Walmart CFO John David Rainey joins Yahoo Finance Live to discuss the chain's latest earnings beat, where consumers are still feeling the brunt of inflation, the impacts of retail thefts on Walmart's profit margin, and opportunities seen in China and e-commerce channels.

Video Transcript

- I mentioned those retail earnings shares of Walmart. We're watching those closely. That's after the first quarter earnings came in stronger than estimated. Walmart beating on the top and bottom line, lifting full-year guidance as well. We're seeing strength in the grocery segment in particular, offsetting a weaker performance in apparel and electronics. Walmart's e-commerce business skyrocketing over the last year.

Let's break all of this down with Walmart CFO John David Rainey, alongside Yahoo Finance's Executive Editor Brian Sozzi. John, thank you so much for being here. Really interesting numbers and quarter from you guys. Talk to me first about the sort of give and take that you guys are seeing in the store, the grocery side versus more discretionary items and what trends are looking like right now.

JOHN DAVID RAINEY: Sure. Well, it's good to be on the show. And first I'll say that we had a really strong quarter. We're pleased that revenue, our top line, was able to grow over 7%. But I think, very importantly, we saw that our operating income grew at 17%. And what this demonstrates is that the value proposition, our value proposition, is really resonating with customers.

But we continue to see, as you noted, a mixed shift in our business. As consumer wallets are stretched more thinly, they're shifting more of their dollars to purchasing items like food and consumables and less away from general merchandise. And overall, that does have an impact on our business because general merchandise tends to be higher margin for us. But even despite that, we were able to grow operating income in the quarter 17% and impro-- or, increased our guidance for the year as well.

- John David, Brian here, good to get some time with you. You mentioned on the analyst call this morning that sales moderated as the quarter progressed. Why do you think that was the case? And then bigger picture, how financially stressed is the core US shopper at Walmart?

JOHN DAVID RAINEY: Yeah. The moderation did occur in the quarter. And there's a couple reasons Brian to point to. I think one is, just, headline inflation rates are coming down. That affects our revenue numbers as well. We're beginning to lap some of those periods of higher inflation last year. But there were also a couple key trends in the quarter that affected our business and the macro economy at large.

And so one of those I'd point to is SNAP benefits. Those abated during the quarter. And that tend-- we tend to see that spending patterns follow that as well. We also saw overall for the quarter, a reduction in year-over-year tax refunds. And the way that played out in the quarter, earlier in the quarter, we were seeing increases in year-over-year tax refunds. For the quarter in total, it was down 10% or 11%. And again, spending trends followed that.

And then lastly-- and this was a good guy for us-- but we saw an increase related to the cost of living adjustment with Social Security. And that happened earlier in the quarter. And so all these things combined kind of impacted the cadence of revenue growth in the quarter. And so February started off really strong. And then we saw a little bit of a drop down in March and April.

- John David, Brad here. Would love to, in terms of the digital and the e-commerce business-- and you've invested so much into that over the past 7 to 10 years. And it's really paying off here over time. I'm just wondering, as you think about further investment into that technological touchpoint with your end consumer, how you're seeing some of the members of your rewards program or those that are kind of closest to Walmart as a subscriber base, how they're continuing to engage with the brand and where they're even continuing to spend on an average basis, if there's any figures that kind of have been elucidated over that time in the investment in technology.

Sure

JOHN DAVID RAINEY: Well. Our, e-commerce business was up 26% in the quarter. And I feel like we're really hitting our stride here. Our value proposition is resonating. But it's not just around price. It's also around convenience. And that matters irrespective of what your income level is. And so things like online pickup and delivery continue to grow in much faster rates than the rest of our business.

And when you have value like that, when we provide value like that to our customers, you're willing to subscribe to a membership where you have the utility in that. And what we see among those members is that about 50% of them actually come from the channel of online pickup and delivery. And the spending related to that, they are appreciably higher than what an average Walmart customer is. So we want more people to avail themselves of the suite of benefits that we provide for our customers.

- John David, how concerned are you that-- you guys mentioned on the earnings release, still seeing double-digit food inflation. Now, we have gotten a series of rate hikes over the past year and a half. Supply chains have proved. But we're still hearing from Walmart, double-digit inflation. What's causing this, and any relief in sight?

JOHN DAVID RAINEY: Sure. Well, our guidance for the year really has sort of finely balances, a cautious outlook on the consumer, with some conviction in our own ability to execute on our strategy. But you're exactly right. If you look at the headline numbers, sure, inflation is coming down, because we're lapping higher prices last year.

But if you're a consumer going to buy a basket of groceries, prices are still high. If you look at food prices on a two-year stack basis, they're still up 20%. And so pocketbooks are pinched. And that's causing customers to be more discretionary with these larger-ticket items, like electronics, TVs, home, and apparel.

- You said on the call that you are seeing signs of stress on consumers below the surface. Is that the kind of thing that you're talking about? What else can you tell us about those signs of stress?

JOHN DAVID RAINEY: Yeah. it's the same thing that we saw in the prior couple quarters as well. When consumers are coming to our stores, we're seeing trade downs, in terms of buying less expensive meats. Or instead of buying a pack of 12, they're buying a pack of 6. You can see that their wallets are being stretched more thinly.

And when you look broadly-- I look at the same economic data that you do-- but there are other indicators. We're seeing credit as a funding instrument, as an example, be more elevated to where it was in prior periods. You're seeing delinquency rates on credit cards in general tick up.

And so there are these signs that there's some fraying in terms of the consumer health. And we're keeping a cautious outlook on that. There's a lot that we don't know about the back half of the year and we want to be prepared for any type of economic environment.

- John David, we've heard some of your competitors, Target, some of the pharmacy store chains as well have talked a lot about what you and the retail industry call shrink, which sometimes is a euphemism for theft. It seems like some of it is organized crime, coming into the store, stealing lots of stuff. What are you seeing at Walmart? And to you, is that also a sign of the times in economic stress? Or is there something else going on there?

JOHN DAVID RAINEY: Yeah. Well, I certainly think it's related. But to be clear, this is a problem for all retailers. But our main focus at Walmart is protecting our associates, protecting our customers, but also protecting our merchandise. But this is not an issue that one retailer or either the retailers at large can solve by themselves. We need engagement from the local communities to help solve this.

- John David, of course Walmart is very much an international company. And one slide that stood out to me in your presentation is China, some very big sales growth numbers there. What is driving that? And what is the outlook for your China business in the back half of the year?

JOHN DAVID RAINEY: One of the things that I love about our China business is how penetrated we are into e-commerce. That business is roughly 50/50, in terms of brick and mortar versus e-commerce. And I think it's a great indication of how to think about our business as an-- at an enterprise level into the future.

But you're right, China was a real bright spot for us in the quarter. And part of that was the economy reopening. But we also did-- that our team did a very good job making sure that we had the right merchandise in the right place to respond to the seasonal demand earlier in the quarter. So really pleased with the progress that we saw there, not only from a top line perspective, but bottom line as well.

- John David, we know you talked in the past and Walmart has about what the future of retail looks like, especially with AI. And AI, of course, has been the flavor of the earnings season, or two earnings seasons at this point. For Walmart's perspective, beyond a frictionless cashier or, kind of, grab-and-go type of experience, where else do you see AI perhaps improving some of the seamlessness for the business at a whole? And does that have any broader implications for things like headcount too?

JOHN DAVID RAINEY: Sure. Well, we, like all companies, are keeping a close eye on AI and making sure that we're appropriately applying that to the aspects of our business that we think are additive. And certainly, the most obvious examples are around how we can improve customers' and members' shopping experiences, so tailor offers to them that are based upon their own individual preferences, their past buying patterns.

But there's a lot more to AI than just what we can put in front of the customer. When we look at our own supply chain technology that's in some of our distribution centers, we use AI in there with our robots. And so a robot has to go from point A to point B to retrieve inventory to put out to our stores. The route that they take is optimized through AI. So if they have to take a more circuitous route, they're learning from that and trying to become more efficient. That helps us lower our costs. It helps get goods in front of the customer faster. And it's, all around, a win-win.

- Do you have a number, John David, this year and how much you will spend on AI-related technology?

JOHN DAVID RAINEY: We don't have a number that we're sharing. But we spend a lot on technology. We are a very technology-oriented company. We talk about being people led and tech powered, as an omnichannel retailer. And so we spend a lot in technology. And we try to put that in front and create experiences for our customers that make-- that give them the very best shopping experience.

- John David--

- Staying on--

- Sorry, go ahead, Brian.

- No. Lastly, I'm just curious, John David, before we let you go, on the online business, why was your online business up in all three segments and Target was down?

JOHN DAVID RAINEY: Well, I can't speak to Target's results. But what I can tell you is that, clearly, our value proposition is resonating. Customers are coming to us. Online pickup and delivery is a big part of this. And, Brian, this is, like, something that I think is a little bit unique around Walmart.

You saw a lot of companies during the pandemic that benefited, that were more e-commerce. But you saw those trends revert post-pandemic, not for Walmart. When you look at online pickup and delivery, our weekly average customers that are coming to us and engaging digitally, they have continued to go up and to the right, post-pandemic. So we just want to keep those trends continuing.

- All right, John David Rainey, thank you so much for being here, Walmart CFO. Appreciate your time this morning. I know it's a busy one for you.

JOHN DAVID RAINEY: Thank you, appreciate being on the show.