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 another strong sales quarter. We are moving a lot of volume through our business and I'm proud of how our associate team has responded in serving customers, as we manage through this unique period.
We delivered strong top line growth with total constant currency revenue up more than 9% in the second quarter. Sales were strong across all segments particularly in food and consumables. Customers are increasingly choosing Walmart to help them save money, as they deal with broad inflationary pressures. As we navigate the current environment, we know that we're not immune to large macroeconomic shifts. We're facing similar cost pressures that others are seeing related to excess inventory, fuel prices and supply chain, but our business model is structurally sound and our market position is strong.
As the year has progressed, we've seen more pronounced consumer shifts and trade down activity. As an example, instead of deli meats at higher price points, customers are increasing purchases of hot dogs, as well as canned tuna or chicken. Private brand penetration has also inflected higher. And in food category, specifically, the private brand growth rate doubled compared to Q1 levels. We'll continue to manage pricing for customers in a way that preserves our price gaps and allows us to earn market share profitably.
We've been very focused on managing controllable costs and consequently achieved expense leverage across all three segments in Q2, even though we haven't fully lapped the wage investments implemented last year. During the quarter, we also made progress reducing inventory, managing prices to reflect certain supply chain costs and inflation, and reducing storage costs associated with the backlog of shipping containers.
We're encouraged by the initial steps taken by some suppliers to help us reduce product acquisition cost. We've taken similar steps to manage our support and overhead cost too, and we're achieving significant savings in procurement of goods not for resale. In our stores and fulfillment and distribution centers, we've seen labor productivity metrics improved. We are finding efficiencies and reducing expenses, while still focusing on operational excellence.
I want to spend a moment discussing inventory. As a backdrop the shifts that we've seen in consumer behavior through the pandemic, shifting from in-store to online along with big swings in the purchase of goods versus services, and then the reversion back to pre-pandemic norms have been sharp and difficult to predict. These trends have been exacerbated by inflationary pressure on the consumer that many of us have not experienced in our lifetime, the effect of which has recently changed consumption patterns in certain categories for us notably, general merchandise.
The result of all of this put pressure on our inventory levels that peaked in the last quarter. Importantly, the team has a deep understanding of our inventory levels and content and it made a lot of progress during the last quarter. In stock levels have improved about 250 basis points since Q1 in our grocery business alone despite the heavy sales volumes we're experiencing. We also made progress showing through excess inventory, especially in hardline categories. At the end of Q2, Walmart U.S. inventory growth was 26% versus last year, reflecting over 750 basis points of improvement from Q1 levels. Notably, about 40% of the year-over-year increase relates to inflation.
General merchandise inventory growth rates are down more than 15 percentage points from Q1, but still with more work to do. We've cleared most summer seasonal inventory, but we are still focused on reducing exposure to other areas, such as electronics, home and sporting goods. We've also canceled billions of dollars in orders to help align inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is still above optimal levels. And our actions in Q3 will allow us to make significant progress toward rationalizing absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season.
Despite the short-term challenges, we're facing this year, we continue to advance our flywheel strategy and diversify our income streams. For example, the global advertising business grew nearly 30% in Q2,led by Walmart Connect and Flipkart, as new advertisers turn to Walmart to deepen relationships with customers. We now have over 240 million items in our U.S. e-commerce assortment and our marketplace seller account has increased about 60% year-over-year. We continue to sign on more customers to our data ventures offering and the number of Walmart Plus membership continues to grow.
We are also excited about the build out of automation and technology throughout our business and how it will continue to help drive greater efficiency. Through my first couple of months here, I have been able to get out and visit our stores and see our distribution and fulfillment centers and witness the supply chain automation and technology that we're putting in our stores and centers.
One example is the VizPick technology that we've rolled out to our associates across U.S. stores. This tool uses augmented reality to speed the inventory management process enabling associates to get needed product from the backroom to the sales floor more efficiently. This not only saves associate time, but also helps avoid missing sales through side counter out of stocks. It's a win-win. In summary, our business is resilient and with the omni capabilities we built, we are better positioned now than we were in prior periods of economic softness.
Now let's get to some additional Q2 financial details. As mentioned previously, each of our segments delivered strong sales growth. Walmart U.S. comp sales accelerated to 6.5% growth, reflecting strong grocery sales and a higher average ticket size. International constant currency sales were up 9.9% with strength in Mexico, Canada and China, while Sam's Club U.S. delivered comps of 10% excluding fuel and tobacco. Consolidated gross margin rate decreased 132 basis points, reflecting increased markdowns and unfavorable mix shifts in our U.S. businesses. Sam's Club gross profit was also negatively affected by a LIFO charge due to higher inflation.
On the expense side, selling, general and administrative expenses leveraged 45 basis points helped by higher sales, partially offset by the U.S. wage investments implemented last year. Operating income decreased 6.8% and adjusted EPS was $1.77. Two discrete items positively affected our results, operating income, benefited from a favorable insurance settlement of $173 million during the quarter. Adjusted EPS also benefited from this, as well as a $182 million special dividend from one of our equity investments.
Operating cash flow was $9.2 billion, reflecting lower operating income, higher inventory amounts due in part to inflation and the timing of certain payments. During the quarter, we returned $4.9 billion to shareholders through dividend and share repurchase. Through Q2, we are ahead of pace on our original share repurchase plan for this year and now expect to repurchase $10 billion to $11 billion in shares for fiscal year 2023.
Now let's discuss segment results. Walmart U.S. comp sales momentum continued with growth excluding fuel of 11.7% on a two-year stack. Food sales were especially strong with mid-teens growth, while general merchandise sales were soft, particularly in electronics, apparel and home. Transactions increased 1%, while average ticket increased 5.5%. We were pleased to see e-commerce sales growth improved sequentially up 12% year-over-year in Q2 and 18% on a two-year stack.
SG&A expenses leveraged 21 basis points, reflecting higher sales and lower COVID cost, partially offset by the wage investments. The team did a nice job pivoting the expense structure, so the scheduling challenges from Q1 did not repeat. Gross margin pressure led to a decline in operating income of about 7%.
International had another really good quarter. Sales were strong, up 9.9% in constant currency. Currency headwinds negatively affected reported sales results by about $1 billion. Each of our major markets delivered positive comp sales, with Mexico and China leading the way.
E-commerce sales on a constant currency basis grew 15% on top of strong gains last year. Comp sales in Mexico increased nearly 11% with strong growth in stores, as well as e-commerce sales, which grew 18%. The team is doing a good job reinforcing our price message and positioning, as customers manage through this inflationary period. In China, comp sales were up more than 14%, with strong growth in e-commerce sales, which increased 77% in the quarter and more than a 150% on a two-year stack.
E-commerce penetration continues to climb in both our Sam's Clubs and hypermarket stores, as customers increasingly choose omni solutions to meet their shopping needs. Canada, comp sales increased more than 10% even as higher levels of inflation are starting to pressure consumer spending in discretionary and general merchandise categories.
Flipkart continues to meet our expectations and the team is gearing up for Big Billion Days. I traveled to India last month and was impressed by how the Flipkart and PhonePe teams are innovating for the customer and driving growth. PhonePe continue to see strong growth with annualized TPV of over $830 billion reaching a record level of monthly transactions of about 3.1 billion.
International operating income in constant currency increased more than 28% partially attributable to the previously mentioned insurance recovery for prior operational disruptions in Chile.
Sam's Club had another strong sales quarter with comp sales up 10% excluding fuel and tobacco, an increase of more than 20% on a two-year stack. Transactions increased 9.8%. E-commerce sales grew 25% with strong contributions from both curbside and ship to home orders.. Membership income was up nearly 9% with another record high quarter in overall member counts and continued growth in Plus member penetration.
Sam's added more new members in Q2 than any other quarter in recent years benefiting from membership campaigns. Sam's leveraged expenses of 131 basis points, including fuel and 72 basis points, excluding fuel due primarily to higher sales and lower COVID cost, but gross margins were down, as elevated markdowns, supply chain and fulfillment cost and a 70 basis point inflation related LIFO charge pressured profitability. As a result, operating income declined about 35%.
Now let's turn to guidance. With the updated financial guidance we released last month, we outlined the pressures that led us to take a more conservative outlook for the current year profitability. Let me take a minute to provide you with more detail.
When we provided guidance three months ago, we didn't expect food and fuel inflation to accelerate to the levels that we experienced in Q2. In fact, Walmart U.S. food inflation was up double digits year-over-year, and we saw a nearly 400 basis point step up, as the quarter progressed compared to levels at the end of Q1. The rising cost for essential items and customers re-prioritization of spending led to significant mix shifts in our business.
Grocery sales mix increased nearly 300 basis points, whereas general merchandise sales mix decreased more than 350 basis points. This resulted in additional general merchandise markdowns in our U.S. business, particularly in apparel at a time when inventory clearance was already higher than expected in the industry. Higher fuel prices also pressured our supply chain experts.
We finished the quarter on a strong note, however, and ahead of our updated Q2 guidance provided last month and the Q3 back-to-school season is off to a solid store. Contributing factors to the better performance included strong sales at the end of the month with good flow through to the bottom line and lower-than-expected supply chain cost. We're taking additional pricing actions in Q3 to improve inventory levels in the back half of the year, and we've built in more conservative category mix assumptions within our guidance.
Our sales and profit view reflects trends we've seen year-to-date, as well as the uncertainty around inflation and consumer spending in the coming quarters. We've updated our fiscal year '23 guidance to reflect the better Q2 results versus the guidance we provided in July. We continue to believe the sales and profit guidance we provided at the time for the back half of the year appropriately reflects elevated uncertainty in this environment and is our best view of expected performance.
For Q3, we expect net sales growth of about 5% including comp sales growth of about 3% from Walmart U.S. We're expecting operating income to decline 8% to 10% and adjusted EPS to decline 9% to 11%. For fiscal year '23, we expect net sales growth of about 4.5% including comp sales growth of about 4% for Walmart U.S. We expect adjusted operating income and EPS to decline 9% to 11%. Excluding the effect of divestitures, this would translate into net sales growth of 5.5% and a decline in adjusted operating income and EPS of 8% to 10%.
Before I close, I'd like to share my perspective that someone that is new to Walmart and meeting many of you for the first time, I'm excited to join the Company at such an opportunistic and transformational time. Certainly retail broadly is being pressured right now, but that shouldn't detract from the incredible opportunity that we have in front of us. It starts with our mission of helping people save money, so they can live better. We do that every day at a scale that is unmatched by helping people be able to buy the things that they want, and they need. This mission permeates our culture and everything that we do.
I've joined an exceptional leadership team. Their history of operational excellence, their strategy to drive to win is simply something that I wanted to be a part of. When you combine that with the resources we have and the investments we're making in things like supply chain, automation and improving our e-commerce capabilities and diversifying our portfolio, with higher margin products and services like data and advertising, that will result in more durable earning streams, as they scale. We have the potential to not only be relevant in the next chapter of retail, but help define it. And when we execute on these things, we have the ability to appreciably increase our shareholder value over time. I believe that some of the best days of Walmart are in front of us. I look forward to working with you.
And now, we would be happy to take any of your questions. Thank you.
