Walmart Inc. (NYSE:WMT) Q4 2024 Earnings Call Transcript February 20, 2024

Walmart Inc. beats earnings expectations. Reported EPS is $1.8, expectations were $1.65. Walmart Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Walmart's Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Steph Wissink, Senior Vice President of Investor Relations. Steph, you may now begin.

Steph Wissink: Thank you, and welcome, everyone. The format of today's call will follow prior quarters. First, our CEO Doug McMillon will share his reflections on the quarter and year. Then our CFO, John David Rainey will review our Q4 and fiscal 2024 results, provide perspective on the key drivers of our financial framework, and offer initial guidance for fiscal 2025. Following these remarks, we will take your questions. At that time, we will be joined by our segment CEOs, John Furner from Walmart US; Kath McLay from Walmart International; and Chris Nicholas from Sam's Club. In order to address as many questions as we can, please limit yourself to one question. Today's call is being recorded, and management may make 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-GAAP reconciliations on our website at stock.walmart.com. Doug, we are now ready to begin.

Doug McMillon: Good morning, and thanks for joining us to talk about our business. Our team delivered a great quarter, finishing off a strong year. We drove sales growth of 4.9% and adjusted operating profit growth of 10.9% in constant currency. Highlights include: higher transaction counts and unit volumes; gains in market share in the U.S. and internationally; improved in-stock levels with inventory being in great shape and down versus last year; strong performance in Walmart U.S. customer experience scores, even during the high volume days before Christmas. Plus, this year, we passed $100 billion in global e-commerce sales for the first time. We had a very good holiday season. We were strong in the US, Mexico, Canada, and India, where we had the best Big Billion Days ever, and we continued the strong performance in China with the start of Chinese New Year.

Typically, we see some of our customer experience scores dip during the high volume hours and days we experience during the holidays. But during Q4, the Walmart U.S. team delivered three year high customer scores in our stores, for pickup and delivery from stores, and for those orders that flow directly from our e-commerce fulfillment centers. I'm excited about the omni-channel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient, but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3. Our general merchandise prices are lower than a year ago, and even two years ago in some categories, which means our customers are finding value in areas like apparel and hardlines.

In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries. Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year, and high teens versus two years ago. Private brand penetration is up in many of the countries where we operate, including the United States. During our Q3 call, I mentioned that we might find ourselves in a deflationary position early in calendar 2024. In Walmart U.S., we're there in general merchandise, but the slope of the decline softened during Q4, meaning the prices are lower than a year ago, but not as much as the trend line would have suggested at the end of Q3. We saw the trend line for food and consumables in Walmart U.S. soften too, resulting in our retail prices in food and consumables being slightly higher than a year ago.

In total, for Walmart U.S., our year-end retail prices on like-for-like items were inflated by about 80 basis points. Importantly, we're encouraged by our strength in terms of units and transactions. Sam's Club U.S. is in a similar pricing position to Walmart U.S., and outside the U.S. our pricing comparisons to a year ago are in more of a normal range. We're excited about the momentum we see and we're pleased with the quarter, but my focus stays primarily on what we're building for the longer term. That future is an omni-channel one where we simultaneously strengthen our stores and clubs and build a more compelling ecommerce business. As it relates to strengthening our stores and clubs, we're investing in remodels and supply chain automation to improve the customer experience and increase productivity.

Those things are going well. We'll remodel 928 stores and clubs globally over the next year, including 650 stores in the U.S. Not long ago, we shared that we would be building 30 new Sam's Clubs in the U.S. over the next several years, and more recently we announced we will add more than 150 supercenters in neighborhood markets in the U.S. over the next five years. Most of those are new builds and locations where we need a new store, but a few of them will be discount store conversions to a supercenter where we're relocating in the same community. Outside the U.S., we'll open around 230 stores and clubs next year, mainly in Mexico and Central America, and in China where they'll mostly be Sam's Clubs. We ended the year with 47 Sam's Clubs in China, and they continue to be quite strong on the top and bottom line.

We are, by far, the leading membership club operator in China with 28 years of experience there. So, our physical fleet is getting stronger, and it plays a hybrid role serving customers and members when they visit, and simultaneously enabling an important portion of e-commerce. Beyond our stores and clubs, we're continuing to strengthen our first and third-party e-commerce capabilities and scale those businesses around the world. The combination of marketplace and the commissions that go with it, fulfillment services, membership, advertising, and our smaller but fast-growing data monetization business enable us to grow our bottom line faster than our top line, while delivering everyday low prices for our customers and investing in our associates at the same time.

Marketplace is an engine for our business. As we've added more sellers in the U.S., we've seen more of them use our fulfillment capabilities. Marketplace is also the fastest growing aspect of e-commerce for us outside the U.S. That growth helps us drive our global ad business. For now, we see the biggest dollar impact from Walmart U.S. and in India from Flipkart. But as these businesses scale in places like Mexico and Canada, we expect to see a similar relationship. Globally, we drove advertising growth of 28% for the year to reach $3.4 billion. Our announcement today that we've agreed to acquire Vizio gives us the opportunity to reach and serve customers in new ways and connect more dots for those that advertise with us. Membership is another area where we'll continue to enhance our offerings.

Walmart Plus members spend nearly twice as much with us as non-members, and they buy more over the course of a year. At Sam's Club U.S., we're rolling out new exit technology that enables our members to use Scan & Go to just walk out after completing their transaction on their phone, further enhancing their membership. Last year, we began describing ourselves as a people-led, tech-powered, omni-channel retailer dedicated to helping people save money and live better. This description is really resonating for us inside the company. We can prioritize our associates, our values, and our culture and put impactful technology to work to help us fulfill our purpose, strengthen the customer and member experience, and strengthen our company. Here are some recent examples of us being tech powered.

Our new generative AI powered search on the Walmart U.S. app, which rolled out to iOS users last month and is coming to Android users this month, is a great example. One of those popular searches this month was help me buy a Valentine's Day gift. And rather than searching separately for things like chocolates, a car, jewelry, flowers, the search returns a list of results that are relevant and curated. And Flipkart launched a similar generative AI search tool, which was available just in time for Big Billion Days. Another example is our ability to provide customers and members with more convenient and affordable delivery. We already offer express delivery in the U.S. where customers can get their orders delivered fast. But what if you need something faster?

There's a pot of chili on the stove and you realize you forgot chili seasoning. Drone delivery can get it to you in 15 minutes or less. Delivering by drone isn't new to us. Over the last two years, we've operated 37 hubs across seven states, completing 20,000 deliveries. By the end of the year, we'll make it available to about 75% of households in Dallas, Fort Worth. I'm really excited about how the pieces are coming together in the near term. Our customers will have an improved store experience given our remodels. They can pick up an order, have it delivered to their doorstep or into their home, or get a fast drone delivery when they want it. And this flexibility is enabled by a more intelligent, more connected, and more automated supply chain.

From scaled businesses to our faster growing newer businesses, we're well on track to continue to hit the financial targets we laid out and make important investments for the future. And while we do this, we can grow in a way that helps us achieve our goals of creating opportunities for our associates and becoming a more sustainable business. In 2017, we announced a bold ambition to work with our suppliers to reduce, avoid, or sequester one gigaton, that's 1 billion metric tons, of greenhouse gas emissions by 2030. We call it Project Gigaton. Our merchants and suppliers got to work and made investments in practical things like energy efficiency, packaging, redesign, and load optimization. We've reported steady progress since then, and we're excited to say that our suppliers have now reported projects exceeding that 1 billion metric ton mark six years early.

We'll continue to work with our suppliers on real initiatives with real-world impacts that make our products better and our business stronger. As we think about developing our associates, we want them to feel, think, and act like owners. The degree to which our team takes ownership will have a big impact on our level of success. That's what motivated us to make shares of Walmart stock part of U.S. store manager compensation. It's also why we decided to do a three-for-one stock split. Today, more than 400,000 associates participate in our associate stock purchase plan. That's a big number, but hopefully even more will choose to participate and take advantage of the 15% the company contributes for the first $1,800 purchased by an associate each year.

Psychologically, it just feels better to buy a whole share rather than a fraction. We believe in our plan, and we're looking for ways, in addition to our 401(k) and the match that goes along with it, to help our associates build wealth and do more than just earn a paycheck. I'll close by thanking our associates for delivering a great quarter to end a year where we've accomplished so much. We're out to build on our momentum. We have strong omni-channel businesses globally and they're getting stronger. We're focused on executing the plans we have for this year and beyond, which we believe will deliver top and bottom line growth within the framework we've discussed and improve ROI over time. With that, I'll turn it over to John David.

John David Rainey: Thanks, Doug. We're excited about the progress we've made in growing and evolving our omni-channel platform in pursuit of our purpose to help people save money and live better. Our teams did a great job in the quarter, finishing the year strong. For the year, in constant currency, we achieved 5.6% net sales growth and over 8% adjusted operating income growth. We have strong underlying momentum exiting Q4 and are clear about the strategic initiatives we're seeing driving profitable growth in the years ahead. This is reflected in the sustained sales and operating income growth included in our FY 2025 guidance. I'll recap Q4 results using the framework we introduced at our investor community meeting last year, growth, margins, and returns.

As a reminder, there's a supplemental presentation on our IR website with additional information beyond my remarks. First growth. Constant currency sales increased nearly 5% or almost $8 billion in Q4 with strong growth from all three segments, led by increased transactions across in-store, club and e-commerce channels. International sales grew 13%, reflecting strength in Flipkart, Walmex, and China. International e-commerce sales increased 44%, reaching a penetration level of 25%, which is a record high for us. This included Flipkart's largest ever Big Billion Days event with 1.4 billion customer visits over the eight-day period. In the U.S., Walmart comp sales grew 4%, reflecting increased unit volume and share gains. Like-for-like sales inflation was about 1%, moderating approximately 160 basis points from Q3 levels.

We saw better than expected holiday sales, including two record-breaking volume days leading up to Christmas. Store-fulfilled delivery sales were up nearly 50% and we reached a $2 billion monthly run rate. Delivery has been a key source of share gains among upper income households and is also the most productive channel for acquiring Walmart Plus members. Sam's Club US delivered comp sales growth of 3.1% excluding fuel, with strength in food, consumables, and health categories. E-commerce sales increased 17% and we gained grocery share in both units and dollars. E-commerce continues to be a key point of differentiation for Sam’s with delivery and curbside driving e-commerce growth and in-club Scan & Go penetration up over 270 basis points.

Turning to margins. Enterprise gross margins expanded 39 basis points. Customers are responding as we continue to manage pricing aligned to competitive historic price gaps. In addition, we had lower markdowns resulting from strong inventory management, with Walmart U.S. inventory down 4.5%, Sam’s down over 8%, and international relatively flat excluding currency. This puts us in a good position to start the new fiscal year. The timing of Flipkart's Big Billion Days was a partial offset to gross margins, and while category mix pressure continued this quarter, we're encouraged to see sequential improvement versus Q3. SG&A expenses on an adjusted basis deleveraged 16 basis points, largely due to higher variable pay expenses in the U.S. relative to last year as a result of exceeding our planned performance.

One of the areas I'm most pleased about is the improvement in e-commerce profitability within the Walmart U.S. segment, resulting from lower e-commerce fulfillment cost, and densifying the last mile. Our store proximity to customers is an advantage as we increasingly use stores to fulfill e-commerce orders. We've lowered last mile store to home delivery cost by about 20% in the last year, even as we've shortened delivery times to same day from around 90% of stores. Combining the fulfillment efficiencies with the improved product margins of e-commerce, we far exceeded the 200 basis point goal we outlined at our investor community meeting and lowered e-commerce losses by more than 40% versus last year's level. We also saw another strong quarter from our portfolio of higher growth initiatives that reinforce our core omni-retail model.

Global advertising grew approximately 33%, led by internationals 76% growth. Internationals growth benefited from the timing of big billion days, but still delivered full year growth of about 30%. Sam's ad business achieved a new high with almost 50% more advertisers versus last year. Walmart U.S. Connect ad sales grew 22% with more than 50% growth from Marketplace sellers. We're encouraged by the strong demand from new advertisers as active advertiser counts increased over 20%. We're excited about our agreement with Vizio to bring together their unique operating system and our Walmart Connect advertising business. This combination would create new opportunities for advertisers to connect with customers, empowering brands to realize greater impact from their advertising spend with Walmart.

We believe the deal would close during FY 2025. Due to certain transaction-related costs associated with the acquisition, including for talent retention and technology integration, we expect the deal to be slightly dilutive to EPS in the near term. We plan to finance the acquisition to use cash and/or debt. Importantly, we believe the transaction would be IRR accretive, delivering returns ahead of our expected ROI. Within Marketplace and Fulfillment Services, Flipkart's momentum continued with double-digit growth. In the U.S., Walmart's Marketplace delivered strong holiday events, including Black Friday, our largest marketplace sales day ever. Over the past year we've increased sellers 20% with approximately 30% of sellers using Walmart Fulfillment Services and we're pleased with the trends in our membership programs around the world.

Sam's Club US reached another record high level for member counts and plus member penetration, which led to membership income growth of 10%, and Walmart Plus continues to grow double digits. Strong sales and margins led to fourth quarter adjusted operating income growth of more than 13%, while adjusted EPS of $1.80 increased 5.3%. Below the line, higher interest and non-controlling interest were headwinds to adjusted EPS. Moving to returns. We generated over $35 billion in operating cash flow this year, an increase of nearly 24% due to strong business performance and improvements from working capital initiatives. Return on investment improved approximately 230 basis points to 15%, a level last achieved in 2017. Our stepped-up investments aimed at improving margins and productivity resulted in capital expenditures of $20.6 billion.

The magnitude of ROI improvements reflects some benefits from productivity initiatives that we initially expected to realize in FY 2025. And as we announced this morning, we're pleased to raise the dividend by 9% this year, the largest increase in over a decade, reinforcing our commitment to strong cash returns to shareholders. And as we continue to execute on our long-range plan, we will continue to evaluate the appropriate payout ratio for our business. We have a clear vision to deliver our financial framework of growing operating income faster than sales. I'd like to spend the next couple of minutes on the initiatives we believe will drive improved incremental margins in the years ahead, even as we stay customer and top line focused, deliver value for them, and invest in our people.

Beyond steady broad-based sales growth across segments, incremental profits will be derived from four key areas. Business mix, productivity benefits from our supply chain transformation and automation improvements, product mix, and geographic mix. These areas will contribute to improved e-commerce economics over the next several years. Starting with business mix. As I noted previously, we're excited about how our newer, higher-growth businesses are scaling. Together, these businesses have significantly higher structural margins than our core retail business, and they are growing significantly faster, which has the effect of bending our margin curve upward. Over the past year, global advertising grew 28% to about $3.4 billion. Walmart U.S. Marketplace revenue grew 45%, with more than 35% of orders fulfilled by Walmart Fulfillment Services.

And lastly, global membership income grew 20%. Over our planning horizon, the growth of this portfolio is expected to be one of the largest drivers of operating income growing faster than sales. We believe global advertising and membership alone will represent 20% of annual operating income in FY 2025. These profit streams allow us to fund investments in our core business, while also expanding our operating margins. Turning to supply chain transformation and automation. This was a significant year for the phased deployment of automated technologies to optimize our next generation supply chain. This program spans several years with activity stepping up in FY 2025 and FY 2026. To date we've retrofitted 13 regional distribution centers with varying levels of automated storage and retrieval systems.

This technology gets product to shelves faster and has meaningful benefits to productivity both in our DCs and stores. With the progress we've made over the past year we're on track toward our goal of having approximately 55% of our fulfillment center volume and roughly 65% of supercenters serviced by automation by the end of FY 2026. Already around 1,500 stores are receiving palletized freight from these DCs. There are also exciting benefits from technology being realized in our stores. We're using applications to drive speed and proficiency, including RFID and computer vision, as well as digital displays and labels to remove friction for both customers and associates. New digital tools that automate repetitive tasks or eliminate heavy lifting have increased associate productivity and customers are benefiting from improved in-stock rates and associate accessibility, leading to customer experience scores up over 140 basis points in FY 2024.

We expect to begin seeing the enterprise financial benefits of upstream automation and cost to fulfill, inventory efficiency, store productivity and wage leverage as we move through FY 2025 with a more pronounced benefit in the second half. On product mix, continuing to expand our e-commerce assortment is critical to earning first-position consideration among customers. This is particularly true for general merchandise, including our marketplace. We've accelerated visit frequency and built incredible trust through core essentials like food and consumables. In fact, weekly active e-commerce customers grew 17% this last year. We're building on this trust by improving our general merchandise assortment both on and offline. General merchandise also benefits as US store remodels continue to perform well.

We'll execute another 650 in Walmart U.S. in FY 2025 on top of the nearly 700 remodels completed this year. We're also excited to be returning to store growth in the US, as Doug mentioned. Our supercenter, store of the future design, is resulting in stronger four-wall sales, while also delivering a sales lift in the surrounding trade area, as these modernized stores offer more capacity for pickup and delivery, are more engaging to shop, and are improving customer perception about Walmart, especially in general merchandise, where we're encouraged by the share gains we're seeing. For general merchandise categories that surged during 2020 and 2021 and have longer replacement cycles such as electronics and housewares, we expect relative weakness to persist in FY 2025, although are hopeful to see directional improvement in the second half as comparisons ease.

Lastly, geographic mix. Our international portfolio is accretive to sales and profit growth and is expected to be a larger contributor to enterprise performance. We're on pace to achieve our goals to reach approximately $200 billion in GMV and more than double profits by FY 2028 from the FY 2023 base. This implies high single digit annual sales growth for the segment. In FY 2024, international grew constant currency sales 10.6% and adjusted operating income over 15%. India, Walmex, and China are the sales growth leaders. These three markets are expected to account for approximately three-fourths of international growth over the next several years. In India, Flipkart's growth continues to compound in the double digits, while PhonePe is now processing more than 6 billion monthly transactions and has reached 1.4 trillion in annual total payment volume, about 40% higher than one year ago, and Walmex continues to go from strength to strength.

Turning to guidance, relative to prior years we're introducing a slightly wider range of potential outcomes given the size of our business and a greater degree of variability we've seen. There are three nuanced factors to consider for FY 2925. First, FY 2025 is a leap year, which adds an additional day in Q1. I'll refer to this effect in our Q1 guidance shortly. Second, we'll experience a 53rd week for comp sales in Q4. We've included a slide in our presentation to help with modeling this. And third, on January 30th, we announced that the Board approved a three-for-one stock split effective February 23rd. We're offering full year and first quarter EPS guidance on a pre and post-split basis. For FY 2025, we expect net sales on a constant currency basis to grow between 3% and 4%, and for operating income to grow 4% to 6%.

We expect Walmart U.S. and Sam's Club U.S. net sales growth to fall in line with the enterprise and for international growth to be above enterprise growth. We expect all three segments to contribute to operating income growth, led by Walmart U.S., Walmart International, and then Sam's US. At our Investor Day last April, we outlined a multi-year plan of growing sales approximately 4% and growing operating income even faster. We depicted that as a range of 4% to 8%. Looking at our growth over a two-year period, combining FY 2024 actuals and our guidance for FY 2025 at the midpoint suggests we will grow sales more than 5% and operating income over 8% on average annually. This is aligned with the framework we laid out, and we're pleased with how we're executing on this plan.

At the enterprise level, we expect sales to grow faster than operating income in the first half due primarily to the timing of technology spent. In the second half, we expect operating income growth to exceed our sales growth. And on a full year basis, we expect operating income growth to exceed sales growth by 150 basis points at the midpoint. This spread between operating income growth and sales growth in FY 2025 is similar to what we experienced in FY 2024. Adjusted operating income grew 250 basis points faster than sales, including a benefit of approximately 90 basis points from LIFO. As we've noted in the past, this relationship of operating income growing faster than sales won't occur every quarter, but we aim for the framework to hold on an annual basis at the enterprise level.

We provided additional detail on guidance for interest, tax rate, and non-controlling interest in our press release. We expect FY 2025 EPS in a range of $6.70 to $7.12 on a pre-split basis and $2.23 to $2.37 on a post-split basis. As we continue the multi-year investment in technology and innovation to optimize our supply chain and stores, we expect CapEx to range between 3% to 3.5% of sales for the next couple of years. Importantly, we have good visibility to the ROI on these investments and we're encouraged by what we're already seeing. For Q1, we expect sales growth of 4% to 5% and operating income growth of 3% to 4.5%. The leap year benefit is estimated to be approximately 100 basis points to sales growth. Operating income growth is expected to be below sales growth this quarter, reflecting the timing of technology expenses mentioned previously.

We expect Q1 EPS in the range of $1.48 to $1.56 on a pre-split basis and $0.49 to $0.52 on a post-split basis. In closing, our FY 2024 results demonstrated our ability to reshape our sales and operating income growth trajectory. And our guidance for FY 2025 assumes operating income growing faster than sales again. Our value proposition is resonating with customers. We're deploying capital to proven and scalable investments in our people and platform, and our business model is evolving towards higher margins and returns. I'd like to thank our 2.1 million associates worldwide who are indeed making the difference in bringing our purpose and business strategy to life every day. We're excited that by making our stock more accessible to them, more of our associates can become owners and align their interest with our external stakeholders.

I'll now turn the call over to the operator for questions. Thank you.

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