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Walmart Inventory Glut Eases, Cautious on Consumer Spending

After two lackluster quarters weighed down by inventory overload, Walmart posted an earnings beat that bested Wall Street’s estimates for the third quarter.

While its inventory position showed signs of improvement, the discounter is also touting its fulfillment services and Walmart Connect advertising platform as potential areas for strong growth—as well as higher margins.

In a Nutshell: Walmart Inc. saw revenue growth in the third quarter in its U.S. operations for both Walmart and Sam’s Club, Flipkart and Walmex divisions. Helping growth in the quarter were gains in its grocery business and an improved inventory position in its U.S. businesses.

“It was a good quarter. We delivered strong results on the top line across our segments and our value proposition is resonating with customers,” Doug McMillon, president and CEO, said during a conference call to investors. “We see this in our grocery business and stores and online and key markets like the U.S. and Mexico. Customers that came to us less frequently in the past are now shopping with us more often, including higher-income customers.”

Those new customers have annual household incomes of more than $100,000, McMillon said. He also told investors the company is being “thoughtful and balanced about inventory levels by category and expenses” as it works through the fourth quarter to position itself for next year. “There are places where we’ll remain aggressive, and others where we’re being more conservative,” McMillon said.

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The focus for Walmart is continued investment in technology, including supply chain automation. McMillon said 13 percent of total sales now start digitally. And when thinking about the shopping experience, executing on pick up and delivery has been the focus.

McMillon said global inventory is up 13 percent for the quarter, including 12.4 percent for Walmart U.S. and 2.5 percent for international, but he also said it was inflation that drove most of the increase rather than actual unit numbers. Still, there are seasonal items in some general merchandise categories that still needs to be cleared out, he said.

He also spoke about new businesses to Walmart’s flywheel that should enhance growth prospects for the future. Walmex’s marketplace, Walmart’s Mexican operation, saw the addition of 20 percent more sellers during the third quarter, while the U.S. marketplace on Walmart.com now offers 370 million stock-keeping units.

“That’s an increase of more than 50 percent from Q2. Many of these sellers want to leverage our fulfillment network. They also want to use our advertising capabilities to drive demand, and we’re making that easier for them,” McMillon said.

Walmart’s advertising platform is Walmart Connect. McMillon said that the new marketplace sellers in the U.S. will be automatically on-boarded onto the discounter’s self-service ad platform.

“We believe this seamless integration will help both businesses scale even faster. What you see in our results is that we can run compelling stores and clubs, scale of first and third party commerce business, and connect them together in an omnichannel fashion that saves customers and members money and time,” McMillon explained. “Our strategy unlocks growth opportunities for us in a thread that runs from digital retail to fulfillment and advertising, and opens up even more opportunities with health and wellness and financial services.”

McMillon said the business model is changing as it reflects “where consumer patterns are shifting to,” adding that advertising and fulfillment services businesses are both faster growing and have higher margins.

CFO John David Rainey said market share gains in its grocery business saw nearly three-quarters of the increase from households exceeding $100,000 in annual income. He added that the company has progressed on its inventory remediation efforts. Walmart U.S. saw more than a 10 percentage point improvement from the end of the second quarter, he said.

“We feel good about our ability to sell through the majority of this in Q4,” Rainey said, adding that actions in the quarter included canceling orders and increasing the level of markdowns. He also noted that general merchandise sales declined in the low single digits, with softness seen in electronics, home and apparel.

He also spoke about building out Walmart’s fulfillment services, such as the launch in Canada, “where sellers of all sizes on the digital marketplace can now contract with us to take care of their inventory storage and logistics needs.” Rainey also mentioned that the new offering will provide faster shipping of customer orders within a two-day window to 95 percent of Canadians. He also noted Flipkart’s “The Big Billion Days” annual event, which moved to the third quarter from last year’s fourth quarter. “We had over one billion visits to our site during the eight-day event, and importantly saw more than 60 percent of those customers coming from tier two and tier three cities,” Rainey said.

On the agenda is the use of robotics and AI to fill online orders more quickly. In addition, Rainey said the retailer gained more Walmart Plus members after expanding its last-mile delivery capabilities through a “fourfold increase since January, and the number of pick up points serviced by the Spark driver platform.” Noting the progress in fulfillment and automation, Rainey said the Spark driver platform now serves customers in all 50 states, with more than 10,000 pick up points.

“Building Walmart fulfillment services in the U.S., Mexico and now also in Canada has been an important asset and growing our seller base as they seek an integrated omni sales and fulfillment solution” Rainey said, adding that almost 30 percent of orders on Walmex’s marketplace are now being fulfilled using Walmart’s fulfillment services, which was launched a year ago.

“We’re putting the building blocks in place to deliver a powerful mutually reinforcing ecosystem, [that] not only benefits customers and partners, but also shareholders, with more durable and diversified earnings streams,” Rainey said.

Separately, Walmart’s board approved a $20 billion share repurchase authorization over the next several years. In addition, Walmart on Tuesday said it agreed to a $3.1 billion nationwide opioid settlement framework—joining CVS and Walgreens—to resolve all legal matters connected with prescriptions its pharmacies filled for opioid painkillers, adding that it “strongly disputes the allegations” in the lawsuits filed. The settlement does not include any admission of liability, the company said.

Net Sales: Total revenue rose 8.7 percent to $152.8 billion from $140.5 billion in the year-ago quarter.

Walmart U.S. comp sales were up 8.2 percent from year-ago levels, and increased 17.4 percent on a two-year stack. The discounter said e-commerce growth was up 16 percent from year-ago levels.

John Furner, president and CEO of Walmart U.S., said the retailer still has about $1 billion in excess inventory, down about one-third from the end of the second quarter. “We’re making improvements. Apparel and certain categories in [general merchandise] are the heavy categories, and we’ll continue to work through those.”

Furner also said Walmart U.S. has seen “some customers this year trade into private brands more than they did the previous year.”

Sam’s Club comp sales rose 10 percent, while membership income saw an 8 percent gain, with the member count reaching an all-time high. Walmart International net sales increased 7.1 percent to $25.3 billion. Walmart said operating income for the international business was led by double-digit growth for Walmex.

In addition, the discounter said its global advertising business grew over 30 percent, led by 40 percent growth at Walmart Connect in the U.S. and strength in Flipkart Ads.

Earnings: Walmart said its third quarter GAAP loss per share was 66 cents, impacted in part by markdowns and an inflation-related LIFO charge at Sam’s Club. On an adjusted basis, diluted earnings per share (EPS) was $1.50.

Wall Street was expecting adjusted diluted EPS of $1.32 on revenue of $147.75 billion.

For the fourth quarter, Walmart guided consolidated net sales growth of 3 percent, with Walmart U.S. comps sales, excluding fuel, up about 3 percent. It also forecasted an adjusted EPS decline of 3 percent to 5 percent for the quarter.

“Despite a good start to Q4, our guidance assumes that the consumer could slow spending, especially in general merchandise categories, consistent inflationary pressures in food and consumables,” the CFO said. He explained that relatively strong balance sheets have helped consumers, assisted by stimulus payments. “That’s not going to last forever. So that’s why we take a rather cautious view on the consumer,” Rainey said, adding that Walmart is planning its business with the assumption that “inflation remains somewhat elevated.”

The company also raised its full-year outlook for fiscal 2023, reflecting its third-quarter gains. It expects consolidated net sales growth of 5.5 percent, with Walmart U.S. comp sales, excluding fuel, of about 5.5 percent. It also expects an adjusted EPS decline of 6 percent to 7 percent.

Wall Street was buoyed by the news sending shares up more than 7 percent in midday trading.

CEO’s Take: “It’s been my experience over all these years that Walmart is a well positioned business and is inherently hedged. When times are good, we have room to grow. When things are more difficult, we sell things people want and need,” McMillon told investors. “And with new levers for growth across our flywheel, we’re becoming even stronger and more resilient.”