Walmart Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 17, 2022

There are 15 speakers on the call.

Operator

Greetings. Welcome to Walmart's Fiscal Year 'twenty two Fourth Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll now turn the conference over to Dan Binder, Senior Vice President, Investor Relations. Dan, you may now begin.

Speaker 1

Thank you, Rob. Good morning, and welcome to Walmart's Q4 fiscal 2022 earnings call. I'm joined by members of our executive team, including Doug McMillan, Walmart's President and CEO Brett Biggs, Executive Vice President and Chief Financial Officer And John Ferner, President and CEO of Walmart US. In a few moments, Doug and Brett will provide you an update on the business and discuss 4th quarter and full year results. That will be followed by our question and answer session.

Speaker 1

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. Please review our press release and accompanying presentation for a cautionary statement regarding forward looking statements as well as our entire Safe Harbor statement and non GAAP reconciliations on our website atstock.walmart.com. It is now my pleasure to turn the call over to Doug McMillan.

Speaker 2

Good morning, and thanks for joining us to hear about our 4th quarter results. Let's jump right in. Our team delivered net sales growth of 7.6% and adjusted EPS growth of 9.3%, excluding divestitures. We continued to gain market share in food and consumables in the US, and comp transactions were positive. Consumer demand during the quarter was strong, And the team overcame a number of challenges in the US and around the world to deliver these strong results.

Speaker 2

Going into the quarter, We were confident that we had the people, the products and the prices to deliver, and we did. Our inventory position improved and we delivered high sell throughs In seasonal categories across markets. Food, consumables and apparel were also strong globally. We comped low single digits And general merchandise in the US against strong results last year. And Sam's Club saw broad based strength across categories in the US and in China.

Speaker 2

Our merchants are doing a nice job of navigating the pressure from cost of goods inflation with our customers and shareholders in mind. I like how we're mixing out the business. Consolidated gross profit rate increased 10 basis points for the quarter, including more than 50 basis points in Walmart US. We're working closely with our suppliers to manage inflation, finding a few places where we can roll back prices, And we're paying close attention to how we manage our opening price point items. Q4 and the full year are proof points That we can keep our price gaps in the range where we want them, grow market share, and deliver against our top and bottom line growth algorithm.

Speaker 2

Our associates did an amazing job of serving customers and members during this busy season, even as we faced omicron and supply chain challenges. This quarter's COVID leave peak was larger than anything we'd experienced in 2020 or previously in 2021. We hired more associates in our plan called for to help fill that gap, which negatively impacted expenses, but it was clearly needed. I'm grateful to our associates and store and club management teams for how they set priorities on behalf of our customers and members during the quarter. As I visit stores and clubs, it's inspiring to see how our team is navigating such a fluid environment.

Speaker 2

They're delivering tremendous growth while making significant progress against our longer term strategy. During the fiscal year just ended, excluding divestitures, we grew net sales by 9%, Grew operating profit by 18%, invested $13,000,000,000 in capex to grow our business, returned $16,000,000,000 to shareholders via share buybacks and dividends, Grew our advertising business globally to $2,100,000,000 and took important steps to build our US financial services capabilities with agreements to make 2 key acquisitions. Sometimes it feels like 2020 2021 were just one long year. If you look at growth since the beginning of fiscal 'twenty one through the end of fiscal 'twenty two, excluding divestitures, Our company is about 17% larger in terms of revenue, 31% larger in terms of operating income, And globally, our percentage of digital sales grew from 6% to 13%. As the company grows, we're fueled by the new business model And flywheel, we outlined last year.

Speaker 2

Our strategy is coming to life. Ensuring that we deliver our strategy is where I invest the majority of my time. It starts with the customer and earning primary destination. The Big Basket stock up trip is important. It's foundational to our relationship with families.

Speaker 2

We earned that shopping occasion by running great stores and clubs and offering seamless pickup and delivery experiences, including for our Walmart Plus and in home members in the US. Our membership offering, Walmart Plus, continues to be an important piece of what we're building. We're adding capacity for pickup and delivery. We increased capacity by nearly 20% last year, and we expect to increase capacity by another 35% this year. For Walmart In Home, we recently announced an expansion of this membership service to make it available to about 30,000,000 homes in the US, up from 6,000,000.

Speaker 2

To enable the expansion, we're creating roles for more than 3,000 associate delivery drivers. The majority of these roles will be filled by existing experienced associates. We'll be building out a fleet of all electric delivery vans to support our delivery services and our goal of a 0 emissions logistics fleet by 2,040. Our flywheel is designed to serve families more broadly, deepening our relationship with them, and creating a healthy mix of merchandise and services for our business. Recently, we shared some news about our Fintech startup in the US that will operate under the 1 brand going forward.

Speaker 2

The combined talent of our JV leadership team and that of the pending acquisitions of One Finance and Even is impressive, and our plans are aggressive. We can help our customers and Walmart Plus members save money, have an experience with less friction, and help strengthen the financial position for millions of families. As with our advertising business, our financial services capabilities cross borders. Our PhonePe business in India is growing incredibly fast, And we have strong capabilities in Mexico, which is such an important market for us. As we look to improve the customer experience and strengthen the mix of our business, Expanding our marketplace is important.

Speaker 2

We added more than 20,000 new sellers to the platform in the US last year, and expect to add nearly 40,000 more this year. We're now up to nearly 170,000,000 SKUs, and we're adding more every day. We opened up our US marketplace to sellers from India and created a dedicated team there to help sellers onboard and grow. Many sellers are looking to diversify their business, and they're pushing us to add capabilities, including the expansion of our fulfillment services. We grew our US GMV delivered by our fulfillment services by 500% last year.

Speaker 2

We The robust growth will continue this year as we add more capacity. For Q4, our fulfillment services represented 44% of total marketplace orders in India And 22% in Mexico. Growing our marketplace expands choice for our customers, helps our sellers grow, and enhances our profit margins. Our plan for this year includes strengthening the experience for sellers and adding fulfillment capacity so customers have access to more items faster. It's clear to me that we have years of profitable marketplace and fulfillment services growth ahead of us.

Speaker 2

Staying on the theme of fulfillment and scaling new businesses, We recently launched Walmart Go Local, a last mile delivery solution using our Spark Driver platform to help businesses of all sizes reach more customers. Go Local is making deliveries for the Home Depot and other large retailers.

Speaker 3

But I'm

Speaker 2

most excited about serving small local retailers. We have nearly a 1000 go local service pickup points, and we expect to end this year closer to 5,000. This is good for customers, Our clients and for us, as we lower the cost per order by increasing the combined order size and the route density. As we bring more customers, sellers and suppliers into our ecosystem, it expands our ability to monetize those relationships. A great example is our advertising business.

Speaker 2

Globally, it's been growing at a high rate with high margins and is now a $2,100,000,000 business in only a few years, And we expect this strong growth to continue. And as our e commerce business, including Marketplace, continues to grow, so will our advertising business. We're taking the learnings from the US and India and growing in places like Mexico, Canada and Chile. Importantly, we're beginning to build

Speaker 3

tech platforms that can be leveraged

Speaker 2

in multiple countries. Our strong team of Forms that can be leveraged in multiple countries. Our strong team of technologists and our digital transformation enable global synergies. We see traction in our core business, as well as in our newer businesses. There's real power in the ability to make these pieces mutually reinforcing.

Speaker 2

To design them such that one portion of a customer relationship leads them to another because it's easy and intuitive. Connecting B2B opportunities like advertising enables us to grow earnings and make key investments at the same time. Because of how the flywheel is coming together, I feel great about our ability to deliver against the growth algorithm we discussed last year of about 4% top line growth and operating income growth rates higher than sales. We've highlighted the increased costs we had in Q4 from COVID, Supply chain and wages, and some of these costs are likely to continue through part of this year. But I feel confident in the underlying strength of the business and our ability The Walmart we're building is becoming more impactful for our customers and members, more digital, more automated, and more diversified on the top and bottom lines.

Speaker 2

Now let's move on to our performance by operating segment. I'll begin with Walmart US. The team had a great holiday season. They drove comp sales of 5.6%. You know about our strength in food and consumables, but despite the supply chain challenges, The seasonal hardlines execution for holiday looked good in stores.

Speaker 2

We're continuing to navigate cost pressures and in stock challenges. But overall, I'm really proud of the team for delivering the holiday season, and I believe we'll work our way to an improved in stock level through the course of the year. Building a seamless omni channel experience for customers and prioritizing convenience for them is critical. Our stores have become hybrid. They're both stores and fulfillment centers.

Speaker 2

Last year, we increased the number of orders coming from our stores by 170% versus the previous year, And that's on top of more than 500% from the year before. Having inventory so close to so many customers is a competitive advantage. In some cases, we're getting items to customers in hours rather than days. In Sam's Club US, the momentum continues. Sales and membership were strong.

Speaker 2

Excluding fuel and tobacco, comps were 10.8% for the quarter and nearly 26% on a 2 year stack. Membership income grew 9.1%, driven by membership count, which reached another record high during the quarter. The team leveraged operating expenses and grew operating income 24%, excluding fuel. They had another fantastic quarter year. Sam's continues to drive digital innovation and ad capabilities.

Speaker 2

Our bold and blue club remodels and our strengthened pickup and delivery services will drive growth. At Walmart International, we had another strong year with good progress in all aspects of the flywheel. Overall, sales were strong again in Q4, With growth of 9.8% in constant currency, excluding divestitures. China, Mexico, and Flipkart led the way. Our 21% e commerce penetration is a new record and up nearly 400 basis points from last year.

Speaker 2

We get to serve a spectrum of holidays and festivals during the holiday quarter from Diwali and Big Billion Days in India through to preparation for Chinese New Year. During Big 1,000,000,000 days, 40% of sellers were first time sellers on the marketplace, and more than 100,000 kuranas participated by making last mile deliveries. This is strong, inclusive growth. While our omnichannel model gives the gift of time, access and affordability remain important. We're expanding our ecosystem, and we've made investments in areas such as healthcare, marketplace, telecommunications, and our online food business.

Speaker 2

A few great examples include the launch of Flipkart Health Plus that aims to increase access to affordable care in India, And the acquisition of Food Maestro in Canada to build more personalized shopping experiences for customers. And BYTE, Our value based Internet and telephone service that enables customers in Mexico to enjoy digital connectivity surpassed 2,000,000 members. It's great to see all three of our operating segments doing so well. I'm grateful to our strong and capable leadership team and to all of our associates. We've had an incredible couple of years during these challenging times.

Speaker 2

We have momentum in the business, we have aggressive plans, and we're executing on the strategy. It still feels like we're just getting started. I'll now turn it over to Brett.

Speaker 4

Thanks, Doug. We wrapped up another great year with a strong 4th quarter and good momentum as we start the new year. Over the last couple of years, each quarter has presented unique challenges, but I'm proud of how we've navigated each one of those. The Q4 was no different as we faced the rise of omicron with its impact on the supply chain and our associates. This resulted in some significant unexpected expenses, But despite that, we delivered the top and bottom line results we expected.

Speaker 4

We continue to execute on our strategic initiatives to fulfill the vision we outlined last February. The US flywheel is accelerating and is evident through initiatives like our pending Fintech JV Acquisitions, the launch of a new data business An acceleration of last mile delivery. Sam's growth in membership income has been strong throughout the year as we expand omni options, including club pickup. These and other key initiatives represent large revenue and profit opportunities over the next few years. For the full year, we had record sales of $568,000,000,000 with increased traffic to stores and clubs, while e commerce penetration approached 13%.

Speaker 4

Walmart US grew sales by more than $23,000,000,000 and saw strong market share gains in food and consumables. Over the past 2 years, our US segments have grown sales by $67,000,000,000 or 17 Percent and operating income by 25%. Now let's discuss Q4 results. As a reminder, the previously announced international divestitures significantly We affect year over year comparisons. So my comments today will exclude the effect of divestitures.

Speaker 4

Total constant currency revenue Grew 7.9 percent to over $153,000,000,000 and reached another important milestone with quarterly net sales exceeding $150,000,000,000 Consolidated gross margin rate increased 5 basis points with Walmart US gross margin rate increasing by a healthy 54 basis points, Reflecting primarily price management resulting from cost increases and mix along with benefits from a growing advertising business, Partially offset by higher supply chain costs. Supply chain costs were over $400,000,000 higher than expected, but we expect some of those costs to abate over time. International gross margin rates were lower due primarily to format mix. SG and A expenses deleveraged 19 basis points as increased US wage costs were partially offset by strong sales and lower COVID costs versus last year. Although COVID costs were lower than last year, we had significantly higher associate leave costs in the US than anticipated.

Speaker 4

In the 1st 3 quarters combined, COVID leave costs were about $600,000,000 but increased over $450,000,000 just in Q4, Presenting an unexpected headwind of over $300,000,000 Despite these expense challenges, adjusted operating income increased more than 6% And EPS increased more than 9%. We're in a great financial position, enabling us to allocate capital towards both growth and shareholder returns. Free cash flow was $11,100,000,000 for the year, down versus last year due primarily to inventory build throughout the year, Higher capex and cost increases. We increased share repurchases significantly this year with buybacks of just under $10,000,000,000 A pace we plan to continue or increase in the coming year, given our view of the long term value of the company. In addition, we announced the 40 Consecutive annual dividend increase this morning.

Speaker 4

ROI increased 90 basis points to just under 15%, the best level in 5 years Due primarily to growth and operating income. Now let's discuss the quarterly results for each segment. Walmart US had 1st ever $100,000,000,000 plus sales quarter with sales of $105,000,000,000 Comp sales grew 5.6%, up more than 14% on a 2 year stack. We continue to grow grocery market share as food comps increased high single digits, while health and wellness, apparel, seasonal and automotive categories were also strong. Transactions were up more than 3% despite COVID pressures.

Speaker 4

E commerce sales grew 1% against strong gains last year, resulting in a 70% To your stack. We continue to see elevated levels of cost inflation and have taken prudent steps to manage pricing While having slightly wider price gaps than pre pandemic, we have a good balance of growing market share while managing price with both customers and shareholders in mind. We continue to make strong progress in some of our newer higher margin initiatives. Walmart Connect Advertising experienced robust sales growth This year with a strong pipeline of new advertisers and large growth opportunities ahead. In fact, the number of active advertisers using Walmart Connect grew more than 130 year over year.

Speaker 4

And about half of the ad sales came from automated channels in q4, more than double last year. We expect Walmart Connect to continue to scale over the next few years with plans to become a top 10 ad business in the midterm. Growing e commerce marketplace at WFS have been a priority over the past couple of years as we've invested to expand fulfillment capacity, Introduce new services for sellers and double the number of items available for customers. In fact, we expect to have over 200,000,000 items in our e commerce assortment by the end of the year. The expansion of WFS has also been a key unlock in bringing more sellers to Walmart's marketplace.

Speaker 4

Customers increasingly want home delivery, and we had a 6 fold increase in delivery in the Q4 versus pre pandemic levels. We continue expanding capabilities, including announcing the acceleration of in home delivery to 30,000,000 households by year end. We also announced our new Fintech Business, 1, in January with the pending acquisitions of Fintech Platforms, 1 Finance and Even. SG and A expenses deleveraged 95 basis points as increased wage costs were partially offset by strong sales and lower total COVID related expenses year over year. Still, as I mentioned earlier, COVID leave costs were much higher than expected.

Speaker 4

Operating income grew slightly, aided by Strong margins as well as solid growth in membership and other income. Inventory increased about 28% overall, including higher cost of goods due to inflation, mix and higher than normal in transit shipments, reflecting continued efforts to improve in stock. International sales were strong, up nearly 10%, led by China, Mexico and Flipkart as seasonal events, omni growth and good inventory Position contributed to results. E commerce sales in constant currency grew 21%, on top of strong gains last year with growth of more than 75% on a To your stack, China comps increased nearly 20% in constant currency with continued strength from Sam's Clubs As well as more than 90% growth in e commerce sales. Com sales in Mexico increased nearly 8% and grew faster than the market according to ANTAD.

Speaker 4

Flipkart had another good sales quarter, aided by strong holiday events and favorable trends in monthly active customers and users. We're also pleased with the strong growth of PhonePe with TPV of more than 130% versus last year, with a current run rate of $650,000,000,000 In Canada, comp sales were up 4.6% led by in store shopping and comps increased more than 13% on a 2 year stack. International adjusted operating income and constant currency increased nearly 3%, reflecting lower COVID costs, partly offset by gross margin rate decrease Related to higher sales penetration from Sam's China and e commerce. For the full year, international adjusted operating income grew 12.7%. And we feel confident about our international business as we head into the new year.

Speaker 4

Sam's Club had another impressive quarter with comps up 10.8%, Excluding fuel and tobacco, an increase of nearly 26% on a 2 year stack. Transactions increased 7% and ticket was up 3.2%. E commerce sales grew 21%, and we expanded the rollout of delivery capabilities of digital orders to nearly all clubs during the quarter. Sam's is leveraging Walmart's go local last mile delivery service to provide more convenience to members. Membership income was up more than 9% with another record in member counts and strong plus penetration.

Speaker 4

Operating income was up 41% as higher fuel and membership income as well as strong expense leverage were partially offset by gross margin pressure from inflation And supply chain costs. Now let's turn to guidance. We feel very good about the underlying strength of the business and believe we can deliver full year growth in f y 23 that aligns with the growth algorithm we discussed last year. As you saw in Q4, we're still challenged with increased costs related to COVID and supply chain disruptions. Our guidance assumes that we will see some relief from that as the year progresses, and that the US consumer remains in a generally favorable economic position throughout the year.

Speaker 4

The comparisons against last year are unique, Primarily due to the timing of international divestitures and US stimulus in FY22. As a reminder, the divestitures of our businesses in the UK and PAN were completed near the end of the Q1 last year, contributing about $5,000,000,000 in sales and about $0.07 of EPS in Q1 FY22. Our guidance will be ex divestitures. We expect total company sales to increase about 4%, with Walmart US comp sales slightly above 3% for the year. Given the timing of stimulus overlaps, we expect about a 1% to 2% comp sales increase from Walmart US in the first quarter, followed by somewhat higher comp sales growth throughout the remainder of the year.

Speaker 4

We expect fy23 total company operating income to increase at a rate Slightly higher than sales growth and EPS to grow 5% to 6% versus FY22 adjusted EPS due in part to our aggressive share repurchase program. The quarterly profit growth cadence is expected to be quite variable due to last year's US stimulus as well as lapping Wage Investments initiated in February September 2021. As you would expect, the variability of the quarters looks less extreme when viewed on a 2 year stack. We expect q1 operating income and EPS to be down low double digits to low teens as we cycle the stimulus effects from Last year, that resulted in nearly 30% operating income growth, as well as increased wages this year. On a 2 year stack, Q1 operating income would still be up A mid teens percentage.

Speaker 4

Q2 andq3 operating income and EPS are expected to increase at low to mid single digit rates As year over year comparisons ease due in part to the moderation of stimulus benefits last year, we expect higher growth rates in the back half of the year as we fully cycle wage investments resulting in 4th quarter operating income and EPS increasing by a high teens percentage. Q4 operating income will also benefit from some timing versus fy22, particularly in international, As well as cycling elevated COVID leave costs in FY22. Our effective tax rate is expected to increase to 25% to 26% due primarily To earnings mix. For the year, we expect gross margin rates to increase due to pricing, mix and new business initiatives, although there will be variability quarter Quarter as is usually the case. For the first time in a while, we expect some expense deleveraging as we continue to see elevated supply chain wage and tech costs.

Speaker 4

We'll continue the multi year journey of accelerated capital investment focused on increasing fulfillment capacity, automation and technology to enhance productivity. FY22 capex was about $13,100,000,000 lower than anticipated due to timing of projects impacted by supply chain challenges. Due to that and continued investment in strategic priorities, we anticipate this year's CapEx being at the upper end of the guidance we gave last year I'm very confident as I look to this year and to the future. The company is in an enviable position to serve customers Members and also to achieve our financial goals benefiting shareholders. Now we'd be happy to take your questions.

Operator

Thank you. At this time, we'll now be conducting a question and answer session. So that we may address questions to as many participants as possible, we ask you to please limit yourself to one question. One moment please while we poll for questions. Thank you.

Operator

And our first question is from Steph Wissink with Jefferies. Please proceed with your question.

Speaker 5

Thank you. Good morning, everyone. I'd like to double click on one of the comments you made in your remarks regarding elevated levels of inflation. And I think you signaled that you Are seeing slightly wider price gaps versus pre pandemic. Can you maybe give us some sense of how much inflation you're observing real time?

Speaker 5

How much those price gaps have widened and then what your expectations are for the quarters as the year progresses? Thank you.

Speaker 6

Hey, Seth. Good morning. This is John with Walmart U. S. First, I just want to appreciate our teams for how they delivered in the last quarter.

Speaker 6

The $105,000,000,000 sales number has been impressive given all the And I just want to thank the team for everything they've been through the last couple of years. And when it comes to pricing, we really take a long term View on this and we manage pricing for both customers and shareholders. We're constantly monitoring our share, our price gaps to competitors. And we'll continue to do that as we move forward. And then what we're seeing right now is not only Gaps that we're proud of that are valuable for customers, but we're also seeing the opportunity to increase some of our rollbacks in stores and we're really proud of the team.

Speaker 6

We're seeing about Same member of RobEx now that we had at the end of Q1 last year. So while we have supply chain challenges and other costs coming through, the teams are doing a nice job managing mix and pricing and looking after both our customers and our shareholders.

Operator

Our next question comes from the line of Bob Drbul with Guggenheim Securities.

Speaker 7

Hi, good morning. Just a couple of quick questions. The first one really, thanks for giving us the advertising piece. Can you just elaborate a little bit more just on the growth that you've experienced to get to the $2,000,000,000 number? And just How quickly you do expect that to ramp?

Speaker 7

And given the fact that you gave us the $2,000,000,000 number, Doug, would you be willing to give us How many people have signed up for the Walmart Plus membership?

Speaker 3

Bob, you got one and you want both. That doesn't surprise me. I'll start with the advertising number and John can add here. The business model is changing. I think that's the headline.

Speaker 3

We've got A business that's becoming increasingly digital, the e commerce business first party, third party is growing. It gives us the opportunity to grow advertising income. It's grown at a fast rate And it's growing across markets. The U. S.

Speaker 3

Is important in that number, but India, Mexico and other markets are going to have growth there too and the margins are helpful. They help us keep prices low for customers and they help us deliver the operating income number percentage. So we're excited about What the future looks like as it relates to the growth of the advertising business. We're not going to share Walmart Plus yet. I don't really want to have the company defined by 1 metric And with subscriptions being such a topic these days, everybody gets really focused on that.

Speaker 3

Walmart is always going to be a business where you need to look across And see how the omnichannel business is playing out. There are going to be times when e commerce grows faster than stores. And as we've seen recently, stores or attractive during certain periods of time. Walmart Plus is important. It helps us grow our e commerce business.

Speaker 3

It helps Deepen the relationship with customers and have more data. And at some point, we'll probably talk about that number. And by the way, there are other types of memberships, Not just in Sam's Club across the world, but

Speaker 6

in some

Speaker 3

of our other businesses too that are growing. So I think there will probably be a number of Membership type metrics over time that you'll want to keep an eye on. But I don't think it would be good if everybody got overly focused on Walmart Plus. Our ability to serve people with pickup and delivery has improved as we've made these investments. It's one of the reasons why we continue to tell you how much capacity we're growing to do that.

Speaker 6

Yes, Bob, this is John. And then a couple of things. First, I think the advertising business is a reflection of the momentum we have And total Walmart U. S. And I'm really proud of the way the team has helped position us to serve customers any way they want to be served, whether that's at home, I think buyers, sellers, suppliers and customers.

Speaker 6

And we have a unique opportunity to be able to help sellers and Suppliers reach customers in a way that's effective for them, grow their business and do it in a way that is positioned on top of an omni retail Platform. So certainly excited about the growth. I'm excited about the capacity additions in store and in Walmart fulfillment services. Those enable sellers To be able to transact more frequently with our customers and that's really the key to the growth of advertising is have a large seller and supplier base that can reach our customer base.

Operator

Thank you. Our next question is from the line of Karen Short with Barclays. Please proceed with your question.

Speaker 8

Hi, thanks very much. So Doug, I wanted to ask you a question. You've made the plane analogy in the past with respect to Knowing when and where you want to land the plane, but there are moving parts to getting to the destination. So I wanted to just ask Bigger picture, when you think about 'twenty three specifically, well, calendar 'twenty two, where you think the biggest source of That could be to landing the plane and then also where you would put the biggest sources of risk on landing.

Speaker 3

Thanks, Karen. I think the biggest sources of risk are external. It's been an unusual last year or 2 and figuring out How you lap stimulus, what happens with inflation, both on the cost of goods side as well as on the operating side will cause us to have to be good managers. But I think we've demonstrated over time that we have a lot of really good managers at Walmart. In terms of upside, I mean, I'm Excited about what's happening in our stores and clubs.

Speaker 3

We've got great momentum in Sam's. There's a lot to be excited about in international. India continues to be really exciting. Walmex is kind of going from strength to strength. Sam's business in China is good.

Speaker 3

So I think that Sam's International could contribute. And on the Walmart U. S. Side, John, you can jump in here too. I think we've got An opportunity to continue to improve both stores and e commerce.

Speaker 3

And the fact that we're now up to 170,000,000 items For customers is exciting and the way sellers are responding to fulfillment and Seller services and that relationship is really encouraging. So I think marketplace is one of those areas where we can see growth including That last mile component that we're building out, I think that's exciting too. I do too.

Speaker 6

And Kieran mentioned just a second ago, Proud of the momentum and the positioning being an omni retailer, but also excited about the shape of the business model and how it's changing. Now Brett laid out Last year early, the growth algorithm and the way that the business model could change over time and those services that Doug just referenced For sellers including fulfillment and marketplace, last mile, go local, all these things help so many businesses reach customers in addition to just the Walmart business. And they all have an impact on the operating model, which I'm really quite excited about. And these are components that will help customers. Number 1, they'll help shareholders and they'll help us position the way that we offer value to customers all across the country.

Speaker 6

So at go local, we talked about the number of fleets that we have today that's Our last mile business is expanding. We'll have a fleet of electric vehicles coming online over the next couple

Speaker 3

of years. So There's just a

Speaker 6

lot going on that, it's going to take a lot of friction out of customers' lives, help them stay in stock at home. And then with the improvement in fundamentals over the next I'm also very excited about our ability to manage through whatever external forces that we see. We've got a lot of experience doing this. We've got great teams that are ready for this And the strategy is really clear.

Operator

The next question comes from the line of Timion Gautam with Morgan Stanley. Please proceed with your question.

Speaker 9

Hey, good morning everyone. My question is on guidance. In 'twenty two, you beat your comp guidance and your EBIT Guidance, both by healthy amounts. If 2023 ends up being better than what you just guided, is it driven by sales Or is there a chance the margin can perform better within the 3 given some of the alternative? And then just to clarify, Brett mentioned the Q4 EBIT growth for fiscal 2023.

Speaker 9

Is there any way you could unpack it a little because It's a big change and jump, but it seems like you're going to be lapping some hefty SG and A growth. And you said something about international lapse. So just try to Maybe it's not as steep as it sounds. I think if we look at some of the pieces.

Speaker 10

Hey, Sami, it's Brett. I'll kick off. Yes. I think a lot of what Doug and John just said is if there were if we get to the end of this year and we've done better than we've laid out For guidance, I think it's a lot of what they just talked about. It's our new businesses that are higher margin continue to grow.

Speaker 10

Sales momentum continues. We assume obviously this is going to continue with a 4% sales growth. That's a big number on top of what we've already done. So it could be sales driven and it can continue to be margin driven as well as these new businesses develop as our general merchandise business It's stronger, which helps with mix. It's all of those things.

Speaker 10

And we always talk about there's so many levers that we can pull at different times when we need to. It's also all those levers that can They play to our advantage in any given year, in any given time. So I just feel good about the momentum of the business. I'm as I said this to Corden this morning. I'm as optimistic as I've ever been about the business and the shape of the business model.

Speaker 10

To answer Q4 specifically, there's a couple of things. There's some holiday timing in international. We also had Some impacts of some impairments this quarter, some of that was adjusted out. But it's those things but also the cost. When you look at the supply chain cost The COVID costs in Q4, that's a big change and we do expect some abatement of costs over the year.

Speaker 10

When that happens, how that happens obviously is to be seen, but it's those things that help that Q4 operating income.

Operator

Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question. Good morning. Thanks a lot

Speaker 11

for taking my question. Your customer base looks a lot like the overall U. S. Consumer. There is a lot of concern around the low to mid income consumer.

Speaker 11

The outlook for that consumer this year given the stimulus lap, Inflation and other uncertainty, how did you factor all of that In as you were planning the year ahead, you probably could have gotten away with guiding to something less than Your algorithm, excluding divestitures, so is there a risk that you have a recency bias where The business in January was good and hopefully this doesn't come across as snarky, but do you think you have more visibility Into the macro, the investment committee or others, there's just a lot of uncertainty out there right now.

Speaker 3

Michael, this is Doug. I'll go first. As it relates to the 4 and greater than 4, what we told you a year ago is that, That is something we believe we can deliver or beat over time. And as Brett told you, when we made that Commitment and share those numbers. There are going to be time periods that are higher and time periods that are lower.

Speaker 3

But over time, we think that's a really sound set of numbers to share and we thought it was important to repeat that because we still have that confidence. And we have that confidence because of all the pieces that we've been talking about. The strategy is coming to life. The business model is changing. As it relates to this year in particular, we've got opportunities to improve in stock.

Speaker 3

We've got opportunities to improve store and club standards because what happened With COVID leave, there's just there's upside and there will definitely be challenges. We know that for sure. But we just have These different opportunities to make choices to deliver the results and we believe that it was important to repeat the number.

Speaker 6

Hey, Michael. Something that Doug said is really important about improvement. One of the most Fun parts of working at Walmart is having such a large team just every day get up and try to be better than they've been and Run a better business and I've enjoyed that for almost 30 years. But one of the things that's really important and your question is we serve Really all income groups across all geographies in the U. S.

Speaker 6

And last year we saw growth amongst income groups and geographies. So I think that's a clear reflection of the number of choices that we offer customers. We offer customers an experience through walmart.com and e commerce. We offer Pickup experiences, we offer in store and just about everything in between, including in home delivery, which will expand To a significant number of households up to 30,000,000 households this year. So, I think our ability to serve all across It's quite important going forward.

Speaker 6

And for the team this year, we'll be really focused on execution. And I know Sam's would say exactly the same thing, but across The geographies and income were well represented and we're going to fight really hard to deliver great execution for customers

Speaker 3

all across the year. Michael, you started by saying that the Walmart U. S. Customer looks like the U. S.

Speaker 3

Population and it does to a really large degree. And so we'll serve everybody. And during periods of inflation like this, middle income families, lower middle income families, Even wealthier families become more price sensitive and that's to our advantage. So we've been through this before and we run with inflation around the world all the Inflation is a different environment in the U. S.

Speaker 3

Right now than it has been in recent times for sure. We've been dealing with inflation in South America and Mexico and other places and just kind of understand what that looks like.

Operator

Thank you. Our next question is from the line of Caitlin Sheehan with Goldman Sachs. Please proceed with your question.

Speaker 8

Hi, good morning. Thanks for taking our question. You had mentioned improving in stocks throughout the year. We're just wondering how you would categorize how Q4 ended up from an in stock level and what areas could still benefit from improved inventory? Can you talk about any sequential improvements you may

Operator

be seeing in the supply chain and how you view the cadence of the supply chain challenges throughout the

Speaker 8

rest of 2022?

Speaker 6

Good morning, Kate. This is John. Let me talk about Q4 and then I'll come back to the supply chain. I think in general, we were seeing Really nice improvements in in stock late in Q3, early Q4. We're happy with how the holiday season turned out, including the ability to deliver seasonal and hard lines Across the quarter, which you saw a couple of strengths that really stood out were the apparel business and our health and wellness business We're both strong throughout the quarter.

Speaker 6

And those resulted due to demand, those resulted in pretty decent sell throughs. And then in January, With the effects of Omicron, we took a step back at in store, in stock and the line. But what we're seeing right now is better flow through all across The supply chain, you heard the increase in inventory, a large reflection of what is inbound. So we see recovery happening pretty quick. There are a couple Categories in the store that you'll see some out of stocks in that are really national issues.

Speaker 6

And as far as the supply chain, we talked about it in Q3. There were some significant improvements in flow through at ports, changing lead times, getting containers moved into the country and that's all helped. But Just a reminder, about 2 thirds of what we sell is made, manufactured or assembled here in the United States and we see growth across those categories as well. So I think we'll see Much better flow the next few weeks months and get us into really good position as we lean into the 1st and second quarters.

Operator

Thank you. The next question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Speaker 12

Hey, good morning. Congrats on a great year and hats off Brett on a wonderful career at Walmart. My question is on the consumer again. And I guess I'm curious if you're seeing any Noticeable changes in spending patterns by income course in light of inflation, lack of stimulus. You talked about January being the best on a 2 year basis, but just wondering if you could unpack it a little bit by income level.

Speaker 6

Hey, Chuck. This is John. I'd also echo congrats to Brad on a great career. Thanks for mentioning that.

Speaker 3

He's not done

Speaker 6

yet. We'll Chill on that. We'll talk about that later. But definitely it's made a nice impact. Chuck, a couple of things.

Speaker 6

We said a second ago, We do serve the country broadly. We see the ability to serve all income groups. And things like private brand versus Brandon, we don't really see any change at this point. We see strong demand, private brand penetration is about flat. So at this point, we see really strong demand and the customer, who is in good shape with a strong balance sheet.

Speaker 6

So we're We're optimistic that the inventory pull throughs that we have done and have in transit will get us in great position to be able to serve customers as we get into this fiscal year.

Speaker 10

Thanks for the sentiment, Chuck. Appreciate it.

Operator

Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets.

Speaker 8

Just two questions. 1, I guess, similar question maybe that's been tried to ask, but there's some concerns going into the quarter about Whether or not you could maintain this kind of earnings growth algorithm against the strong results in 2021. And so maybe just Can you help us understand the underlying factors that enable you to grow on this higher base? You talked a little bit about Connect in the advertising business, is there just underlying progress in e commerce profitability? I know we don't Talk about it the same way anymore, but just what do you think are those underlying drivers that helped you maintain this level of growth?

Speaker 3

Kelly, We're all one to answer that. So I'm sorry to interrupt you. The business model, the income statement is just changing shape. And I I think that kind of the headlines are the company is becoming more digital. It is starting to become more automated and over time will become even more automated.

Speaker 3

And when you look at the gross margin number, we can manage it. Now some of you like to watch gross margin as I guess makes sense quarter to quarter. Brett was reminding us yesterday, you can drive yourself crazy doing that. Gross margin over time, I mean, look at our track record, we can manage gross margin. Now then below gross margin, we've got productivity opportunities and technology whether it's an app in a store for an associate on the sales floor or robotics The fusion center creates an opportunity for more productivity over time.

Speaker 3

That is helpful. And then you get to these other businesses like the advertising business, The last mile delivery business, fulfillment services for e commerce, the marketplace itself, and these are helpful businesses From a margin point of view and as they become a larger percent of total, the shape of the income statement changes. And our confidence in that, not only in the U. S. But around The world and the markets we operate in is high.

Speaker 3

And so that's why you sense that confidence from us. Brett, do you want to go next? I think

Speaker 10

you said it well. Again, John addressed it. I'd just add

Speaker 6

a couple of things there. First, having digital relationships with customers is so important. More and more we fulfill from stores, the stores are stores, but they also act as fulfillment centers as we said earlier. So this ability To interact with customers digitally is important. Our workforce is becoming more digital.

Speaker 6

We've got over a 1000000 associates who have a device in their hands from the And then finally, I'd just reiterate what Doug mentioned is automation and supply chain and using automation to augment the Things that our associates don't want to spend as much time doing so they can spend the time on the things that are value added like in stock and availability. And I would just close by saying, our optimism and improvements this year is we've got a lot of room to improve in in stock and customer ability that we've seen over the last Couple of years, we're really proud of the growth. We know we could have done a lot more had we had the inventory position at the right time and the right place. So I'm really optimistic that There

Speaker 3

is upside to top line. You mentioned e commerce. We're continuing to manage contribution profit with e commerce business as a standalone vertical and Apparel and home are important and we've seen growth there over the last couple of years and in the marketplace helps. And the marketplace has been scaling faster as you can see in the

Speaker 6

$170,000,000 number.

Operator

Our next question comes from the line of Oliver Chen with Cowen and Company. Please proceed with your question. Hi.

Speaker 13

Thank you. Regarding Walmart Investments Ecosystem, what are your thoughts on future shopping experiences, particularly as we see Consumers really are the diverse token. We love your thoughts on how they fit in. And in your prepared remarks, You spoke about FinTech a few times. So it would be great to hear from you how that integrates Your broader strategy and the shopping experience as well as consumerization of healthcare, you're a great provider of health care in different ways across communities.

Speaker 13

Thank you.

Speaker 3

Oliver, you covered a lot there and Your voice was breaking up a bit, but we think we got it. On the future of shopping, it's really exciting. I mean, there are so many things that we can imagine. One of our challenges is just setting priorities and not trying to do too much. But we've got obviously a great strength in stores and I think That's clear.

Speaker 3

The pickup business has been terrific in the U. S. For many years now. Delivery is growing around the world. This delivery that's happening that's unattended is exciting and this Walmart in home business, which leads towards just Keeping people in stock and they don't have to really think about buying the items they buy all the time and we then use that data to serve up impulse items will be part of that future.

Speaker 3

We do think that social commerce around the world and what happens with wearables and AR and mixed reality will be part of our future and We're obviously thinking about that and working on that. And this key, as I mentioned in my remarks, is stitching it together, whether it's fintech or healthcare, and John, you should jump in on Future of shopping FinTech and Healthcare 2, the way you stitch that together so that one business becomes a default for the other is the magic of it. I mean, if we can really become great from a financial services point of view, we can take out friction and costs for customers, make it more delightful to transact with us, Not even really think about transacting, John, as we change the shopping experience as it relates to checkouts in the future, as well as on our app and in other digital forms.

Speaker 6

Yes. Oliver, on the consumer, I'll just start there. I see the same way Doug, it's very exciting to see some of the changes because the consumer, which Historically in the past, you might have thought of as a consumer fits in a segment, consumers really are in a segment depending on the day of the week or the hour of the day. Consumers sometimes need things right away, which we can do in under 2 hours of express delivery. They may need a pickup order in a couple of days and they may need something for a kid's birthday party We can work with all of those and it's really exciting.

Speaker 6

On FinTech and Healthcare, specifically those are on our Flywheel for important reasons. 1, in FinTech, we're excited about the potential acquisitions that we mentioned, pending regulatory approval. But we're looking for modern innovative ways to offer customers the ability to access affordable financial solutions And Financial Products, because a considerable number of customers, including middle income customers are underserved when it comes to financial services and we believe that we have a role that And then just going on to health and wellness, it's a big question with all these things that you have in there. But the health business It was our fastest growing comp business in Q4. We're excited about continuing to be able to serve customers at Pharmacy, our pharmacists and pharmacy techs have done a tremendous job this last year in serving customers.

Speaker 6

And we're seeing with the addition of things like our telehealth company And other services, the ability for our pharmacists and tech to practice at the top of their licenses and really help customers live better. You put all this together, all of these opportunities really do position the company to live through its purpose and that's to help Customers' money so they can live better and the combination of retail, financial services and health and wellness do that really well.

Operator

Our next question is from the line of Ben Vanu with Stephens. Please proceed with your question.

Speaker 13

Hi, thanks. Good morning. There's been a lot of great questions asked. So I want to ask a more specific one. You mentioned some places to roll back prices.

Speaker 13

I'm curious, Is that because you see less inflation in those categories? I suspect not. Or is it because You see the opportunity for that to really resonate with the consumer. And within that idea, are there categories, places where you're Seeing a change in consumer behavior, whether it's trading down or otherwise, that you think creates a unique opportunity for you all?

Speaker 6

Hey, Ben, it's John. Thanks for the question. On the rollbacks, this is all about making sure the customers see value At a time when prices are rising in so many parts of the economy being able to offer a customer value and fight inflation It's what we do. It's what our merchants do. And that will continue.

Speaker 6

As I said earlier, the counter rollbacks today It's up pretty significantly from the end of Q3 and about to where it was at the end of Q1 last year. So I'd say I was just I was in the store across early this morning and we've got rollbacks in consumer electronics and parts of dry grocery and those values really matter as customers become more concerned and they think more about Inflationary pressures. So we'll continue to be an everyday low price retailer. That's our platform. We want to offer great values With price gaps that deliver for shareholders as well each and every day that we operate, but we'll make sure that customers see value in key categories as we get into this year.

Operator

Thank you. The next question is from the line of Scot Ciccarelli with Truist. Please proceed with your question.

Speaker 3

Good morning, everyone. I guess a bit of a follow-up On that question, as you guys hold down prices despite higher procurement costs to drive price gaps, are you seeing any kind of competitive response? Or do you find You're almost competing against yourself because other companies just can't hold down prices the way you can. Around the world, Scott, retailers are all having to manage this. And We talk about price gaps, our price leadership position for a reason because prices are relative.

Speaker 3

And it's more fluid in an inflationary environment So we have to spend more of our time paying attention to that. We do mix across categories. We think about things like opening price points and protecting For a lower income family, some of the things that they need from a Staples point of view. And then as John mentioned, we use rollbacks to communicate Not only the reality of prices are coming down in some places, but the emotion or perception we want customers to have about us Being there for them and earning their trust during a period of time like this. So I wouldn't say that We're unique in having to work through that.

Speaker 3

Of course, everybody is. But we are likely a bit unique with the depth of experience that we have And the talent of our team to be able to manage it and our long standing supplier relationships and the way we work with them to try and help them get through This situation as well, the amount of communication between us and suppliers is always high. It's particularly high right now.

Speaker 6

It is. And I'd just refer to things that we said in the past. A merchant here has so many levers between mix and categories, what they feature on The homepage this morning at the top of the homepage is a section on rollbacks. They can change that. They can change modules.

Speaker 6

They can change features. There are just so many things that they can do to manage mix over time That it puts our team into a good position to do this. We've got experienced people who know how to do this and we have a number of associates here in the U. S. That worked in other markets Where inflation is quite common and that's really been helpful this last year to have that expertise inside the business.

Operator

Thank you. Our next question is from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Speaker 3

Thanks. Good morning, everybody.

Speaker 14

I wanted to take a shot at some of the comp questions that have been asked prior. You talked about 1% to 2% in the U. S. In the first Quarter sort of 3s in 2Q and 3Q that would suggest you accelerate roughly 4 in the 4th quarter. So I guess my question is you'll be going again sort of peak food at home inflation, some elevated stat benefits.

Speaker 14

So I want to get into like sort of how you're thinking about getting there. Do you expect any deflation to occur, Share gains in grocery to accelerate as some of your customer base sort of seeks out more value. And Embedded in that is that is there accelerated growth in general merchandise as you fill out the assortment and the fulfillment options.

Speaker 6

Hey, Christopher, I'd say a couple of things regarding the question. A lot of the phasing that Are in the forecast, definitely include strong customer demand. They include better inventory positions. We talked about inventory in total being up 28% with a considerable amount of that that is in transit on the way, which does include general merchandise, but Also has a reflection of what we believe will be better in stock positions in food and consumables. And the quarterly phasing also has the lapping Stimulus last year and the months we're in, we had a large ice storm last year in Texas and then in the months of March April, we had stimulus That was significant.

Speaker 6

So it does reflect that across the quarters. And I don't think I'd add anything else to that, Brett, unless you have anything.

Speaker 10

No. As you can imagine, the quarterly phasing is More challenging than normal just given the comparisons that we're up against. But I think as John said, there's a number of things during the year that make us feel confident in the total year. And we've given you as good as we feel like we can today on where we think it will stack up for the quarters. But it's there's going to be some quarterly variability certainly during the year.

Operator

Thank you. We have reached the end of the question and answer session. I'll now turn the call over to Doug McMillan for closing remarks.

Speaker 3

Thanks again for your time and attention. I'd just summarize By saying it's great to have momentum in all three segments as we start this year, I think it's clear that we're changing

Speaker 6

to To serve customers

Speaker 3

and members in the way that they want to be served and having stores and an e commerce business, pickup delivery, fulfillment centers, a marketplace, All of those things are helpful as it relates to that. And the great thing about it is the way that we're building these and designing them is that the company can grow Earnings and grow the bottom line while we're doing it. The business model changes and it enables the customer member to benefit and our business to benefit at Same time. So I'm excited about the short term momentum and looking forward to the year. Thank you all.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Walmart Q4 2022
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