Walmart Inc.

Greetings. Welcome to the Walmart Fiscal Year 2023 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Dan Binder, Senior Vice President, Investor Relations. Please note that this conference is being recorded. At this time, I'll turn the conference over to Dan Binder, Senior Vice President, Investor Relations. Dan, you may begin.

Thank you, Rob. Good morning, and welcome to Walmart's second quarter fiscal 2023 earnings call. I'm joined by members of our executive team, including Doug McMillan, Walmart's president and CEO, John David Rainey, executive vice president and chief financial officer, John Ferner, president and CEO of Walmart U.S., Judith McKenna, president and CEO of Walmart International, and Kath McClay, president and CEO of Sam's Club. In a few moments, Doug and John David will provide you an update on the business and discuss second quarter results. That will be followed by our question and answer session. Before I turn the call over to Doug, let me remind you that today's call is being recorded and will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include, but are not limited to, the factors identified in our filings with the SEC. Please review our press release and accompanying slide presentation for a cautionary statement regarding forward-looking statements, as well as our entire safe harbor statement and non-gap reconciliations on our website at stock.walmart.com. It's now my pleasure to turn the call over to Doug McMillan.

Good morning and thanks for joining us. A few weeks ago, we updated you on our expectations for how we would perform in Q2 and for the year. The second quarter finished stronger than we had anticipated, and John David will touch on that in a moment and provide more detail for the back half of the year. Our sales were well ahead of plan with inflation lifting our average transaction size, but we know that the amount and persistence of inflation is negatively affecting many families. From the U.S. to Mexico to Canada to Chile, they're prioritizing how they spend their money. We're pleased to see more families from a variety of income levels choose us as they look for value. Our purpose is to save people money and help them live better, and that's especially important right now. After the first quarter, we shared how the environment had changed. The cost of food and fuel, a heavier mix of sales in food and consumables, and excess inventory in general merchandise categories were among the most challenging items for us at the time. As we moved through Q2, food inflation continued to tick up, and we continued to see a heavier mix of sales in food and consumables in many of our markets, and that put pressure on margins overall. Food comps in the U.S. were up mid-teens for the quarter, with units and food slightly negative and about flat exiting the quarter, even with double-digit inflation. Another weight on margins has been the number of markdowns we've taken. Starting back in March, we knew we needed to act quickly and aggressively in some categories, and we have. We've made good progress to reduce inventory levels where we've focused and taken markdowns. The aggressive approach we took to move through apparel in particular put financial pressure on us, but it helped relieve pressure on our stores and through our supply chain. We're making good progress to reduce costs. We've reduced the number of shipping containers in our system, for example, by more than half from the Q1 level and are now much closer to our historical averages. We're also managing pricing to reflect our fully landed costs. The merchants are adjusting by category to reflect where we expect demand to be. We had our U.S. store manager meeting last week, and amongst other topics, we shared examples of items where we're holding prices down or rolling them back. Those tend to be opening price point, private brand, food and consumables items. We wanna help families put meals on the table with great value and our other private brands to relieve the pressure they're feeling. The quality value and convenience we offer makes Walmart a smart choice and we're seeing more middle and higher income shoppers choose us. As I've been in US stores recently, I'm pleased how we've executed back to school. As we finish it off in some markets, we've transitioned to back to college in the appropriate stores with items like mini refrigerators, floor length mirrors and futons. In July, I got to visit our associates in India. After visits to Flipkart, Minthra, and PhonePay, a Flipkart fulfillment center, and a Karana to see how they're using PhonePay, I left even more excited about what's happening in these businesses and what's to come. Having visited several of our international markets this year, I'm pleased by how connected we are now and how so much of what we're building is common across markets as we scale marketplace businesses and fulfillment, advertising and financial services, and take steps to make a bigger difference in healthcare. As I look ahead, I expect a strong finish to the back-to-school season and will quickly transition to the holidays. Our fall and holiday products look great. There's a lot of newness, and we've got a strong position in opening price points across categories. From Halloween to Christmas to Flipkart's big billion days, we'll be ready. We'll have a cleaner inventory position, and we'll have a strong seasonal presence. We expect inflation to continue to influence the choices that families make, and we're adjusting to that reality so we can help them more. Regardless of the inflation level, and as we work through the places we have too much inventory, we continue to make progress on our strategy. We're becoming more digital, even more relevant as an omnichannel retailer, and the related businesses like fulfillment and advertising continue to grow. We're building a different business, and we're making progress. Let's move on to our operating segments. I'll start with Walmart U.S. The strong comps we see in food and consumables are leading to market share gains. Pickup and delivery are strong, growth is improving on Walmart.com, including the marketplace, and more people are choosing to be a Walmart Plus member or step up to in-home. Walmart Plus is an important component of our plan. We announced the addition of a streaming benefit. Walmart Plus members will receive a Paramount Plus subscription at no additional cost as part of their Walmart Plus membership in September. The premium streaming service offers a broad content offering with original series, movies, family shows, and live sports. We're excited about the coming launch, and we know our members will be too. Beyond membership, the team is also working on getting items to customers faster while lowering the cost of delivery through a significant increase in the number of orders fulfilled by stores. We've increased this volume by nearly 40% from a year ago. Speed matters, whether it's how quickly we get items to customers or how quickly we scale new businesses. Our white-label delivery platform service, Walmart Go Local, will celebrate its one-year anniversary later this month. Powered by our SparkDriver platform, I'm excited about the growth I've seen so far and the expectations looking ahead. We've passed one million deliveries so far with Go Local. We expect to have about 5,000 pickup locations by year-end, and client satisfaction scores are strong. We continue to sign up larger scale customers and we're making strides on the bigger unlock, which are small and medium sized businesses. Our technology and expertise will help so many of these businesses grow while contributing to our operating margins over time. Advertising is also performing well. In Walmart US, the Walmart Connect team continues to deliver more value to the suppliers and sellers who advertise with us. Improvements to search and our large first-party shopper data have led to performance improvements for our advertisers both year-over-year and sequentially. We've seen the number of active advertisers investing with us increase 121% over last year. Even more encouraging, these improvements have supported the overall site experience for our customers by helping them find the right products or discover new ones that are most relevant to them. As you've heard us say before, advertising is a global priority for us. We continue to see strong growth in markets outside the U.S., like India and Mexico. Turning to Sam's Club in the U.S., comp sales were strong again for Q2, up 10%, marking the 10th consecutive quarter of double-digit comp growth. Similar to Walmart, gross profit was pressured for the quarter on higher-than-normal markdown activity to clear through excess inventory. We'll continue to make progress as we move through Q3, and we'll be in good shape as we enter the holiday season. We like what we see in terms of membership. Total counts are up about 9% over last year, and a penetration of plus members continues to climb. Moving on to Walmart International, where we performed well again in Q2 with sales up nearly 10%, including double-digit comps in the three largest markets of Mexico, Canada, and China. We're also accelerating our digital businesses, including strong e-commerce growth over the last two years. Mexico's up 31%, Canada 32%, and China 152%. We see this growth even as customers choose to do more in-person shopping. It really shows the power of operating across multiple channels. Like the U.S., we see the effects of inflation come through in how people are shopping. In Mexico, we saw all formats perform well, and Bodega was especially strong with comps above the overall WOMX average. We widened our price gaps for Bodega by 140 basis points in Q2, and we're seeing more customers shopping this format. While inflation remains high, most of our markets are growing comps ahead of inflation. I'm proud that we're helping families access the things they need at more affordable prices. I'll close today by thanking our associates for all they do every day to support our customers and members. I'd also like to welcome John David for his first earnings call with us. And with that, I'll turn it over to him.