John David Rainey
Executive Vice President and Chief Financial Officer at Walmart
Thanks, Doug. I'd like to start by thanking our customers, associates and partners for helping us deliver a strong quarter. I will focus my comments on the themes Doug mentioned. First, our sales momentum and share gains; second, operational actions we're taking to improve inventory and supply chain; third, progress we're making to further connect our alternative value streams to our core business; and lastly, our guidance for the balance of the year.
Our Q3 results exceeded our expectations due to sales upside with operating expense leverage across all three business segments. While we're encouraged by our position and our confidence in our business remains high, the macro backdrop remains challenging as persistent inflation is impacting the consumer and our business. As I discuss our results, it's important to note the charges related to the opioid legal settlement framework affect year-over-year comparisons. So my comments regarding Q3 results will focus on the business, excluding adjusted items.
Total constant currency revenue grew 9.8% as our omni-model and strong value proposition continue to resonate with customers during this period of broad inflationary pressures. Each of our segments delivered strong sales results. Walmart U.S. comp sales accelerated sequentially to 8.2% growth with increases in average ticket size as well as transactions. Constant currency sales in Walmart International were strong, up 13.3% led by Flipkart and Walmex, while Sam's Club U.S. delivered its 11 consecutive quarter of double-digit comps with growth of 10.3%, excluding fuel and tobacco.
Our purpose of saving people money has never been more important as inflation remains consistently high. High fuel prices and mid-teens food inflation have forced consumers to manage household budgets more tightly, making frequent trade-offs and biasing spending toward everyday essentials. We continue to manage pricing in a way that preserves our price gaps while gaining market share profitably.
Walmart is well positioned to serve customers and gain greater trip frequency during tougher economic periods, and we have even more tools to do so in this cycle. For example, we've continued to gain grocery market share from households across income demographics, with nearly three quarters of the share gain coming from those exceeding $100,000 in annual income. This quarter, our private brand penetration in food categories increased about 130 basis points, reflecting customers' increased focus on quality products at value prices.
We observed incremental trade down in categories, including proteins, baking goods, baby and dog food. We're working hard to keep prices low and help ease the burden to make customers' lives better. This includes working with vendors to reduce product cost and minimize inflation impacts on final goods' pricing.
Consolidated gross margin rate decreased 89 basis points. More than half of the decline was due to markdowns and sales mix in the U.S. The remaining headwind reflects a $113 million LIFO charge at Sam's Club due to inflation and the timing of sales events in International, including Flipkart's Big Billion Days. Notably, the rate of decline in gross margin improved from 2Q as inventory remediation efforts are progressing.
We've been very targeted in reducing certain categories of inventory in our system and our actions included canceling orders and increasing the level of markdowns. The team has done a really good job addressing our inventory situation, as reflected by Q3 inventory being up only 13% versus last year, including 12.4% growth in Walmart U.S. In aggregate, this level represents a more than 10 percentage point improvement versus the end of Q2.
Notably, about 70% of the year-over-year increase relates to inflation. We feel good about our ability to sell through the majority of this in Q4 and expect continued year-over-year improvement even when including the effects of inflation. We saw stronger expense leverage this quarter as selling, general and administrative expenses leveraged 75 basis points due primarily to higher sales and lower COVID cost. We're focused on what we can control and continue to work down inventory levels and manage general and administrative expenses tightly.
Taking all this together, adjusted operating income on a constant currency basis increased 4.6%. GAAP EPS was a loss of $0.66 but adjusted EPS was $1.50. The difference between adjusted and GAAP EPS reflects a $1.11 impact from unrealized losses on equity investments, primarily JD.com and a $1.05 charge related to the opioid litigation settlement framework. We're pleased that our adjusted EPS outperformed the guidance we provided in August due primarily to better operating expense leverage on higher sales across the business.
Operating cash flow for the year-to-date period decreased $600 million to $15.7 billion primarily due to the timing of certain payments and a decrease in operating income, partially offset by moderated inventory purchases. During the quarter, we returned $4.5 billion to shareholders through dividend and share repurchases. We're committed to continuing to provide strong cash returns to shareholders while still appropriately investing in our business for the long-term. And our Board has just approved a new $20 billion share repurchase authorization that we expect to utilize over the next several years.
Let me briefly reference key highlights by segment. For Walmart U.S., comp sales momentum accelerated in Q3 with a two-year stack of 17.4%, up 570 basis points from Q2. Monthly sales gains were relatively consistent throughout the quarter. Food sales continued to lead with mid-teens growth. We're particularly encouraged to see year-over-year growth in food units sold after experiencing a slight decline last quarter. We also continue to make good progress on improving in-stock levels in our grocery business despite the heavy volumes we're experiencing.
Inflation remained high, up mid-teens percentage in food categories, reflecting an 80 basis point step-up compared to levels at the end of Q2. We've seen incremental levels of inflation month-over-month be less significant, but it's not clear if this represents a sustainable trend. However, we believe our strong price positioning is contributing to share gains as we attract value seeking customers across the household income spectrum.
General merchandise sales declined low single digits with softness in electronics, home and apparel. E-commerce accelerated sequentially to 16% growth, even as store transactions continued to grow. We experienced strength in pickup and delivery from stores, marketplace, fulfillment services and advertising.
Gross profit rate decreased 77 basis points due primarily to higher markdowns and product mix headwinds, but the team delivered strong SG&A expense leverage of 60 basis points, reflecting higher sales and lower COVID costs. As a result, we delivered better than expected operating income growth of nearly 5%.
Walmart International delivered strong sales results, with sales up 13.3% in constant currency despite continued macro headwinds. E-commerce sales on a constant currency basis were exceptionally strong, up 46% in the quarter. The earlier timing of Flipkart's Big Billion Days event was also a benefit to sales results. Currency negatively affected reported sales results by about $1.5 billion. Each of our major markets delivered positive comp sales, led by a great quarter from Walmex, with comp sales growth of 11.7%, reflecting strong performance in Bodega stores, Sam's Clubs and 17% growth in e-commerce.
In China, comp sales were up 5.6%, reflecting strong e-commerce growth as well as strength at Sam's Club. E-commerce sales grew 63% and penetration reached 41% of sales. Canada comp sales increased more than 5%. And in October, we launched Walmart fulfillment services in Canada, where sellers of all sizes on the digital marketplace can now contract with us to take care of their inventory storage and logistics needs. The new offering will provide faster shipping of customer orders within a two-day window to 95% of Canadians.
In India, Flipkart had a great quarter with strong customer response to our Big Billion Days event, which moved forward into Q3 this year from Q4 last year. We had over 1 billion visits to our site during the eight-day event and, importantly, saw more than 60% of those customers coming from Tier 2 and Tier 3 cities. PhonePe also continues to perform well with annualized total payment volume, or TPV, now over $920 billion and reaching a record level of monthly transactions to about $3.6 billion. This was the first time PhonePe had a quarter with more than 10 billion transactions. International segment operating income was better than expected and increased 3.2% in constant currency, led by Walmex and China.
In Sam's Club U.S., we had another strong quarter with comp sales up more than 10%, excluding fuel and tobacco, and an increase of more than 25% on a two-year stack. Both comp transactions and average ticket increased about 5%. And e-commerce sales grew 20% with strength in curbside orders and ship to home. Membership income was up 8% with another record high quarter in overall member counts, at an all-time high, plus member penetration, Sam's leveraged expenses 68 basis points due primarily to higher sales. This helped offset a decline in gross profit rate due primarily to a 53 basis point or $113 million inflation-related LIFO charge.
For the quarter, Sam's operating income increased more than 18% with fuel and nearly 8% excluding fuel and including the impact of the LIFO charge. Combining these results with my comments about International, you can see Sam's Club is performing well around the world, and we're pleased with the leverage we see across markets with Member's Mark as an example.
As we navigate changes to our external environment, we continue to advance our strategic initiatives that were enabled by our omnichannel retail capabilities. Globally, as we're building a larger e-commerce business, we're scaling our marketplace which unlocks and strengthens our fulfillment and advertising businesses and expands the number of families that choose to be members.
Across our segments, e-commerce is enabling deeper engagement with customers and members, that helps drive strategic growth in our alternative value streams. New sellers on our U.S. marketplace are contributing to our advertising growth and we added more than 8,000 sellers in Q3. Third-party build-out helps diversify and strengthen our product assortment, which now includes more than 370 million SKUs. Strong digital advertising growth continued this quarter, increasing over 30% on a global basis, led by 40% growth in Walmart Connect in the U.S. and Flipkart Ads in India.
As we focus on membership, our ability to leverage our data improves, so we continue to sign on more customers to our data ventures offering, Walmart Luminate, and the number of Walmart Plus memberships continues to grow. We gained some of these new Walmart Plus members after expanding our last-mile delivery capabilities through a fourfold increase since January and the number of pickup points serviced by the Spark Driver platform.
We're making good progress in fulfillment and automation. The Spark Driver platform now serves customers in all 50 states for more than 10,000 pickup points with the ability to reach 84% of all U.S. households. This coverage includes a growing revenue stream from businesses utilizing Walmart GoLocal, our delivery as a service offering that has already made over 1 million deliveries since launching last year.
Building Walmart fulfillment services in the U.S., Mexico and now also in Canada has been an important asset in growing our seller base as they seek an integrated omni sales and fulfillment solution. For example, almost 30% of orders on Walmex' marketplace are now being fulfilled using Walmart fulfillment services, which was launched a year ago. In September, we opened a next-gen fulfillment center in Illinois. This 1.1 million square foot facility features robotics, machine learning and automated storage, resulting in increased productivity and a better service for our customers at faster delivery times.
And last week, we acquired Alert Innovation as we expand our market fulfillment center build-out. MFCs are positioned inside or attached to Walmart supercenters and use robotics and AI to fill online orders more quickly. We're putting the building blocks in place to deliver powerful, mutually reinforcing ecosystem that not only benefits customers and partners, but also shareholders, with more durable and diversified earnings streams.
Turning to guidance, in this period of macroeconomic uncertainty, we believe that we are well equipped to continue gaining market share in an environment, where consumers need to stretch their dollars further. We will continue to advocate for customers and work with our supplier partners to maintain strong price gaps and deliver lower relative pricing versus competitors. We're also navigating real inflation on our own cost structure and continue to seek ways to reduce cost and improve leverage potential.
With these considerations in mind, we're maintaining a balanced approach to our guidance, incorporating a cautious view on the consumer together with our confidence in our ability to execute. We're updating fiscal year '23 guidance to reflect the Q3 upside and leaving our sales and profit assumptions for Q4 unchanged. Despite a good start to Q4, our guidance assumes that the consumer could slow spending, especially in general merchandise categories, given persistent inflationary pressures in food and consumables. Our guidance provides flexibility to compete in a promotional environment, accounts for pricing action to reduce remaining excess inventory and anticipates ongoing mix pressure.
For Q4, we expect net sales growth of about 3%, including comp sales growth of about 3% for Walmart U.S., with food and consumables growth continuing to outpace general merchandise. We expect year-over-year operating income within a range of a 1% increase to a 1% decrease. And adjusted EPS is expected to decrease 3% to 5%, including higher year-over-year tax and interest expenses.
For the full year, incorporating the Q3 upside, we now expect net sales growth of about 5.5%, including comp sales growth of 5.5% for Walmart U.S. On an adjusted basis, we expect operating income to decline 6.5% to 7.5% and EPS to decline 6% to 7%. Excluding the effect of divestitures and on an adjusted basis, this would translate into net sales growth of 6.5% and a decline in operating income of 5.5% to 6.5% and a decline in EPS of 5% to 6%.
Looking beyond Q4, we know some of the unanticipated costs experienced this year shouldn't repeat next year. That said, we're planning our business with the assumption that inflation remains somewhat elevated. In addition, we've had significant currency headwinds this year. Based on year-to-date results and current FX rates, we estimate a year-over-year sales headwind for this fiscal year of $4.1 billion from currency and a potential sales headwind of about $3 billion next year.
Also, as we've had $236 million in LIFO charges this year at Sam's Club, we're likely to experience LIFO charges in Walmart U.S. as well next year. Based on current assumptions, these LIFO charges next year for both Walmart U.S. and Sam's Club could approximate roughly $1 billion of gross profit headwind. It's important to note that inflation, inventory levels and additional factors that are challenging to predict will influence the aggregate amount. We're committed to providing you ongoing updates to the assumptions, as we report our quarterly results.
And with that, we'd be happy to take your questions.
