Certainly it's early. It's only been about a week. So, really no read or anything to report on at this point. But we're looking forward to learning about the data as it comes in. Speaker 1: (44:42) Our next question is from the line of Edward Kelly with Wells Fargo. Edward Kelly: (44:51) Yeah. Hi. Good morning. Just a few mostly kind of followups. Just first on July, any color on the gross margin performance in July? And then, as it relates to holiday, I'm just kind of curious- Edward: (45:03) ... in July. And then as it relates to holiday, I'm just curious early thoughts on the current environment, what we should expect, consumer behavior. And how are you preparing to win in a shopping environment that probably will be different than anything we've seen historically? John: (45:17) Hey, Edward. On the margin, we don't break out by month, but across the quarter the results are of course in the really stronger mix and then fewer markdowns as a result of higher sell throughs and general merchandise. And then as far as the holiday season, it's August now, and we're in the midst of the beginning of back to school. So we're carefully thinking through each of the different holidays and how they may change as a result of what's happening. But even with schools, we're still learning day to day, which schools are open or planning to open. And I think every one of the holidays that will be experienced over the next couple of months, we'll have to decide as we get closer. So the team's really working on plans and contingency plans and making sure that we are ready for the customer any way they want to shop. They've shifted purchasing online. You can see that in our online results of 97%. And with the growth of pickup, we'll make sure that we're ready with both of these types of fulfillment options, in addition to store shopping. So however the customer wants to shop, we'll be ready. Speaker 2: (46:23) Our next question comes from the line of Scott Mushkin with R5 Capital. Scott Mushkin: (46:28) Hey, guys. Thanks for taking my question. Actually, I did want to follow up on something that came up earlier in the call on the grocery business. I think the second quarter, I know food was up high single digits, but the overall grocery business was up mid single digits. And I know you guys referenced some out of stock issues, but that was a a challenge across the industry. So if we take a step back, it looks like a lot of your competitors ran in the high teens. And so that's a pretty big difference. And I was wondering if you could maybe revisit that again and say what you think drove that big delta between you and some of your grocery competitors. John: (47:09) Yeah, Scott, this is John again. As I said earlier, we were a high single digits in the food category. Stronger comps in general merchandise. And the growth in the quarter in food was about $3 billion in sales. And what we're really focused on is the change in the number of stock up trips, which you've had a pretty big increase in the average ticket. And then internally, what we're working through, as I said earlier, we've now got over 4,000 of our stores back open until 10:00 PM. John: (47:47) We think that had an impact. And then again, early in the quarter, coming out of the first quarter, we dealt with a number of issues with out of stocks. And Walmart's been improving over the year, its ability to run a very lean and efficient supply chain. And with the spikes in sales late in the first quarter, early in the second quarter, those had a disproportionate effect on our business because of out of stocks. But for the most part, I'm feeling much better about normalized inventory levels and our recovery. And now, we'll just work through different categories and issues we have with the supply chain, not been able to fill at the right time, but in general, the inventory levels are coming back into a more normalized position. Speaker 2: (48:33) The next question comes from the line of Chuck Grom with Gordon Hasket. Chuck Grom: (48:36) Okay. Thanks a lot. Can you guys just unpack the ticket versus traffic dynamic throughout the quarter? And I guess I'm curious was the slow down in July a mostly ticket. And then when you look ahead to 2021, how you're thinking about lapping these great results. And then, the final question would be if you guys could elaborate on Walmart fulfillment services? Thanks John: (49:00) Yeah. More to Chuck, the question on lapping next year, we're working on the month of August. Speaker 3: (49:11) We're all smiling at each other. Chuck, if you could please tell us what's going to happen in 2021, we would appreciate it. John: (49:16) That's right. That's right. And so, we're just constantly reevaluating, evaluating how to dynamically make sure that we are staying ahead of where the customer is and what the customer needs from us. Back to you, what was your first question again? Traffic tickets. Again, we don't break up the month by the quarter, but you saw the quarter number down 14 and then stock up trips are up. So customers are coming less often, but they're buying a lot more while they're there. And the combination of those two factors are what resulted in the 9-3 comp. John: (49:52) So just much bigger baskets. And our pickup business, which is growing faster than the total... Our econ business is growing faster than the total, the pickup businesses are a much larger ticket than what you'd see as a permanent store shopper. And then on the marketplace and fulfillment services, again, early in the journey. We're just a few quarters in, but excited about the leadership and the team and what they're able to do for sellers. And this will... A combination of this along with marketplaces and then other relationships for sellers can easily list the number of items on the site, we think will provide a really valuable place for sellers to come and sell to our customers. So we're excited about the prospect of all these businesses. Doug: (50:35) As it relates to the future, I would just remind everybody that at this point, we've got stores, pickup, delivery, the growing e-commerce fulfillment center, assortment and set of capabilities. And so we're positioned to serve them how they want to be served, how they want to shop. So I think the flexibility to respond to 2021 and beyond is there, and the team's doing a great job of reacting with speed. Doug: (51:01) The [inaudible 00:51:02] inside the company has picked up. We kind of smile when we think about the holiday, because while we have to plan some aspects of the holiday, we're managing near term much more actively than we would in a different environment. So I think we're set up to have a business that will grow at a fast rate and to manage the profitability of it. It was good to see in the last few years, our general merchandise business online grow, and you guys know we've had a lot of brands and a lot of items. Doug: (51:37) And then in this last quarter, it was unique because a lot of people were at home and stimulus checks supported purchasing things for them to use at home to entertain themselves or to fix their home up, so that was unique. But the commonality of it is that the GM business in Walmart is strong. And that contribution percentage, contribution product percentage of eCommerce is an encouraging metric. So I know you're all trying to figure out what the future looks like. I think we're fundamentally well-positioned for it. And then, we'll manage the short term to react to the opportunities that are presented. Speaker 2: (52:16) Thank you. So next question is from the line of Paul [inaudible 00:52:20] with the Citi. Paul: (52:22) Hey thanks. Guys, two questions. One, I'm just curious to hear you talk about the gross margin improvement. How much of that was from simply mixed shift versus maybe if you can talk about which categories or segments did you see gross margin improvement on a year over year basis? And then second, just back to econ profitability, Doug, if e-com runs up about 100% for the rest of the year, what does profitability look like for 2020? Thanks. Doug McMillon: (52:53) A lot better. It's a lot better. We figured that out. Brett was reminding us this morning. If you get more sales, it helps everything else. So we've written that down and we're going to [inaudible 00:53:03]. I think John about through the components to be e-commerce earlier. I won't repeat all the pieces, but there's some big pieces of e-commerce P&L that are moving in the right direction. And they were before. It's just that these tailwinds accelerated that. So we don't know what the economy will look like next year in the US. We'll have to wait and see, but this theme of an omni-channel presence is happening inside the company all over the world. We've focused in this conversation a lot on the US because that's where your questions went. But if you dig into what's happening at [inaudible 00:08:38], look at what Canada is starting to do. It's exciting to see that thematically, this work is looking more and more common. Doug McMillon: (53:44) And of course, we're learning a lot from Flipkart and how they operate. But these conversations about strategy and the e-commerce P&L are increasingly common from country to country. John: (53:57) On gross margin, it was a number of different things, which I mentioned a lot of it was mixed. Certainly general merchandise. As Doug said, we've been very focused on general merchandise business. And it's nice to see that really come to fruition in the second quarter, but also you sell more of your markdowns and markdowns were a big part of this story or lack of markdowns, big part of the story, Q2. Fuel margins were also better. So it's really all three of those things that were in our favor for the quarter. Speaker 2: (54:29) The next question comes from the line of Edward [inaudible 00:54:32] with KeyBank. Edward: (54:33) Hey, thanks for taking the question. I guess really quickly on last mile, I know you've been innovating a lot there. Could you give us an update on your ability to roll out this membership from a Spark perspective? If you see any changes in California, due to AB5? And then second, just as you think about store comms, when some of your nonessential peers opened up, did you see any discernible difference? Thank you. John: (54:57) Edward, on the last mile today, we're delivering from about 2,800 stores with line of sight to expanding more. We've now got express, which is a service that you can expect a delivery in just under two hours. In some cases, even faster than that in around 2,000 stores. So those are a big numbers and getting bigger. So I think the ability for Walmart to expand its delivery service is strong. Spark is a program that we're running, as you're aware, mostly in the center of the country, in the Midwest. And it's doing well and growing. John: (55:36) And we're excited about the innovations that the team are working on in Spark to make this a business platform that's easier for drivers and others. Doug: (55:49) On the last question, Edward, my sense is that the order of things, the order of tailwinds that impacted the business were one, stimulus, two, eating at home, three, being at home, and all the things that you wanted to do to have the indoors and outdoors be more pleasurable. And you weren't spending money if you're a customer on travel and lodging and things like that. So those dollars were available for you to buy things for your home as well. Those are the things that were more impactful tailwinds and whether or not other competitors were open. Speaker 2: (56:24) The next question is from the line of Ben [inaudible 00:56:27] with Stevens. Ben: (56:29) Hey, thanks. Good morning, everybody. I want to ask around working capital and inventory in particular. Obviously, working capital has been a really nice tailwind for the business for the last couple of quarters in light of what inventory and receivables and payables have done. You've built up a pretty sizable cash balance on the balance sheet. Could you help us think about how you think about positioning cash balance going forward, whether it's preparedness for normalization of working capital or otherwise? And then if I think about inventory in particular down 7.5%, where would you have liked that to have been in a normal environment? So we can get a sense of where you guys are positioning that line up. Doug McMillon: (57:13) Ben, this is Doug. [inaudible 00:57:15] will respond to the working capital question. We're laughing here because if you've been in some stores with us in the second quarter, early in the second quarter, we could have used inventory everywhere. I mean, I saw some stores that were remarkably like... It was deeply concerning and the team was obviously scrambling, but we could walk you across the super center and we've felt pressure in e-commerce too. But we were obviously feeling pressure in the beef and pork categories, as was well reported, but we were out of stock on fabrics. We were having challenges in sporting goods. We needed a lot more inventory than what we had during portions of the second order. And we look a lot better today, but we were really a lot lighter than we would have wanted to be. Doug: (57:57) And just an example, Ben, we think about 25 million Americans would go fishing on a regular basis before February. And that number has now moved to 35 million. So 10 million people decided to pick up just this one hobby. And [crosstalk 00:58:13] the bicycles the same way, golf. Doug McMillon: (58:15) I [inaudible 00:58:15] fishing in the store this week. And we're still really light on just basic terminal tackle, hooks, and bombers and stuff like that, that's got a lead time on it different than what this environment requires. John: (58:28) In a working capital, and just how we think about capital allocation in general, it really hasn't changed. We're going to continue to support the [inaudible 00:58:37] CapEx down a little bit, but I would think about that more as timing, just not wanting to interrupt our stores with everything that's going on. We have built up a little more cash than normal. And some of that's just because we're generating more cash than we have in the past, but also it's not about time to have a little bit of extra cash on hand as opportunities come about and just ensuring that we protect the business. But as far as how we think about capital allocation, I wouldn't view any changes in that. Speaker 2: (59:09) Thank you. At this time, we've reached the end of our question and answer session. Now I'll turn the floor back to Doug for closing comments. Doug McMillon: (59:17) We don't have anything else to say other than thanks for paying attention to the company and we appreciate you dialing in today. Thank you. John: (59:24) Thank you. Speaker 2: (59:24) Everyone, this concludes today's conference. You may now disconnect your lines at this time. We thank you for your participation and have a wonderful day.