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