Walmart WMT Q2 2022 Earnings Call Transcript

Rob: (00:00)
Greetings welcome to Walmart’s fiscal 2022 second quarter earnings call. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, that this conference is being recorded. At this time, I’ll now turn the conference over to Dan Binder with Investor Relations. Dan, you may begin.

Dan Binder: (00:26)
Thank you, Rob. Good morning and welcome to Walmart’s second quarter fiscal 2022 earnings call. I’m joined by members of our executive team, including Doug McMillon, Walmart’s president and CEO, Brett Biggs, executive vice president and chief financial officer, John Furner, president and CEO of Walmart U.S., Judith McKenna, president and CEO of Walmart International and Kat McLay, president and CEO of Sam’s Club.

Dan Binder: (00:57)
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 SCC.

Dan Binder: (01:30)
Please review our press release and accompany 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 McMillan.

Doug McMillon: (01:48)
Good morning and thanks for joining us. Results for the second quarter were strong. Excluding divestitures, we saw revenue growth of 7.6% in constant currency, leveraged expenses, and grew operating income ahead of sales at 24.1% in constant currency.

Recent quarters have demonstrated more than ever that our omni-channel strategy is the right one. As we serve customers, regardless of how they want to shop. There are occasions when people want to visit a store, times when they want to pick up, and times when they want to have it delivered. We’re going to keep innovating and executing to get better at all three as our diversified omni model positions as well to gain share and high-growth markets around the world. I want to thank our associates for the work they did to deliver these results. They continue to step up and serve others in an inspiring way.

Since the pandemic began, we’ve been clear that our priority is the safety of our associates and those who shop with us. We think it’s important that as many people in the U.S. get vaccinated as soon as possible and vaccines be made widely available around the world. As the Delta variant spread, and as the potential for future variants persists, we made the decision to require our U.S. teams above store and club level to become fully vaccinated by October 4th. At the same time, we doubled the cash incentive to get vaccinated for hourly associates in the U.S. to $150. We’re grateful to those associates that are already vaccinated.

I’m confident in the fundamental strength of our business, even as we navigate the benefits from economic stimulus in the U.S. for both this year and last year. We’ve proven our ability to serve customers and challenging environments in across multiple channels, formats and countries. The phrase, serving customers, has traditionally meant one thing at Walmart. But today, it includes serving marketplace sellers, our advertising partners, and those that want to use our fulfillment services or proprietary software.

Our advertising business in the U.S., Walmart Connect, nearly doubled during the quarter versus last year with active advertisers up more than 170%. And this isn’t confined to the U.S., we’re growing ad businesses and Mexico, India, Canada, and most recently, in Chile.

Our fulfillment services for marketplace sellers continues to scale too. We’re on track to hit full year double digit GMV penetration by year end. We also announced during the quarter, that we’ll serve other businesses through certain in-house technologies used for pickup and delivery. Our partnership with Adobe is an example of that. These are a few examples of how we’re using our assets to scale new businesses within the company, and build new streams of revenue and profit.

Our tech and product teams have made a lot of progress modernizing our technology and way of working. We’re starting to see the fruit generated by their efforts as we build innovative solutions that have utility across the enterprise. We’re starting to see more examples of where one idea or one tech product can benefit more of our businesses and faster.

Cloud powered checkout comes to mind. This technology enables seamless experiences for customers and associates like mobile Check Out With Me, Scan & Go and self checkout. More than 30 applications across five countries are leveraging cloud powered checkout for retail transactions. Things like building a 360 view of the customer using machine learning is important for our business in the us, but it’s also important in other markets. That’s why we’re now leveraging this technology in Mexico and in Central America. The Ask Sam app that you’ve heard us talk about, was originally built for Sam’s Club associates. Now the same concept has been adapted for use in super centers. It helps our associates be more productive and better serve customers. I’m really pleased about the work our tech teams are doing to unlock value across the business.

Now let’s move on to segment results. I’ll begin with Walmart U.S. The underlying business is strong, even as we navigate the many effects of the pandemic, as well as government stimulus this year and last year. Customer behaviors changed during the quarter, as people were shopping with us more in-stores than online. As that shift occurred, we gained market share in grocery. Even as e-commerce growth slowed, as we layered on top of tremendous growth last year, we feel good about our two year stacks of comp sales and e-commerce growth. The good news for us is that we can serve them either way. And of course they get to choose.

We also saw nearly triple digit growth in advertising sales, through Walmart Connect and added thousands of new sellers on our eCommerce marketplace during the quarter. I like the progress we’re making with Walmart Fulfillment Services too. We saw 150 basis points, sequential improvement in GMV measured as a percentage of marketplace GMV. Recall earlier this year, we announced a step up in CapEx spending with heavy emphasis on supply chain in the coming years. This will mean additional capacity and automation from our largest fulfillment centers to our stores. These investments are aimed at increasing assortment to broaden our appeal with customers and get product positioned and picked efficiently to deliver it faster.

These investments will increase capacity, help support the growth of Walmart Plus and improve productivity. From our merchandising point of view, we launched new private brands in healthcare and pet categories. The new insulin product we’re offering is a huge win for customers. We call it, ReliOn, and it will save customers up to 75% off the cash price of branded insulin products. Sam’s Club in the U.S. continues to impress. 19 years ago, I got the opportunity to become the chief merchant at Sam’s. And I can confirm there hasn’t been a time, in at least 19 years, when Sam’s has had this much momentum. They also have strengthened so many key metrics, including our most important membership metrics.

We saw that story, continue this quarter with membership income growth of 12.2%. The fourth consecutive quarter of double digit growth. Total membership counts are a record high and overall renewal rates. And those for Plus members continue to be strong. Similar to Clubs in China and Mexico, members are shopping with us in Club for pickup and delivery. Sam’s is an innovation engine for the company, and they’re showing us all what’s possible with technology products like Scan & Go.

For our businesses outside of the U.S., we continue to see strong results and continuing markets through a combination of top-line growth and operating discipline. Excluding divestitures, net sales increased nearly 13% in constant currency. E-commerce continues to play a bigger role for us. Net sales penetration for eCommerce was about 19% in Q2, an increase of more than 700 basis points from last year. We’re strengthening our omni-channel approach in Mexico, China, and Canada. In Mexico, we launched Walmart Pass, a membership model where customers get unlimited same-day delivery from stores, completed the roll out of Scan & Go to all Sam’s Clubs, added new sellers to the marketplace, and grew our online SKU count by 30%.

China had a particularly strong quarter with growth in e-commerce of 75%. during the 618 festival, e-commerce penetration in this market reached 45%. Our business in Canada also had strong e-commerce growth of 41%. We’ve seen an uptick in net promoter scores there as more customers are shopping with us across channels. Our eCommerce marketplace in India, Flipkart, continues to drive strong growth in GMV in line with our high expectations. This team has been busy. They introduced Flipkart Camera, a first of its kind technology at scale for the Indian customer that allows users to view products in their physical environment, expanded their grocery business to over 70 cities, and launched a new commerce platform called Shopsy to help reach the reseller community. They’re also increasing customer stickiness with Flipkart Plus. It’s a tiered program based on spend that helps us drive higher repeat rates. Customers in the program transact more frequently. And we see lower churn than others.

They also recently completed a new funding round, which placed a value on the business of about $38 billion, significantly higher than the valuation when we invested just three years ago. There were large votes of confidence from a strong group of investors, and we’ll put those dollars to work to deliver growth in key areas, such as grocery, fashion and our supply chain.

You should see the common threads and leverage points across our businesses. Increasingly, we think about global businesses and global tech products, rather than thinking or working a country at a time. There’s more of a digital first mindset here. Before I close today, I’d like to remind everyone of the new ESG report we published last month. I encourage you to invest time with each of the briefs to understand our priority issues along with the progress we’re making against our commitments. For example, on emissions, we’ve reduced absolute scopes 1 and 2 greenhouse gas emissions by more than 17% since 2015. Our original target was 18% by 2025. The tremendous progress we’ve made means we’re on track to achieve the updated target. We announced of the 35% reduction by the same date. Additionally, our suppliers report having avoided more than 186 million metric tons of CO2 emissions in 2020 for a cumulative total of more than 416 million metric tons avoided since we started Project Gigaton in 2017.

I also want to take a moment to mention an announcement we made on July 27th regarding the Live Better U education program. Walmart will now pay 100% of college tuition and books for associates as part of our commitment to invest nearly $1 billion over five years in career training and development. This means that roughly 1.5 million full and part-time associates in the U.S. can earn a college degree or learn other skills without the burden of debt. This is a fantastic initiative, giving our associates the opportunity to learn and grow.

I’ll close by thanking our associates for how they serve others and our leadership team for their vision and ability to lead so much positive change so quickly. They built us into a global leader in omni-channel retailing with a model that is uniquely Walmart. Our team is designing with the customer at the center of our flywheel, which is coming together nicely. It’s exciting to imagine how far we can go. And now over to Mr. Biggs.

Brett Biggs: (12:58)
Thanks Doug. Our strong second quarter and the solid start to the third quarter positioned us to deliver great year financial results while making steady progress against our strategic priorities. Our results continue to demonstrate the power of the omni strategy, providing customers with new products, services, and tools.

No matter how customers want to shop, we’re here for them. In some periods in-store shopping will lead the way. And in some, e-commerce we’ll lead the way. While we’re always striving for more in each part of the flywheel, I’m pleased with the overall growth of the business. In Walmart U.S. Comp sales grew 5.2%, and transactions grew more than 6% as customers are returning to the convenience of one-stop in-store shopping. E-commerce sales grew 6% in Q2 and 103% on a two year stack.

We continue to build a very sizeable e-commerce business around the world. In fact, we’re on track to deliver $75 billion in globally commerce sales this year, and on our way to a hundred billion in the near term. We’re also seeing continued strong us markets or gains in grocery, which is a key part of our business. Sam’s Club members are increasingly utilizing curbside pickup for online orders and the adoption of Scan & Go technology in Club is at an all time high. The success of scan and go at Sam’s is one of the reasons we included this as part of the Walmart Plus offering.

An international e-commerce penetration is now at nearly 19% of sales, and we’re rapidly expanding omni-services in key markets, such as Mexico. We’re also rapidly expanding higher margin businesses like advertising, data monetization and e-commerce marketplace, which gives us flexibility to invest aggressively for the future, while growing profit near term.

These businesses are in different places along the maturity curve, but we’re scaling them. For example, Walmart Connect U.S. advertising sales nearly doubled in Q2, and we expect the rapid growth to continue. While businesses like our new FinTech JV are still in a startup phase. We know the opportunities are significant and we’ll share more in the coming quarters.

Now let’s discuss Q2 results. As a reminder, the previously announced international divestiture significantly effect year over year comparisons. So my comments today will focus on the underlying business, excluding the effect of divestitures. In addition, the pandemic continues to create both tailwinds and headwinds for the business. U.S. government stimulus benefited sales this year and last year, but many international markets continue to be negatively affected by COVID and related government operating restrictions. COVID costs remained elevated, but significantly lower than last year.

Total constant currency revenue growth was strong of 7.6% to more than $138 billion with strength across all reporting segments. Walmart U.S. comp sales increased more than 5% in Q2 and more than 14% on a two year stack basis. International sales growth was strong of nearly 13% in constant currency, was strength in India, Mexico, and China, while Sam’s Club comp sales grew more than 10%, excluding fuel and tobacco. Currency benefited sales by about $2.4 billion.

Gross margin rate declined 22 basis points. Reflecting category mix shifts at Sam’s Club, and format mix shifts in international. But Walmart us gross margin increased with favorable mix and strong Walmart Connect results. SG&A expenses leveraged 78 basis points. Reflecting strong sales, lower COVID costs and a 36 basis point benefit from last year’s adjusted items. Partially offset by increased wage investments in the U.S. Adjusted operating income on a constant currency basis was up 15.1%, leading to strong adjusted EPS of $1,78 with a 3 cent benefit from currency.

As anticipated, free cashflow declined about $8 billion, due primarily to inventory increases from improved in stocks and higher CapEx. We repurchased 2.4 billion of stock in Q2 and 5.2 billion year to date, which is up significantly from last year. This is one of the largest quarters for buybacks over the past two years, demonstrating our financial strength and belief in the bank or company.

Now let’s discuss the quarterly results for each segment. Walmart U.S. had another strong quarter. Underlying business trends continue to be solid, including strong grocery market share gains, according to Nielsen, and an acceleration of store traffic. In fact, comp sales increased each month through the quarter, and we’re off to a good start with the back to school season. On top of extraordinarily growth last year, e-commerce sales were up 6% and have more than doubled over the past two years.

Strong sales trends were led by grocery, health and wellness and apparel, as well as reopening categories, such as automotive, travel and party supplies. Grocery sales were up 6%, including the benefit from modest ticket inflation and increased low double digits on a two year stack basis. That results in 2.4 billion of growth in food sales year, over year, and about 5.5 Billion of growth on a two year stack. Strong price positioning, great fresh quality, and improved in stocks, are driving results.

We’re excited about the traction we’re seeing in strategic growth businesses. Walmart Connect sales roughly doubled in Q2 versus last year as we ramp up new advertisers. The Spark Driver platform continues to grow supporting last mile deliveries from stores. Over the past 12 months, we’ve doubled Spark’s coverage to more than 500 cities nationwide. Providing access to more than 20 million households.

Our e-commerce marketplace is also expanding and we expect to make hundreds of thousands of additional items available for fulfillment services this year alone. The Walmart business model is evolving and these newer businesses are contributing to results in a more meaningful way. Walmart U.S. gross profit rate improved 20 basis points with lower markdowns and strong advertising revenue. Partially offset by increased supply chain costs, margins were also helped by administering COVID vaccines this year and lapping last year’s COVID related closures of vision and auto care centers.

We’re continuing to see a bit more cost inflation than normal, but our merchants are working with suppliers and monitoring price gaps to keep prices low while managing margins. Operating income was strong up about 12% on an adjusted basis. Inventory increased 20% due to lapping COVID related inventory effects last year and strong sales growth this year. We continue to monitor industry trends related to transit and port delays. Our merchants continued to take steps to mitigate challenges, including adding extra lead time to orders and chartering vessels specifically for Walmart goods. Out of stocks and certain general merchandise categories are running above normal given strong sales and supply constraints.

International had a great quarter, with strong sales and profit growth. Net sales grew nearly 13% in constant currency, including strengthen India, Mexico, and China. It’s encouraging to see the continued progress for a large and growing e-commerce business in our markets. E-commerce sales grew 86% and penetration accelerated more than 700 basis points to nearly 19% of constant currency sales. Comp sales in Mexico increased 4.7% as the omni-channel strategy continues to accelerate. We’re seeing strong response to the launch of Walmart Connect media in with the number of advertisers and campaigns growing rapidly.

Flipkart had another good quarter sales growth was strong even as they dealt with COVID and we continue to see improving trends and monthly active customers and users. We were excited to take another step to position the Flipkart group for future growth with the completion of a $3.6 billion funding round in July, that included strong representation from external financial investors valuing the business at nearly $38 billion. In Canada, COVID-related government restrictions on the sale of non-essential categories like apparel and general merchandise pressured sales and profitability, but we’re optimistic that we’ll see a more normalized sales and profit environment in the back half.

China comps increased 2.9% and we’re up 11.6% on a two year stack. And e-commerce penetration has now reached more than 25% of sales in China. International operating income was strong, increasing about 28%, reflecting sales strength, the benefit from lapping last year’s discreet tax item, and lower COVID costs. Excluding the discreet, item adjusted operating income increased over 12%.

Sam’s Club delivered excellent results with strong growth in sales membership and profit. Comp sales grew 10.6%, excluding fuel in tobacco, and were up nearly 28% onto your stack basis, including strong e-commerce growth. Membership trends were also strong as we achieved a new high for overall member counts, saw significantly higher renewal rates and delivered record Plus member penetration. Sam’s operating income was up 11.5%.

Now let’s turn to guidance. We’re closely monitoring the evolving COVID impacts around the world. Guidance discussed today as soon as a continued strong us economy with no new significant government stimulus for the remainder of the year all of the guidance discussed excludes the impact of international divestitures.

We now anticipate higher full year sales growth due to the strong first half performance and an expected good back half of the year. With consolidated net sales growth expected to be up six to 7%, versus prior guidance of a low to mid single digit increase. Walmart U.S. comp sales are expected to increase five to 6%, representing about $20 billion of growth.

We anticipate Sam’s Club comps to increase 7.5 to 8.5%, excluding fuel in tobacco, and international constant currency sales growth of seven to 8%. We’re also raising full year guidance for operating income and EPS. On a constant currency basis, we expect full year consolidated, adjusted, operating income to increase 11.5 to 14%, which is a material step up from our prior guidance of high single digit growth. And even more significant increase from our initial guidance in February.

Walmart U.S. adjusted operating income is expected to increase 11 to 13.5%. Full year adjusted EPS is now expected to be in the range of $6.20 to $6.35. This is an increase from prior guidance of low double digit growth, as well as above the initial guidance of flat to up slightly.

The third quarter has started off well as back to school shopping is underway and we expect grocery market share gains to continue. We now anticipate Q3 adjusted EPS in the range of $1.30 to $1.40. With Walmart U.S comp sales, excluding fuel increasing between six and 7%. Again, I’m very pleased with the second quarter results and feel good about the underlying momentum of the business. Thank you for your time and interest this morning, and we’d be happy to take your questions.

Rob: (24:47)
Thank you. At this time, we’ll now 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 is in the question queue. You may press star two if you’d like to remove your question from the queue. For participants using speaker equipment, maybe necessary to pick up your handset before pressing the star key. One moment, please, while we pull up the questions. Thank you. And our first question today comes from the line of Bob Drbul with Guggenheim. Please [inaudible 00:25:18] the question.

Bob Drbul: (25:19)
Hey guys. Good morning. I guess the question that I have is you guys talked about inflation running through. I was just wondering if you could maybe give us some categories that you’re seeing the most pressure, how you’re adjusting with price and what you’re seeing competitively with pricing throughout the business. That would be helpful. Thank you.

John Furner: (25:38)
And Bob, good morning. It’s John. Just a couple of things. First, I want to say thanks to my team for the quarter they just completed and the work they’ve done to position the business so well for now and in the future and our merchant team that’s as broad as the team at Walmart. And unfortunately, they they have a lot of levers that they can use all across the business to make sure our value is right for customers. We’ve seen strengthened food, in general merchandise and other categories.

And as the environments change, the team, they’ve just done an amazing job reacting to so many things over the last 18 months and continue to do so. And they’re been quite deliberate about ensuring that our value remain strong. I’m happy to report that our price value is as strong as it has been throughout the pandemic and above what it was before the pandemic began.

And so the teams doing things like driving strong businesses in apparel and home and general merchandise, in addition to food, help them mix out. Inventory management is another key to this. We finished the quarter up about 20% an inventory which I think we’re well positioned going into the rest of the year based on where the inventory is. And we’ve had strong sell-throughs, the comp sales always help.

So with the cost pressures that we do see across the supply chain, I mean, you heard Brett mentioned that we’re doing things like chartering vessels and securing supplies that we to ensure that we are ready for the third and fourth quarter. And we’ve seen some inflation to low single digits, but the thing I watched that I think is just most important is that, we see our unit share and categories like food growing faster than our dollar share, to ensure that we can position ourselves well in terms of retail value for the customer and play a role in keeping inflation down for the country.

Bob Drbul: (27:26)
Thank you.

Rob: (27:31)
The next question is coming from the line of Simeon Gutman with Morgan Stanley. Please [inaudible 00:27:35] your question.

Walmart WMT Q2 2022 Earnings Call Transcript

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