Walmart has about $1.5 billion in inventory “that if we could just wave a magic wand, we’d make it go away today,” chief financial officer John David Rainey told Wall Street analysts in a quarterly earnings call Tuesday of the retailer’s battle to get overstock under control.
The first order of business? Slashing billions of dollars in fourth-quarter orders to get back on track.
In a Nutshell: “The second quarter finished stronger than we anticipated,” CEO Doug McMillon said. “Our sales were well ahead of plan with inflation lifting our average transaction size.”
He said the company realized back in March it needed to “act quickly and aggressively in some categories” by chopping prices to move stale stock. “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,” he said.
McMillon insisted that Walmart will have a “cleaner inventory position” and a “strong seasonal presence.”
“We’ve got a strong position in opening price points across categories,” he said of the Halloween and year-end holiday season.
“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,” McMillon said.
Walmart U.S. has seen growth in the number of middle- and higher-income consumers hunting for value, an “encouraging” development for the retailer’ sales. Backpacks and men’s flannel are among the better-selling categories, McMillon said. While Walmart is focused on keeping prices down, some things have gotten more expensive.
Beginning in September Walmart-Plus members will receive no-cost access to the Paramount Global platform’s streaming content offering. The offering is exclusive to Walmart for the first year of a two-year deal. It’s Walmart’s way of trying to draw customers away from Amazon.
Apparel isn’t the only category with an inventory problem.
“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,” Rainey said. “We’ve also cancelled billions of dollars in orders to help align inventory levels with expected demand.”
Rainey said Walmart has been managing prices to reflect supply costs, as well as inflation, and reducing inventory means it’s spending less on storing piles of product in overflowing warehouses. Most of its overstock is in general merchandise categories such as hardlines and apparel.
According to Rainey, Walmart is using supply chain automation and technology to increase efficiencies. “Our business is resilient, and with the omni capabilities we built, we’re better positioned now than we were in prior periods of economic softness,” he said.
“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,” he said.
Rainey said Walmart is “taking additional pricing actions in Q3 to improve inventory levels in the back half of the year. And we 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.”
Net Sales: Walmart said total revenue for the second quarter rose 8.4 percent to $152.9 billion, which included a net sales gain of 8.2 percent to $152.4 billion. Walmart U.S. sales were up 7.1 percent to $105.1 billion, while comps rose 6.5 percent and 11.7 percent on a two-year basis. E-commerce grew 12 percent and 18 percent on a two-year basis.
Sam’s Club sales were up 9.5 percent, while membership income rose 8.9 percent. Walmart International net sales increased 5.7 percent to $24.4 billion. Double-digit comps were posted in the retailer’s three largest markets—Mexico, Canada and China. China posted a 77 percent increase in e-commerce sales and a 152 percent jump on a two-year basis.
The retailer ended the quarter with inventory levels up 25.5 percent to $59.9 billion, an increase of $11 billion, the CFO said.
Earnings: Earnings per share (EPS) for the quarter were $1.88, while adjusted EPS was $1.77.
Wall Street expected $150.75 billion in sales.
Walmart said its consolidated gross profit rate fell by 132 basis points, in part due to markdowns and the mix of sales in the U.S.
For the third quarter, Walmart expects consolidated net sales growth of 5 percent, with U.S. comps, excluding fuel, up 3 percent. Adjusted earnings per share is expected to decline between 9 percent to 11 percent.
For Fiscal Year 2023, the retailer maintained its outlook for the back-half of the year, with consolidated net sales growth at 4.5 percent. Walmart U.S. sales are projected to climb 4 percent, excluding fuel, with adjusted EPS down between 9 percent to 11 percent.
CEO’s Take: “I think what you should take away from Q3 and Q4 guidance [is] that we’re expecting the environment to look a lot like Q2,” McMillon said. “And we’ve seen strength in some categories. It’s really encouraging for those that are under the most pressure that are most price-sensitive.”
Editor’s note: An earlier of this article misstated the amount of the cancellations as “hundreds of billions”, instead of billions.