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.

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.

Michael Lasser:

Good morning. Thank you so much for taking my question. My question is on the outlook for fiscal year 2025. At the outset of last year, Walmart guided to 2.5% to 3% constant currency sales growth. This year, it's guiding to 3% to 4% constant currency sales growth. Presumably, there's some benefit from the extra week and leap year within that outlook for this year. But essentially, on a full-store sales basis, you're guiding to a similar level, yet the impacts from inflation is going to be a lot more moderate this year. So what do you see that's driving this, what seems to be a bit more optimistic outlook? And as part of that, if you could comment on what would have to happen in order for you to hit the high end of your operating margin outlook, that would also be quite helpful. Thank you so much.

Operator:

Our next question is coming from the line of Krisztina Katai with Deutsche Bank. Please proceed with your question.

John David Rainey:

Sure. I'll start on the answer to the improvement of gross margin. John may want to jump in there, but we're just in a healthier place than we were a year ago. And I think inventory is a big part of that. As we noted, inventory in the U.S. was down 4.5%, down 8% for Sam’s. And that just enables us to operate a lot more effectively. We saw markdowns in the quarter be notably less than they were the year before, and all those have an effect on gross margin. John, do you want to talk a little bit more about that, and I'll go back to e-com?

John David Rainey:

Sure, and Krisztina, I'll address the improvement that we've seen and expect to continue to see in our contribution margin on e-commerce. There's a couple elements to this. One is, I'm really pleased with the way the team has performed on cost of fulfillment. That has gone down 20% in the last year. A lot of hard work has gone into making that happen. But the unit economics of delivering a package to a customer or a member have simply improved. So that's a big part of the improvement we've seen. And we expect to see continued improvements there. Second aspect of this is the densification of our network, specifically the last mile. As we have more customers coming to us, using us through e-commerce channels, it enables us to spread that cost of delivery over multiple customers. And so if you think about an item like our weekly active customers on e-commerce, that's up 17%, much more than our top line. So customers are recognizing that they can come to Walmart for convenience just as much as they can on price, and that actually helps the profitability of this channel for us. In terms of where we or when we can get to profitability, we have line of sight to e-commerce being breakeven when we include all the various components of this, advertising, fulfillment services, all that together. But to be clear, we're focused on getting to e-commerce profitability even without the subsidization of those additional items. That's a little further down the road. We have a lot of work to do to get to that point, but we're really pleased with the progress that we've made and the plan that we have going forward.

Kathryn McLay:

And if I can just comment on China. If you look at their progress over the last few years, they had a digital penetration of about 4% in 2019. They're now at 48%. It's almost 50-50 offline and online and we're driving our profit through that business. So I think they've shown a path to really growing omni-sales profitably.

Simeon Gutman:

Hi, good morning everyone. Doug, I was going to ask you to kind of keep it high level. For fiscal 2024, the prior year, it was a tough consumer year, but strategically Walmart made progress on a lot of fronts. If you look at fiscal 2025, can you boil down the year one to three measures of success? And I have some ideas, but I won't preload the question. And then what will define success in terms of strategic initiatives? And then just secondarily any evolving thoughts about reinvestments in the business, so the business should continue to see higher EBIT growth over the next several years. Do you -- since you have one year or at least a couple years under your belt now of seeing that evolve, do you find that the reinvestment rate should be any greater such that not all of that flows through?

Operator:

Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

John David Rainey:

Hey, Rupesh. Good morning. It’s John. Really pleased with the team. They're growing top and bottom line, and we're investing in the future, as we talked about. This year we're planning to do 650 more remodels. We did close to 700 last year, which is I think our largest year, and had a really big month in the month of November. The results are very promising. As you know, there is more space for customers. We opened the store up. We're really proud of the results in apparel, in home, beauty. We see positive signs out of the pet department. There are a number of things that are coming together. In the fourth quarter, in particular, we're really pleased with the toy performance, where we saw unit share gains with big brands like Lego, Mattel, Muffin Dugs. So there's some really nice signs coming out of those stores. And we're really looking forward to this year to put another, as we said, 650 remodels out in the market.

John David Rainey:

We do, Doug. It's been a lot of fun to see how these came together. As I mentioned, the sell-throughs are really strong throughout the fourth quarter. And Valentine's Day was a strong holiday early in the year. Because we're so close to customers, we were delivering same day up until 8:30 that night. I wouldn't recommend that for everyone, but certainly the capability to be able to take flowers to someone at 8:30 who had a bit of a moment was a lot of fun. Save the day.

Kelly Bania:

Hi, good morning. Thanks for taking our questions. I wanted to just talk a little bit more about advertising, 28% growth for the year. I think you said reaching $3.4 billion. Just doing some math here, it seems like that could be adding about $300 million to $400 million in EBIT on an annual basis. Now, just wanted to see if that's in the right ballpark and what kind of magnitude of growth you're forecasting for this coming year and really the next couple of years? And also if you can just elaborate here on the vision with Vizio as it relates to advertising.

Doug McMillon:

Yes, we're not going to say too much. Obviously, we need to give that some time for the process to play out. But as John David said, we are really excited about the opportunity to bring together Vizio's operating system with our ad platform. And we can appreciate that you all would probably have a number of questions about it. Marketplace and advertising are key drivers of profitability growth, as we've already discussed. And this acquisition accelerates the buildout of our advertising platform into the connected TV business, which will be exciting. But given that the acquisition hasn't closed, we can only reinforce what we've already shared. So we'll be limited in our remarks today. So you may want to save your questions for another topic. We want to focus for now on our quarter on the company's strategy and more broader topics and then we can come back to you once the deal is closed.

Robert Ohmes:

Hey, thanks for taking my question. My question is on the transaction comps. I think it was 4.3% for Walmart U.S. That's a pretty strong number in a big quarter for you guys. A couple things on that. Can you talk about how that kind of played out in terms of the fourth quarter? Was it more grocery driven and e-commerce driven in grocery, or did you have really strong transaction growth year-over-year in holiday? And then in the guidance you guys have given for Walmart U.S., how should we think about that transaction momentum continuing? And then also, probably the biggest drivers that's sustaining that kind of high level of transaction growth for this year.

Doug McMillon:

I think the things you've done to make it easier to pick at store level should be mentioned too, RFID and apparel. Having inventory levels down so that people can find things. I think it helped us a lot when it came time to pick toys at the last minute, for example. Our accuracy, -- our customer scores reflect that improved accuracy. Combine that with the automation that we're putting into e-commerce fulfillment centers and you can start to see that there's a great opportunity for us to leverage math and optimize where things come from, but our accuracy is also improving.

Operator:

Our next question is from the line of Corey Tarlowe with Jefferies. Please proceed with your question.

Doug McMillon:

Yes. Thanks, Corey. This is Doug, and others can chime in here and help me with this, but we're very excited about generative AI. There are big opportunities for us to improve the customer and member experience, improve associate experiences and productivity, and help take costs out of business, and we're moving. I think big picture, we've got a very clear plan as it relates to what we want to build versus what we want to leverage from others and we've got good partnerships and good advisors and we've got a strong tech team that knows what they're doing in this area. So I do expect that it'll have benefits. As I talk to other CEOs and we learn here, I think it's still too early to try and quantify this specifically. I think as we look back on what develops, we can probably tell you in the rear view mirror how things played out from a cost perspective, for example. But the thing we're most excited about that's already happened is the way search has improved. The way generative AI helped us really improve a solution-oriented search experience for customers and members is the thing that we're most excited about and it happened pretty quickly and it impacted Super Bowl search results. We gave you an example of Valentine's Day earlier and the team is learning how to do that across all of our markets and the entirety of the company. So that's also exciting. We also rolled out something we call My Assistant on our Me@Walmart applications so that all of our associates have access to generative AI tools and capabilities. So strategically, the way I think about it is, the leadership of the companies working through where our biggest opportunities are, prioritizing and resourcing those opportunities. But we're also making generative AI available broadly so that we get surprising good news from the way that all of our associates interact with it. Anybody else want to comment on that technology?

Doug McMillon:

That exit technology still requires a member to scan their items on their app. So Scan & Go is the first step and then you can just leave the building when the transaction is completed. But obviously, eventually we want to remove all of that as part of the process, too.

Doug McMillon:

Thanks for the question.

Paul Lejuez:

Hey, thanks, guys. You mentioned rollbacks being up versus last year. Can you quantify that and maybe talk about what percent of those rollbacks are being vendor-funded? How that compares to last year as well? And how that might have also compared to how you operate rollbacks historically? Also I'm curious in which categories you're most focused on providing those rollbacks? Thanks.

Operator:

Our next question is from the line of Seth Sigman with Barclays. Please proceed with your question.

John David Rainey:

Seth, this is John David. We're pleased with what we've seen in market share gains. In the quarter, we gained share in virtually every category. But notably, one of the biggest contributors in the quarter was in this income demographic from households that make more than $100,000 a year. For general merchandise, as an example, two-thirds of the share gain that we had in the quarter was through this income demographic and digital channels. And what that illustrates, I think, broadly, is that our value for convenience is every bit as much -- every grade is what it is for price. And that resonates to people regardless of the size of your paycheck. And so that's one of the reasons we think that we're gaining share, our value proposition is resonating with customers and they're clearly shopping us in new ways versus how they have historically.

Doug McMillon:

There's so many things Seth in there, but what customers want, they want a great price, they want a great environment, they want value and they want experience. And we've been talking about for a couple of years the flexibility that we can offer that we couldn't or did not years ago. And the stores are a very important part of the e-commerce solution, including delivery, but also picking and at times just being exactly what they are which are great stores that offer those four elements. So remaining flexible can be really important in saving people time. John David mentioned convenience and that is definitely a driver of the results.

Operator:

Thank you. This will conclude today's conference. You may disconnect your lines at this time and we thank you for your participation. Have a wonderful day.

Steph Wissink:

Thank you and happy holidays, everyone. Joining me today at our home office in Bentonville are Walmart's CEO, Doug McMillon, and CFO, John David Rainey. Doug will begin with his reflections on the quarter and year. John David will follow with his view of enterprise results and segment highlights using our financial framework of growth, margins and returns before speaking to our updated guidance for the year. For specific segment level results, please see our earnings release and accompanying presentation on our website. Following prepared remarks, we'll take your questions. At that time, we will be joined by our segment CEOs, John Furner from Walmart U.S.; 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. Thank you for your interest in Walmart. Doug, over to you.

John David Rainey:

I'd like to start by thanking our customers, members, associates and partners for helping us deliver a good quarter. We're pleased overall with how the team executed and how our strong value proposition and omnichannel strategy continue to resonate with customers. We're gaining share, seeing strong e-commerce growth, and excited about the contributions from higher margin businesses like advertising. Sales grew more than 4%, gross profit was better than expected and we exceeded our guidance for EPS. These results reinforce the benefits of our highly diversified business with broad-based contributions across segments and markets, channels and formats, and strategic growth areas. While we're pleased with our topline results, operating income was below our guidance due to higher than anticipated expenses largely certain legal accruals. I'll provide more details on guidance shortly. But the key takeaway is that we're raising our full year sales and EPS guide while reiterating our prior operating income guidance. We expect the relationship between profit and sales growth to favor profitability in Q4 and for the full year to align with our goal of operating income growing faster than sales. Now let me review the key financial highlights for Q3, using our financial framework of growth, margins and returns. First, growth. Constant currency sales increased 4.4% or nearly $7 billion. Importantly, we saw traffic growth across both in-store and digital channels. All three operating segments experienced mid-single digit sales growth, with comp sales for Walmart U.S. up 4.9%, in Sam's Club U.S. up 3.8% excluding fuel. International grew sales 5.4% in constant currency with Walmex sales up more than 9%, and China up 25% with strong performance in Sam's Club and e-commerce. The timing of Flipkart's Big Billion Days pressured international sales growth as the event moved from Q3 last year to Q4 this year. So we expect the timing to be a benefit to Q4's growth rate for the segment. PhonePe also continued its strong momentum with annualized TPV or total payment volume reaching 1.2 trillion on nearly 5.8 billion monthly transactions. And PhonePe recently achieved an impressive milestone eclipsing 500 million registered users. We continue to grow share in key categories, particularly in Walmart U.S. grocery where we delivered positive comps and saw strong share gains in both units and dollars. Grocery inflation moderated nearly 300 basis points from Q2 levels to a mid-single digit increase versus last year. But on a two-year stack, it was still elevated at a high teens percentage. We see our customers showing ongoing discretion in seeking value to manage within their household budget, while general merchandise sales were down low-single digits year-over-year in Q3, the rate of change was stable to Q2 levels and we gained share across categories. As we enter the holiday season, we're working hard to lower grocery prices to ease the pressure for customers giving them more capacity for general merchandise spent. Our business is rooted in a timeless purpose to save customer's money, so they can live better. Against any economic backdrop, we're there for customers, how and where they need us and we're making shopping with Walmart and Sam's Club, more convenient. Omni services including pickup and store fulfilled delivery continue to drive strong growth, leading to a 24% increase in Walmart U.S. e-commerce sales and 16% growth at Sam's Club. Multi-channel shoppers are more valuable, engaging more often and spending more with us. Pickup and delivery for Walmart U.S. has been a key source of growth and share gains among upper income households and has become the most productive channel for acquiring Walmart Plus members. In International, Walmex's expansion of omni offerings led to 1.5 million Bodega store-fulfilled digital orders in Q3. In Canada, we continue to roll out our unlimited next day store delivery subscription called Delivery Pass, which is now available from two-thirds of our Canada stores. And I was in China recently where our business is nearly a 50-50 split of physical and digital. I was impressed with how we're serving omni customers with speed and accuracy through new engagement and delivery models. Turning to margins. Gross margins expanded 32 basis points, reflecting the timing shift of Big Billion Days in India and lapping last year's LIFO charge at Sam's Club U.S. Walmart U.S. gross margins increased to 5 basis points reflecting lower markdowns and supply chain costs. But we're still seeing an ongoing category mix pressure as health and wellness and grocery sales outperformed general merchandise. Continued disinflation along with the success of our merchants at Sam's Club and bringing down the cost of inventory resulted in us not taking the expected $50 million LIFO charge in Q3. We no longer expect any further LIFO charges in Sam's Club this year. As we've said previously, over the next several years, we expect margins to move higher as we modernize our supply chain and scale higher margin growth initiatives. We made good progress on both during the quarter. We continue to deploy capital to build technologies and optimize our next-generation supply chain with automation and productivity benefits starting to appear in our results. We now operate nine regional distribution centers servicing U.S. stores with varying levels of automation with six more centers in active stages of construction. Currently, more than 15% of stores receive merchandise from these facilities, helping to get product to shelves faster and more efficiently. During the quarter, we opened our third next-generation e-commerce fulfillment center. These 1.5 million square feet facilities are expected to more than double the storage capacity, enable 2X the number of customer orders fulfilled daily, and will expand next and two-day shipping to nearly 90% of the U.S. including marketplace items shipped by Walmart Fulfillment Services. They also unlock new opportunities for our associates to transition into higher skilled tech focused positions. To support the store fulfilled digital business, we're on-track to have seven stores with automated market fulfillment centers or MFCs operational by the end of this month. These MFCs start thousands of the most sought after items and are expected to increase order capacity and productivity, while also increasing inventory accuracy, which helps us deliver perfect orders for customers. As we focus on improving e-commerce margins, we're making good progress in lowering digital fulfillment cost and densifying the last mile by tapping our broad store and club network. Over the past year, Walmart U.S. has increased the percentage of digital orders fulfilled by stores by 800 basis points and Sam's Club fulfills nearly 60% of online orders from its clubs. With the growth of our Spark Driver platform, we've lowered store to home delivery costs by 15% even as we shorten delivery times the same day for more than 80% of our stores and in some cases as quick as 30 minutes. As we scale Walmart GoLocal, we are densifying the last mile, and we're approaching the milestone of 12 million deliveries for other retailers with this service. I'd like to touch on our portfolio of higher growth initiatives. These businesses reinforce our core omni-retail model in our key to driving operating income growth ahead of sales over time. In Q3, this portfolio positively contributed to gross margins. Global advertising grew approximately 20% in Q3 with Sam's Map growing over 27% and Walmart Connect, up 26%. As an illustration of the omnichannel benefits of our ad platforms, more than 75% of Sam's Map active advertisers are investing in search and sponsored ads as in-club sales attribution has improved returns of digital ad spend by over 30%. International's ad revenue growth was impacted by the timing of Big Billion Days, but we're on track to deliver strong growth of approximately 45% for the full year. Moving to marketplace and fulfillment services. Customer engagement continues to validate our strategy is to invest in ways to grow this business on a global basis. As Doug mentioned, we held the inaugural Marketplace Seller Summit to help accelerate our marketplace growth. For cross-border sellers in the U.S., we're expanding access to more customers beyond the U.S., Canada and Mexico by opening our e-commerce marketplace in Chile to cross-border products next year. Over the past year, we've increased marketplace sellers by more than 20% and the number of sellers utilizing Walmart Fulfillment Services is up over 55%. Next, membership remains a compelling way we deepen engagement with our customers. Sam's Club membership income grew over 7%, reflecting record member counts and Plus Member penetration. During Q3, we held events that were focused on member acquisition and digital engagement. We'll take a similar approach again during Q4 offering discounted access to Walmart Plus memberships while providing members early access to the best savings event throughout the holiday season. Turning back to the middle of the P&L. SG&A expenses deleveraged 37 basis points on an adjusted basis, impacted by higher year-over-year wage related cost in Walmart U.S., including higher variable pay expenses relative to last year when we were below our planned performance. Store remodel costs were also higher as we rolled out 117 of our flagship design stores earlier this month and legal expenses increased. Lastly, the timing shift of Big Billion Days pressured international expense leverage in Q3, we'll see the benefit come through in Q4. Third quarter adjusted operating income grew 3%, including 270 basis points of currency tailwind, while adjusted EPS of $1.53 increased 2% and compared favorably to guidance of $1.45 to $1.50. Relative to our guidance, Q3 EPS benefited by $0.01 from releasing the LIFO reserve we had earmarked for Sam's Club. Moving to returns. Over the last 12 months, sales have grown more than 6% and operating income increased about 22% and when combined with a disciplined capital approach, return on investment improved 130 basis points to 14.1%. The primary driver was lapping last year's Q3 charge related to the opioid legal settlement framework. ROI also reflects some benefits from productivity initiatives that we initially expected to realize in FY '25. We continue to expect our ROI to increase over the coming years. In addition to our strategy, our financial position is an advantage and enables us to compete in an increasingly dynamic retail environment. Turning to guidance. We're confident in our agility and our ability to execute and we're focusing our investment in areas where we can widen our omni advantage, deepen engagement and drive sustained growth in new revenue streams. We like our position relative to competitors as we've maintained strong price gaps and increased share while preserving flexibility to respond to competitive dynamics. But we're not immune from the vagaries of the economy. We see our customers showing ongoing discretion in making trade-offs to be able to afford the things they want given the sustained high cost of the things they need. Recently, we've experienced a higher degree of variability and weekly performance in between holiday events in the U.S., including seeing a softening in the back half of October, it was off-trend to the rest of the quarter. Sales during November have turned higher as unseasonal weather abated and we kicked-off holiday events. So sales have been somewhat uneven and this gives us reason to think slightly more cautiously about the consumer versus 90 days ago. We still expect sales growth to moderate in Q4 versus prior quarters as grocery inflation further normalizes towards historic levels. So we're encouraged by the increased traffic and share gains we've seen and expect them to continue. As such, we are modestly raising our full year sales guidance to 5% to 5.5% from 4% to 4.5% previously primarily to reflect Q3's outperformance. For operating income, we're maintaining the guidance range of 7% to 7.5% growth. In addition to the 40 basis points of unexpected legal expenses in Q3, we also expect to record charges in Q4, totaling approximately 20 basis points to 30 basis points related to unplanned store closures and recovery costs associated with the recent hurricane near Acapulco, Mexico. This impacted 28 of our stores and less than half of them have been reopened at this time. Partially offsetting these costs is the approximate 40 basis point benefit from lower than expected LIFO charges compared to our prior guide. The net effect is a 20 basis point to 30 basis point headwind to our prior guide and as such, we currently expect to be in the lower end of the operating income growth range for the year. We expect merchandise mix pressure to continue in Q4 with grocery and health and wellness sales rates outpacing general merchandise and potentially be a bit more pronounced given the uncertain consumer environment. Based on Q3 results and less of an increase in interest cost for the year than we previously expected, we're raising our full year EPS guidance range to $6.40 to $6.48. In closing, let me reiterate what I said previously, aligned with our financial framework, we expect the relationship between profit and sales growth to favor profitability in Q4 and for the full year operating income to grow faster than sales. We like our competitive position. Our financial results clearly demonstrate that our omnichannel strategy is winning. We're growing our share across categories, deepening customer engagement across channels, while investing in areas to widen our competitive advantage. The holidays are here and our value proposition resonates with customers looking to save money as they celebrate. Operator, we'd now like to open the line for questions.

Simeon Gutman:

Hi. Good morning, everyone. I have one question, I'll make it maybe two-parts. The first part, the legal expense it -- so that we can judge whether or not we should keep it in. It sounds like you're keeping it in. I'm not sure you're able to share what the nature of it is, but it seems like it was unexpected. So if there's any more color on it. And then the second real question is, alternative revenue and profit. Was it hidden in any way this quarter? Do we get an inflection, into next year, that seems to be the big investment question. And are we going to see it ramp up, and does it happen in a certain period or it just continues to build? Thank you.

Doug McMillon:

Simeon this is Doug. I would just add that I think you should have it in the continue to build category rather than in inflection.

Operator:

Our next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question.

John David Rainey:

Sure. I'll start and then, John, is probably going to want to jump in. Yes, the legal expenses hit the U.S. segment. There were some other items in there, like, I'll point out that we spent a little bit more on remodels. We did an all-time high level of remodels in the quarter. But this is investing in our business, which we definitely want to lean into. We're excited about the returns we're seeing around that. We're excited about the returns you're seeing on e-commerce. And so there were some investments related to that, but the vast majority of the delta between our guidance and actual performance was related to the legal accrual. In terms of our long-term plan, and as it pertains to like possible changes in the consumer, I think our value proposition resonates more than ever when the consumer is pressured. And we've seen this year that they not only are coming to us for the value that we provide, but also for the convenience and these are areas that we're investing in. So we have a ton of conviction in the strategy that we have in our -- in place and our ability to execute on that. We should separate that from calling out some maybe potential weakness or wobbling among the consumer that we saw in the back half of October. But we're very excited about the plan we have in place.

Doug McMillon:

Kelly, this is Doug. And related to the last part of what you asked about, I don't think there's anything that causes us to think operating income won't grow faster than sales. We've had really strong sales performance now for a few years. Obviously, we were impacted by what happens in our environment, but we expect to grow share. We expect to have a healthy topline and as it relates to operating income, we've got a really good multiyear plan with two primary dimensions, one is the automation investments that will -- that drives productivity improvements and the other dimension is related to how the digital business has changed the shape of the income statement. Both of those things will be true, and it's a multi-year plan that shows progress along the way. So you guys from quarter-to-quarter, year-to-year will see us make progress, and not every quarter, maybe up into the right in every category, but if you look at what happens from a trend point-of-view, those are the things we expect to deliver and because operating income is growing faster than sales, we -- our plan requires that we grow return on investment at a higher rate over time. That's the plan.

Operator:

Our next question is from the line of Paul Lejuez with Citi. Please proceed with your question.

John Furner:

Hi. Good morning, Paul. It's John, I'll start with Walmart U.S. and then pass it over to Kath and Chris to talk about the other segments. I think if -- as you step back and look at the growth, one, we're pleased with our online pickup delivery business from stores, we have strength in food. The team has continued over the last few years to expand our capacity, and more importantly, they made improvements on key metrics like the one we call Perfect Order which is getting customers what they want, when they want, and I think that's a reflection of better in-stock in food, overall that's helped us with our share gains and the food category. With marketplace really pleased with the progress the team has made with Tom Ward and Manish having their First Summit as we mentioned earlier. In the quarter, we're seeing more sellers come online, our assortment has grown significantly. And just this week, I was in one of the new fulfillment centers that John David mentioned, the Lancaster, Texas which is a great facility managed by a very qualified team and it's of course reassuring to see the amount of marketplace inventory that's come again and seeing the number of marketplace sellers which we're grateful for those sellers who trust us to do their fulfillment and that's been -- that's been promising. Now, in the month of November, we had our first event last week and getting into our holiday season, we have a long way to go from here until the end of holidays. But, really pleased with the results in marketplace, which is of course reflective of results in art and apparel, and gifting and other categories that are in line with the question you asked about general merchandise. So these are important businesses because they help customers shop the way they shop with -- the way they want to shop, when they want to shop. And marketplace over time, of course, will be a key driver to some of the other businesses like advertising as more sellers find customers on the Walmart Marketplace, they'll want to use services like our fulfillment services and our advertising business. So, turn it over to Kath to talk about international.

Chris Nicholas:

So, it's exciting time. Paul, thanks for the question. I think what's really interesting for all of us, but definitely for Sam's is that members want this, and so we're giving them what they want and we are at 13% of sales, 16% growth in the quarter. But we think it's a really huge opportunity, and as I think about e-commerce for and omnichannel sales for Sam's, I think about a digitally connected member. So Scan and Go teaches our members that we are a digitally relevant business and they look to shop online and on the -- whether on the web or on the apps and we feel really good about that. We've got all-time highs in that space. The other thing is really interesting is, as we look at the new members. We got an all-time high number of membership in Sam's and a lot of those people that are coming in now with digitally engaged members that coming in and they're buying new memberships digitally. So we're feeling good. In terms of mix, GM and a Club Pick (ph), so grocery, pantry they're all strong, which we're feeling good about. We don't have a marketplace in Sam's yet, we're very focused on items and on curation of great items and I think that's going to be really important for the Sam's business as we go forward. And the thing that I finished with, there is the great items, drive the organic traffic. So we'll continue to focus on those great items and I think we'll get a lot -- we'll continue to get a lot of organic traffic there.

Paul Lejuez:

I was just curious how general merchandise performed online within the U.S. business. I think, last time, you said there were several categories that were up double-digits, curious how some of those general merch categories performed.

Paul Lejuez:

Thank you. Good luck.

Kate McShane:

Hi. Thank you. Good morning. We are wondering if you could go into any more detail as to what would explain a softening in late October. Do you think it could partially be due to student loans or is it more of a function of being a shoulder period or a low before the holiday? And just the variability you're seeing week-to-week that you noted increase the risk in being more promotional than maybe was originally planned and expected in Q4.

John Furner:

This is John. Kate, good morning. I think what's encouraging is that our traffic, our transaction counts, remained strong and consistent throughout the quarter. The end of October, we did grow our Halloween business a little less than we expected. I'm sure there's something to do with weather and it being on a Tuesday, which is different than prior years. And then as we got in November with the cold weather, we saw cold weather categories respond right away. Our event was strong, so John David said it right. We're just cautious of the shift that we did see. But overall seeing the number of customers who shop continue to grow. We've seen new customers all year across a wide variety of income groups. We'll be ready for all those customers and we'll be ready for anything that they need at the time. I really like the flexibility the team has built-in. We delivered Halloween up until 06:00 PM on the date of the holiday, which is something we haven't been able to do before. So our Express and same day delivery service continues to grow, which is helping us right up until the point customers need product.

Operator:

Thank you. Our next question is from the line of Michael Lasser with UBS. Please proceed with your question.

John David Rainey:

Well, Michael, it's good to speak with you. One of the things that we're looking at closely in our business is units, and we've seen good growth in units, so it has not been entirely driven by just higher prices. We think we're positioned well as we go into the end of this year and into next year. To answer your question, it would depend upon what's driving the 2% comp. And so it's hard to extrapolate trends from this year into that. The team here, though, is very focused on what could happen in a more deflationary environment and making sure that we're --we have a cost structure that supports the revenue environment that we operate in. So when you think about the relationship between operating income and sales on a multi-year basis, we actually feel like we're in a really strong position given what's happening in the business from one quarter to the next that may not always be the case as we manage through certain headwinds, but we feel like we're positioned well for virtually any economic environment. And I'll remind you, like I know there's maybe trepidation or concern among consumer health. This is when we shine. This is when Walmart is at its best when we can deliver value for our members and customers. And so we look forward to being able to put up financial results in any economic environment.

Michael Lasser:

Thank you.

Rupesh Parikh:

Good morning, and thanks for taking my question. And I had a question just on the SG&A line. So at least in the Walmart U.S. business, it appears both wage inflation and remodels appear to be a significant headwind on that line. So just curious if you expect those headwinds to continue into next year?

Rupesh Parikh:

Thank you.

Krisztina Katai:

Hi. Good morning and thanks for taking my question. On general merchandise, the low to mid=single digit deflation that you're seeing relative to the comp that you put up would imply maybe that the units have improved sequentially. So one, can you talk about what you are seeing in units, your current price gap this holiday, and how might you be thinking about price versus units dynamic into next year. And then two, I just wanted to see if Kath and Chris would like to share their initial reflections on the new roles?

Chris Nicholas:

Thanks for that, Krisztina (ph). So let's talk about general merchandise first. Customers are responding to rollbacks. I mentioned one earlier in the Barbie category, which is the Malibu Dream House. So we see that consistently across other items in toys and toys is top of mind because it's the Christmas, whether it's the Melissa and Doug home set that's rolled by $10 to $25. We have the old classic Furby. That's $49 down for $59. Really good unit movements. We -- we're also happy to see, as I said earlier, the number of rollbacks that are across the entire store and the assortment of over 50% over last year. So customers are responding. But most importantly, our team is proud to offer great values and lower prices to customers. We've been in a pretty steep inflationary environment the last couple of years, so it's good to see some of these prices come back in line. And as far as how we think about that going forward, we mentioned this earlier that the results in e-commerce are quite encouraging at plus 24% for the quarter, and the breadth of the offer in e-commerce as it develops, I think is quite encouraging with growth of the marketplace, continued acceleration of the online pickup delivery business, and our first party business. And as we get into this holiday season, the team has worked really hard on inventory positioning, the condition in stores. Our MPS levels are at a really good spot and have continued to improve. And I think the result of that is we've had consistent traffic growth throughout the quarter and we continue to see that, which is a good sign for what may be to come.

Kathryn McLay:

Yeah, Krisztina. Thanks for the question. I would say, first of all, it's incredible that it's only been a quarter since I stepped into the role. It's -- Judith and the team have honed a really exciting portfolio of businesses, and it's been great to be able to get out into the markets. I've, over the last quarter, been in Mexico, China and India, and just looking at the pace of transformation and the way the teams rise to the challenge to be relevant in those local communities is extraordinary. And the ability to cross-learn between markets is such a great gift that we have in the international business. So I've been impressed by the strength of the teams that we have out there and also just really impressed by how they're translating our purpose and mission to save people money so they can live better into being really relevant. So whether it's in Canada, where they were able to actually have a Thanksgiving meal at a price lower than last year, whether it was in Walmex -- sorry in Mexico, where they've held down prices on basket -- a basket of essential items, no matter where it is, where you are in the international portfolio, the teams are working really hard to be relevant and help those communities celebrate the holiday and festivals that are rolling out over this -- over Q3 and into Q4. So excited to join the team.

Operator:

Our next question comes from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

John David Rainey:

Robbie, good to speak with you. This is John David. I'll start and address the LIFO part of the question and maybe hand it over to Doug and others. On the improvements that we've made there. That is, as you know, dependent upon the cost of goods that we're buying. And we've seen the pricing level come down overall broadly. But I don't want to miss the point to mention that our teams have actually done a really good job of working with suppliers to help affect that outcome. So this is not something that just happens to us. The team has worked to actually have this outcome, so it's far better than what we expected when we went into the beginning of the year, and we're actually pleased to see this outcome.

John David Rainey:

It's across all categories. It probably skews a little bit more to consumables and GM,

Robert Ohmes:

And just anything on wage pressures, Doug?

Robert Ohmes:

Great. Thank you.

Operator:

The next question is from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

John Furner:

I think the short answer is -- it does make it does make sense to accelerate, and we have accelerated. So we will complete this year a couple of hundred more than we did the last few years. So the number of remodels has gone up. The team has got much more, I'd say got their arms around the process, the new fixtures, the changes. So the remodels are happening a bit quicker and more smoothly than they were years past. And also the supply chain is helping. We were doing remodels in '21 and '22, where we had a hard time getting fixtures and getting parts and getting the equipment in on time. So we're feeling better about the way these are all coming together. The performance of the remodels we are -- I mean, we continue to be pleased with on the top line, we continue to be pleased with the MPS numbers. We see the customer reaction of the new assortment, particularly, as I mentioned earlier, apparel, pets, beauty, home, a number of categories is really great. And I mentioned I was in one that completed just a couple of weeks ago in Uvalde, Texas. And you know it's just such great -- such a great investment in the community. It makes the store feel new, refreshed. People are -- there's a different look in their eye and a smile. The associates are thrilled with the results and they were really proud of it. And as we go on the holidays, I think that customers will really love to see in these communities all across the U.S. more access to different products than they had before. And one of the things that's important in all these remodel processes is that the customer notices the difference and they notice the difference not only in the facility but in the product. And I think we're delivering both of those in the remodel. So we'll continue an aggressive plan for the remodel locations into next year

John Furner:

No, it's in the plan. What happened in Q3 is a few that had been in process, slipped into late October, and then 117 on one day was quite a big number. So what you'll see going forward is a more balanced of remodels completing by quarter. Ideally, we would have liked to complete -- we wouldn't want to have those so close to the holiday. I think the teams have done a nice job of finishing the remodels and then getting back right into merchandising for the holiday. So to be more even across quarters, but that's all built into our plan.

John Furner:

Thank you.

Edward Kelly:

Hi. Good morning, everyone. Thank you for taking my question. I have a question on the gross margin in the US, the margin was not touched year over year. I think the expectation was that it maybe could have been better than that. I was hoping that you could provide some of the puts and takes around that. I'm not sure if GLP-1 is maybe having a bigger impact there. So just thoughts on the gross margin this quarter and then maybe how we should think about that in Q4 and then a clarification around the legal charge. I think you said $75 million, but then 40 basis points. So I'm not really sure. I'm a little bit confused about that. Thank you.

Edward Kelly:

Thank you.

Peter Benedict:

Hi, guys. Good morning. Thanks for taking the question. Just GLP-1 just came up here in that last question, just curious. We hear it's a thing, maybe expand on maybe what you're seeing there, how it's impacting your business currently and what you see for that going forward. Thank you.

Peter Benedict:

Okay. Fair enough. Thank you.

Seth Sigman:

Hey. Good morning, everyone. I wanted to follow up on the consumer. I know it was discussed quite a few times today, but you guys, throughout the year have discussed a number of different signals of sensitivity, buying more around paycheck cycles, seeking more value, coming up with a promotional event. So just curious if you could provide a little bit more perspective on that and maybe more specifically what you are seeing in terms of market share across income cohorts. Thank you.

John Furner:

Yeah. Good. Thanks for asking, Seth. We've been pleased to see share growth all year, and we've talked about that across income groups. And what's been encouraging as of late is a bit higher share growth in general merchandise categories. We saw that month by month throughout the third quarter.

Seth Sigman:

Okay. Thank you.

Operator:

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

Steph Wissink:

Thank you, and welcome, everyone. We're excited to discuss with you the results of a strong second quarter and our upwardly revised outlook for the year. Joining me are Walmart's CEO, Doug McMillon, and CFO, John David Rainey. Following prepared remarks from Doug and John David, we'll take your questions. At that time, we will be joined by our segment CEOs

John David Rainey:

Thanks, Doug. I'd like to start by thanking our customers, associates and partners for helping us deliver another strong quarter with better-than-expected results in sales, operating income and adjusted EPS. Sales were strong across all segments, and we gained U.S. market share in grocery in both units and dollars, while delivering gross margin rate expansion. Our focus on saving customers' time and money continues to resonate, especially in high volume seasonal periods. We have good momentum in the business. Year-to-date, we grew sales by over 6.5%, adjusted operating income by about 12%, and adjusted EPS by roughly 8%. With our Q2 results coming in better than expected, we're increasing our full-year guidance, and we're well positioned as we enter the back half. I'll discuss guidance shortly, but first I'd like to review highlights of our Q2 results using our financial framework of growth, margins and returns. Starting with growth. For the second quarter, constant currency sales increased 5.5%, or more than $8 billion. Walmart U.S. comp sales excluding fuel increased 6.4%, with growth in both store and digital transactions. Grocery, and health and wellness sales continued to outperform, and we are encouraged by the modest sequential improvement in general merchandise. E-commerce sales were up 24%, driven by store fulfilled pickup and delivery and advertising. We like the trends we're seeing in e-commerce. Customers are increasingly counting on us for convenience, and they're visiting our app and sites more often. In Q2, weekly active digital users grew more than 20%. Similar to Q1, consumer spending remains resilient at the headline level. Customers are stretching their dollars further and seeking better value across more categories more often. We see grocery staples and in-home meal options being purchased more often. Sales of general merchandise kitchen tools like hand blenders and stand mixers have inflected higher as customers are preparing more food at home. They're also buying more necessities and focusing on lower-priced items and brands, and customers still want to celebrate key moments. Over the last year here in the U.S., we've partnered with suppliers to utilize rollbacks and offer select seasonal baskets of goods at the same prices as last year, essentially removing the impact of inflation. Customer response has been strong, and sales have exceeded plan for events like Memorial Day, 4 July and our Walmart Plus Week Savings event. We're taking a similar inflation-fighting approach to Back-to-school, with a basket of 14 of the most popular classroom essentials for under $13. In our international segment, sales were strong, up 11% on a constant currency basis, led by double-digit growth in Walmex, China and Flipkart. E-commerce grew 26%, and we experienced positive store traffic across markets. Similar to the U.S., customers are still pressured by elevated inflation with spend over indexing towards food and consumables. We're seeing higher private brand penetration across markets as customers globally look for a combination of value and quality. And Sam's Club U.S. comp sales excluding fuel increased more than 5% with member fee income up 7%. On margins, consolidated gross margins increased 50 basis points as we lapped last year's elevated levels of inventory markdowns and supply chain costs. These tailwinds were partially offset by ongoing category mix pressure, as grocery and health and wellness sales outperformed general merchandise. One of our strategic priorities is improving digital margins with an eye towards e-commerce profitability. I'm pleased with the progress we are making, particularly in Walmart U.S. contribution profit, which has been driven by fulfillment efficiencies and better product margins. We're leveraging our stores to fulfill more than 50% of digital orders, and activating our local delivery networks to get product to customers faster at lower cost. At our Investment Community Meeting in April, I said that we expected 200 basis points of improvement in contribution profit this year, and we're on track to achieve that goal. We're also pleased with performance of our higher margin growth initiatives that reinforce our core omni retail model. I'll provide highlights on each of these. First, marketplace. We're continuing to scale our marketplace in the U.S. with new items and sellers. The number of customers buying items on our marketplace increased 14% in Q2. Sales were strong in both consumables and general merchandise categories, with double-digit growth across home, apparel and hardlines, and the number of sellers utilizing our fulfillment services increased more than 50%. In Mexico, we also expanded the number of sellers and items available on the marketplace, resulting in 40% GMV growth for the quarter. In Canada, we opened our first automated e-commerce fulfillment center in Alberta, which includes Walmart Fulfillment Services and expands two-day shipping to 97% of households. And in India, Flipkart's Myntra is the country's largest e-commerce marketplace for fashion and lifestyle products, offering top brands to customers across India. Myntra now provides access to more than 6,000 brands on its marketplace. Moving to advertising. Our global advertising business delivered strong growth of approximately 35%. In the U.S., Walmart Connect sales increased 36% in Q2, and the business has nearly doubled in size over the past two years. We're seeing strong growth in sponsored ads and increased demand for in-store activation. Advertiser count grew 60%, with strong momentum in new advertisers. Sam's advertising business grew 33%. The in-club sales attribution feature for search and sponsored ads has generated strong interest from advertisers. On average, advertisers are seeing a nearly 30% improvement on the returns of digital ad spend as they gain full visibility to the member journey from intent to purchase, both online and in-clubs. And in international, the advertising business grew nearly 40%. And lastly, membership, Sam's Club U.S. member counts increased mid-single digits with strong plus membership growth in renewals as plus penetration is up 1.3 percentage points versus last year. During the quarter, we achieved record member acquisition tied to Walmart Plus Week and continued to enhance the value of the Walmart Plus membership. We introduced Walmart Plus Assist, which provides a 50% discount off the regular membership fee for customers receiving government assistance. We also partnered with Expedia Group to launch new travel benefits for members. Turning back to the middle of the P&L. As expected, SG&A expenses were higher versus last year and deleveraged 33 basis points. This reflects higher variable pay expenses relative to last year when we were below our planned performance, tech investments and increased store remodel cost in the U.S. Partially offsetting this, international expenses leveraged significantly on strong sales growth. As we increasingly utilize technology in our business, we're pleased with the performance metrics from our newly automated distribution and fulfillment notes. Our automated e-commerce fulfillment centers are achieving efficiencies of 30% higher units per hour than non-automated buildings. We're also seeing increased productivity from the more than 15% of stores now being served by automated regional distribution centers. It's early in the rollout process, but we are encouraged that some of these facilities are driving operating leverage well beyond our initial expectations. Second quarter adjusted operating income grew more than 8%, and our adjusted EPS of $1.84 was up 4%. Our plan is to grow operating income faster than sales, and our second quarter performance achieved this despite lapping the $173 million insurance settlement that benefited international's other income last year. Similar to Q1, below-the-line items were pressured by higher net interest expense, reflecting the increase in rates and noncontrolling interest due in part to stronger results from Walmex. The team continued to do a good job managing inventory, and we ended the quarter down 5%, including an 8% decline in Walmart U.S. We feel good about the progress we've made on in-stock levels as supply chain is normalized and the composition of our inventory mix is improved. We're maintaining discipline in how we're buying general merchandise during this uncertain macro environment to mitigate future risk if demand softens. ROI or return on investment, declined 100 basis points. As a reminder, we calculate ROI on a trailing 12-month basis, and the decline in Q2 is a result of nearly $4.2 billion in charges we incurred in Q3 and Q4 last year, related primarily to the opioid legal settlement framework and the separation of Flipkart and PhonePe. Together, these negatively impacted second quarter ROI by 140 basis points. As we lap these discrete charges in the coming quarters, we expect a stronger ROI inflection in the back half of the year. We're also starting to realize some benefits from productivity initiatives that were initially planned for fiscal year '25, and we continue to expect our ROI to increase over the coming years. I'll now briefly discuss some additional Q2 highlights for each segment. For Walmart U.S., our 6.4% sales comp included a high single-digit increase in grocery and a high-teens increase in health and wellness. Although general merchandise sales declined low single digits versus last year, these results were 300 basis points better than Q1, aided by outperformance from early Back to School shopping in our Walmart Plus savings event. We saw a 240-basis point shift in sales mix from general merchandise to grocery and health and wellness in Q2. Grocery inflation moderated more than 400 basis points from Q1 levels and more than 700 basis points year-over-year to a high single digit increase as we lapped higher levels from last year. On a two-year stack, grocery inflation remained over 20%. We're encouraged by the growth in units sold, particularly in food categories where disinflation is more pronounced, such as fresh meats, seafood and eggs. In addition, private brand sales in grocery were up more than 9%, with penetration up nearly 40 basis points in Q2 and up more than 170 basis points on two-year stack. Lower markdowns and supply chain cost resulted in a gross margin rate increase of 40 basis points, despite ongoing pressure from category mix shifts. The negative impact to margin mix from outsized growth in branded drugs accelerated in Q2. Other income grew nearly 4%, led by continued growth in Walmart+memberships. And overall, Walmart U.S. operating income increased 7.6%. Our international segment delivered another impressive quarter with double-digit sales growth and strong underlying profit growth. Operating income increased 2.2%, but was negatively impacted by 20 percentage points from lapping last year's insurance recovery that I mentioned earlier. Walmex had another strong quarter with sales up 10%, reflecting strength in our Bodega stores, Sam's Club and E-commerce. E-commerce sales grew in the low 20s, with traffic up more than 5%. Walmex is an excellent example of our omnichannel retail strength across formats and channels. Bodega Aurrera is celebrating its 65th anniversary and has become the most valuable retail brand in Mexico. These Bodega stores have consistently delivered strong performance and continue to accelerate e-commerce to better serve customers, now offering more than 60,000 SKUs from 586 stores in 299 cities. In China, sales increased 22%, led by strength from Sam's Club and e-commerce. We're executing well with increased online and offline traffic across both the Sam's and hypermarket formats. In India, Flipkart delivered strong GMV and net sales growth as the core business continues to perform well. The team continues to focus on expanding the ecosystem of products and services like advertising, travel and healthcare, and on delivering continued contribution profit improvement. Flipkart's consistent progress and performance reinforces our confidence in the long-term value of this business. India is leading the largest digital transformation in the world, and Flipkart is the leading marketplace in India, and we continue to be super impressed with PhonePe's strong and consistent performance. Annualized TPV or total payment volume has surpassed $1.15 trillion, and for the first time, we processed more than 5 billion transactions in a single month. Sam's Club delivered another strong quarter with solid unit growth and e-commerce up 18%. It's encouraging to see members embrace omnichannel with strong in-club traffic gains and increasing engagement with our digital tools in and outside the Club. In Q2, utilization of Scan and Go increased 570 basis points, and curbside pickup saw double-digit growth. Similar to Walmart, sales strength at Sam's was led by grocery and healthcare categories as the members focused on value and essentials. While discretionary categories were pressured overall, items with compelling price and quality and strong value to market are driving sales. Sam's Club operating income was up 22%, due in part to lower LIFO charges. Turning to guidance. There continues to be a reasonable level of uncertainty in the economic backdrop for the balance of this year. While inflation has moderated and employment levels have been steady, credit markets have tightened, energy prices are higher, and some customers face additional expense from the resumption of student loan payments in October. As such, we continue to be appropriately measured in our outlook. We're raising our full year guidance to reflect Q2 performance and our expectations for Q3. I'll highlight the key changes, but please refer to the press release for a full list of updated metrics. For the full year, we now expect net sales in constant currency to grow approximately 4% to 4.5%. We now anticipate LIFO will be a $200 million charge to operating income versus the $500 million charge that was in our prior guide. We expect operating income in constant currency to increase approximately 7% to 7.5%. This now assumes a 30 basis point year-over-year tailwind from LIFO compared to our prior guidance, which assumed a 100 basis point headwind. And we estimate adjusted EPS to be in a range of $6.36 to $6.46, including an expected $0.05 impact from LIFO. To bridge to our prior guide, we flowed through the Q2 beat, removed the Walmart U.S. LIFO charges that were previously expected in Q3 and Q4 and modestly raised our sales expectations. Looking at Q3, we're now offering the following view. We expect net sales growth in constant currency of approximately 3%. Operating income growth in constant currency is expected to be approximately 1%. This year-over-year growth is impacted by several comparison factors. We expect ongoing mix pressure impacts to gross margin to continue in Q3. We also expect a negative impact from fuel margins at Sam's Club versus last year's elevated levels. And similar to Q2, variable pay expense is expected to be higher in Q3 versus last year when we were below our planned performance. We don't typically guide currency, but it's worth noting that if rates stayed where they are currently, we'd see a $1.6 billion benefit to Q3 reported sales and reported operating income growth would be closer to 3.5%. And lastly, we expect Q3 adjusted EPS of $1.45 to $1.50. In closing, we're pleased with the strong first half of the year, and we positioned the business favorably for the back half. Our financial performance is validating our omnichannel strategy, driving organic sales growth while improving margins and returns. We're optimistic about our ability to improve our performance even more in the future. We like our position. And now I'll hand it back to [Doug] for a few comments before the operator opens the line for questions.

Operator:

[Operator Instructions] Thank you. And our first question is from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

Doug McMillon:

Robbie, this is Doug. I'll go first and then John or others can add if they want to. What's making a little bit better as the run rate compared to the previous quarter and how back-to-school started? And typically, when back-to-school is strong, it bodes well for what happens with Halloween and Christmas and GM in the back half. I do think our food and consumables percent to total in Walmart U.S. will still go up. Part of it is what's happened with inflation and disinflation in the GM categories. But relative to what I would have thought 90 days ago or when we started the year, GM is holding up better than I would have guessed. And I just - I feel like that with our store managers and the merchants, we want to have an optimistic posture on GM as we go into the back half. Anybody want to add anything?

John David Rainey:

There are also categories of general merchandise that on our marketplace saw double-digit increases, things like home, apparel, hardlines, which really gives you an indication of how our business, is changing as we're selling more third-party assortment.

John David Rainey:

On the second part of your question, Robbie, with respect to high-income consumers, we continue to see share gains across all income demographics. I think encouragingly for us in the quarter, the number of categories that we saw share gain and actually expand it. But this has been pretty consistent for five or six quarters now. And it really points to the fact that our value proposition is resonating with customers. It's not just about everyday low prices. It's also about convenience and convenience matters to every household income demographic.

Katharine McShane:

Hi. Good morning. Thanks for taking our questions. With gross margin expanding about 50 basis points in the quarter, is there a way to quantify the buckets of contribution between the higher-margin businesses like marketplace, and advertising, and the impact mix that's coming from the stronger grocery? And just given the more optimistic general merchandise commentary, is there any update to your mix assumptions in guidance for the second half when it comes to gross margins? Thank you.

Operator:

Our next question is from the line of Oliver Chen with TD Cowen. Please proceed with your question.

Doug McMillon:

I'll take the last one first. This is Doug, Oliver. Thanks for the question. I'm really excited about what's possible. And we've been working for a few years now to try, and get our data in better shape so that we can really put it to work. We still got room to improve there, but we have made progress. And when you start imagining what we can do to personalize for customers, and members more effectively while still living in an EDLP world and driving the business model that way, because that's the winning strategy for us. There's a great opportunity for us to be more anticipatory, and to be more relevant to them, and communicate in a way that shows that we know who they are in a healthy way, while protecting privacy. So having that data, go to work with our own large language models, and using large language models from others, presents a tremendous opportunity. And I think it will unlock a lot of use cases on the customer member side. As I mentioned in the prerecorded remarks, the opportunity with associates is also terrific. The supply chain is the third area that comes to mind. So, I think, this will be an opportunity for us for a really long time to try, and grow top line and be more efficient as a company by putting that technology to work.

John Furner:

They are - John David. And we've talked about this for a while that the flexibility in terms of what we offer is meaningful for customers. And the transaction growth. We're proud of the team. We saw that in eCommerce. We mentioned marketplace. Pickup and delivery have been strong. In-store traffic and transaction count has also been strong. So having an offering that's there for the customer. However, they want to shop, whenever they want to shop is helping us. And having as many locations as we do certainly is an important part of the equation when it comes to delivering. The last thing I would say is, is in general merchandise, and other categories where we have seen a number of rollbacks this year that are quite intentional. The results are really strong, whether it's the Justice 17-ish backpack or the Frito-Lay multi-pack from general merchandise to food, we are seeing rollbacks work across the business and customers are responding. They're choiceful. They're being thoughtful about what they buy, and our merchants have done a nice job of leaning in seasonally to ensure that our rollbacks are in the right places for the customer.

Rupesh Parikh:

Good morning, and thanks for taking my question. So, I wanted to go to the international business in China specifically. I was hoping to get more color in terms of what you're seeing in the market. Now for the second consecutive quarter in a row, your results seem to stand out versus some of the weaker macro data points that we're seeing out there in China.

Operator:

Our next question is from the line of Paul Lejuez with Citi. Please proceed with your question.

John Furner:

Compared to a year ago, Paul, certainly, inflation is at a lower rate than what it was. It's been relatively stubborn in dry grocery more than other places over the course of the year. Price gaps are something that we spend a lot of time on each and every week. We start Monday talking about trading and what's happening in the market, price is always one of the major topics. We would assure that our value are right, and we are pleased with where the value is today. The grocery business is gaining share. Certainly, we're going to watch the market. As I said a moment ago, we do have a number of rollbacks that are effective in food. Our rollback count in food is higher than last year. It is lower in general merchandise than a year ago, but a reminder that last year we were clearing a lot of inventory that had been backlog, so the general merchandise rollbacks which are very effective are more choiceful, and I think reflective of the seasons that people are in. So, our job from here is to ensure that we're ready for people that are getting back to school all across the country in the next couple of weeks, colleges, we have tailgating season coming up Labor Day, and we're right into the holiday food season. I'd say, too, I felt promotions is the easy solution to inflation versus doing the hard work of working with your suppliers to walk back all the commodity and cost increases that kind of have been absorbed over the last 2 years. So there's a lot of work in just tracking the cost of transportation. And then as that's come down, working back with each supplier to have a look at what proportion of the cost is impacted by that and how do you roll that back. So I know in Sam's, the team have a great big board. They ring a cowbell every time we get a cost decrease. And you flow it on to the member. And I think that's how we want to think about it versus thinking about how do we go out and do promotions.

Simeon Gutman:

Good morning, everyone. Judith, congratulations, and to every promotion, congratulations. My question is more medium term. I wanted to ask about the inflection on EBIT dollar growth. At Shareholders', we talked about how in fiscal '25, it should or could get better than where we are today, realizing we're lapping some easy compares from last year right now. Can we hone in on what needs to take place for this EBIT dollar growth inflection? Assuming healthy sales, leverage over fixed cost, Marketplace ramping, is it advertising? Can you talk about sort of what's in your control and what's more sales-driven as we think about EBIT growth going forward?

Doug McMillon:

Simeon, this is Doug. I'll just add on. I think John David said it well, the two threads, the two questions are how is the automation work going? And how is that playing through as it relates to productivity? And that's a multiyear implementation of these various forms of automated storage and retrieval systems that we've talked to you about. And then the second one is how is the business model changing? And the engine for that is what's the digital percent of total, how is e-commerce growing and what's the pull-through to advertising and the other components that shape that business model. And the reason I'm repeating it is because I wanted to make the point that it's not just the Walmart U.S. business that's going through that transformation. As I've been traveling in International in the last few weeks, the commonality from Canada to Chile, and Judith had that team from Mexico in town this week, what Gui and the team are doing there, it's very consistent as it relates to how omnichannel retail is coming to life across our company. So I think those are the two threads to keep your eye on.

Operator:

Our next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question.

Doug McMillon:

Hi, Kelly, thanks for the question. One, really happy with the performance. And the team deserves credit for a lot of improvements that enabled the 24% growth. When we talk about pickup and delivery specifically, I think I would take a step back and just remind everyone what we talked about at our investor conference and what we're ultimately trying to do with supply chain in the entire e-commerce business, is densify our inventory at the first mile, make the middle mile as efficient as possible and then shorten the last mile. And our store locations, over 4,700 locations in addition to the fulfillment centers, enable us to do that. So what's happened over the last year or so is more of our e-commerce business and deliveries have come from stores because that's where the inventory is closest to the customer and helps us with efficiency. So it's important to frame that, that is a part of the total. The way we measure this internally as we look at the number of transactions and customers and what they bought in the store, what they picked up and what was delivered. The second part of your question, really pleased with the progress in Marketplace. Our Plus event was a good marker for us in terms of what's possible. With the Marketplace, a majority of our revenue from that event was driven by Marketplace sellers. And I'm thankful to the sellers who participated and helped us find customers or helped our customers find value at a time when they're looking for value. And that was across all categories, including general merchandise. In fact, much of the event was general merchandise. So I think the team has positioned the Marketplace well. And in terms of the second part of your question with advertising, there are opportunities for sellers. There are opportunities for suppliers. We'll continue to learn, grow and experiment in stores and on the site. We want to ensure that Walmart Connect, the name Walmart Connect, connects our buyers, suppliers and sellers all to our customers in a way that's accretive to the customer experience. We want to make sure that customers are finding what they want when they want it. And if this business can help people connect together, that's great. And we saw that happen in the quarter. And the growth was higher than our e-commerce growth.

Operator:

Our next question is from the line of Edward Yruma with Piper Sandler. Please proceed with your question

Doug McMillon:

Hi, Edward. Certainly, we want to have a digital relationship with as many customers as possible, pleased with the growth overall. And as we've talked about before, Plus is an important part of the offer we have. I would pull the reason back that Plus has had more success to the very core of the offer. The offer was established to limit the number of deliveries people get without having a charge on those deliveries from both the fulfillment centers and the stores. We launched this in 2020, certainly had issues at that point with availability. And we've had inventory imbalances. But in the last year or so, the focus continues to be and improvements have been in the core, where we measure every week something we call perfect order. The stores are very focused on what we call the first-time pick rate, which is picking the order the first time they look for it. And then another thing that we do very intentionally is measure what percent of the order was delivered before there were any substitution. So what customers are looking for is exactly what they ordered at the time that they expected it to be delivered. And that's the way we hold ourselves accountable. Certainly, the other benefits are helpful. There are different features that people are using. And it is important to have a variety of benefits. But the core of the offer is the most important thing that we have to execute going forward.

Seth Sigman:

Hi, good morning, everyone. I wanted to follow up on the value proposition that Walmart offers today. So private label seems to have a lot of momentum and is likely one of the factors that's helping drive market share here. How are you managing private label differently than in the past? And how do you think that plays into the competitive gap here more from a basket-level perspective? And then ultimately, do you think that this advantage is sustainable even in an environment where maybe inflation moderates or prices decline? Love some perspective on that. Thank you.

Kathryn McLay:

Yes. And I think from a Member's Mark perspective, we have seen our metrics around value for money and NPS and quality, our Member's Mark has continued to improve. And we're seeing members choose it because of the quality of the item, because of innovation into those products and also because the great value that they get out of the Member's Mark, price/quality combination.

Judith McKenna:

Yes, Member's Market, of course, is available in our Sam's Clubs globally, around the world but also many other items as well. And I know you were in Chile recently, Doug, and they have a phenomenal international foods aisle, which is showing incredible growth, many of which are private brands, which are imported from around the world, from the rest of the Walmart world.

John David Rainey:

You made some of us eat that.

Operator:

The next question is from the line of Corey Tarlowe with Jefferies. Please proceed your question.

Doug McMillon:

From an enterprise point of view, just on the customer and member first, and others can chime in on that, I feel like that our position is one where if things do get tougher, they're going to increasingly look for value and we're going to be able to grow the top line. Hopefully, things do get better. And there are a lot of conflicting data points, but you guys see the same data that we do. There are reasons to be optimistic in areas like employment and the wage inflation that's happened. And there are other reasons to be concerned - as consumer balance sheets potentially weaken over time. But again, we like our position. We like it in terms of the breadth of product categories we can sell whatever people want to buy. We like it in terms of the way we can serve people, whether its curbside or its delivery or it's in a store club. So our job is to grow our share to win through the customer value prop, which is price, assortment, experience and trust. And whether that's in Mexico or the United States, that's the position that we put ourselves in, and we just need to execute against that. On shrink, John, you can comment too, but I'd just remind everybody, from a total enterprise point of view, we're more than a domestic retailer. And we've got 19 countries. We've got Sam's Club. We've got a variety of businesses. And so, it's not necessarily the same answer as maybe some of the others that are in the news of our shrink.

Doug McMillon:

Shrink is comprised of more than one thing. That's part of it. And we do think that in some jurisdictions here in the U.S., there needs to be action taken to help protect people from crime, including theft. The other part of Shrink is more controllable, and we stay focused on that as a priority.

Krisztina Katai:

Hi. Good morning. Thanks for taking our question. And I'll add my congratulations to Judith as well. I have a question on Sam's Club. I think I heard you say in the single-digit member growth within the quarter. So can you talk about your membership gains and the momentum that you have been seeing in the business as well as the renewal rate? And how you think about membership value for the consumer in the face of moderating food inflation? And then secondly, if I could just ask on the private label penetration that is still increasing. Just how are you generally anticipating volumes to play out in the back half of the year between your private brands versus your national brands as rollbacks are increasing? Thank you.

John Furner:

And Walmart - on our membership, consistent growth last few quarters, but we really did have a successful plus event, really good results all across the business. As I said earlier, the core of the offer is the most important thing that we deliver, and that includes perfect order or fill rates and availability. Customers trust us to be able to deliver their food, consumables and general merchandise items consistently and on time. On the question on private brand volume, I would also just repeat consistency over the last couple of quarters, and we've talked about growth of private brands really since the beginning of 2022. Again, we don't have targets on that. We want to be there for customers regardless of what they choose, whether it's a branded item or a private brand item on private brands. We stay focused on quality and value. And in some cases, like if you're in a store today, you would see a rollback on great value mustard, and it's working really well. It's a staple that has seen really great growth, because of values that we offer. So getting prices back down, and dry grocery is important for the consumer, and we want to be able to help them, and lead that in any way that we can.

Operator:

Thank you. Our final question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Doug McMillon:

Hi, Michael. Thanks for the question. We didn't see COVID coming, and we didn't anticipate inflation to be as high as it - has been in the United States. So, if you could tell me what we're not anticipating right now, I might be able to answer your question about next year, I think your underlying premise that we kind of know what the shape is, and we're not in this position that we were 12 months ago with inventory has got some truth to it. As it relates to doubling down, I think we are being aggressive. We are currently going through our long-range planning cycle. And as we look at our opportunities to invest next year and over the next five years, we look at that board, and we get excited about it. John David made the point in a meeting earlier this week. It isn't it cool to be a part of a company that started in 1962 that sees opportunities to drive strong returns. With today's investments to help you contemporize the business for the future, and I agree with that. Like it's a really cool spot to be in. To have cash flow to have this strong business and to have opportunities in front of us that transform the business, and create another level of operational excellence through productivity, for example. So I think we've got an aggressive plan. We talked at the investor conference about our capital plan. And we continue to see opportunities to invest to grow top, and bottom line. We expect ROI to go up over time. It may not happen that every quarter, operating income grows faster than sales. But over time, as we said at the investor conference, we expect that to be the case, because of productivity in the business model shape. So, I'll just repeat what we said there. I think we're being appropriately aggressive given the environment. And I'm excited about that.

Doug McMillon:

Just maybe one more comment on strategy. As we go through this year's cycle, and I think this was true to a large degree last year, I mean it's pretty common, but we know what the components are. And it's a challenge to execute across multiple fronts. And it's full-time work to run great stores and clubs. It's also a full-time work to grow an excellent eCommerce business, and there are lots of components to that, and it's got to happen around the world. But we've got the resources. And importantly, we've got the talent to do it. And so, I think the shape of that board kind of the where-to-play aspect of our strategy looks pretty consistent, and that builds confidence. We just - we're in execution mode, and we like the plan that's right in front of us.

Doug McMillon:

Before I wrap things up, I just want to acknowledge the tragedy that happened in Hawaii in Maui. The company has stepped forward with financial support for the United Way and Red Cross, as you would expect, we're providing essentials providing supplies. We're flying merchandise there. We're bulking up on what people need. And our team on the ground has done a fantastic job. Our store manager there is Chris Pierce. And Chris and his team have supported the community there, as you would expect them to, and we're really proud of them. That was a terrible tragedy. I mean as we wrap up, I'll thank you for your focus on our business. As I mentioned just a second ago, we are really excited about what's in front of us. I think you know what the plan is. We're positioned to grow the top line. Over time, we can grow profit faster than sales through productivity, and shaping the business model differently, which will result in higher levels of return on investment, and we're excited about delivering that. And I'm grateful to what everyone did for this quarter. And I want to thank Judith for what she's contributed to this company. It's been really significant, and we're going to miss her. Thankful, she's sticking around for a little while to help with some things, and I'm excited for Kath and Chris and Karen. Walmart's got a deep bench, and we'll keep going. Thank you all for your time.

Steph Wissink:

Thank you and welcome everyone. We are excited to discuss the results of a strong first quarter and our upwardly revised outlook for the year. Joining me on the call are Walmart's CEO, Doug McMillon; and CFO, John David Rainey. Following prepared remarks from Doug and John David, we will take your questions. At that time, we will be joined by our segment CEOs John Furner from Walmart U.S., Judith McKenna from Walmart International, and Kath McLay from Sam's Club. In order to address as many of your questions as we can in the time allotted for this call, please limit yourself to one question. The operator will mute your line after your question has been post. After management has responded we will move to the next person in line. 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. Thank you for your interest in Walmart. Doug, we are now ready to begin.

John David Rainey:

Thanks, Doug. I'd like to start by thanking our customers, associates and partners for helping us deliver a strong quarter to start the year. Despite a challenging macro environment, the team executed and we've made progress advancing our various strategic initiatives. I'll begin by reviewing highlights for the quarter using the framework of growth, margins, and returns. Then I'll spend a couple of minutes reviewing key themes for our recent Investor Day before detailing our updated guidance. Starting with growth, for the first quarter constant currency sales increased nearly 8% or about $11 billion with strength across all segments. Walmart U.S. comp sales, excluding fuel, increased 7.4%, including 27% growth in e-commerce. After a strong start, sales growth moderated as the quarter progressed. The 90 basis point deceleration and comp sales growth from Q4 was driven by pricing and the effect of lapping higher inflation rates in the prior year period. We continue to gain share and grow unit volume and grocery. This was consistent with our expectations on how we built our plan. At the headline level, consumer spending has proven resilient, but below the surface, we continue to see signs that customers remain choiceful, particularly in discretionary categories. In Q1 we saw a nearly 360 basis point shift in U.S. sales mix from general merchandise to grocery and health and wellness. To benchmark the magnitude of this shift exceeds the 330 basis points of category mix shift we experienced in all of last year. In addition to the persistence of inflation and food and consumables, customers were also impacted by a reduction of SNAP benefits and lower tax refunds. These impacts were partially offset by higher spending tied to an increase and the cost of living adjustment for Social Security Benefits. In our international segment, sales were strong, up nearly 13% on a constant currency basis led by double-digit growth in China, Walmex and Flipkart. Many of the same impacts on consumer spending in the U.S. affected our international markets too. And Sam's Club U.S. comp sales increased 7% with member fee income up 6.3%. Average spend per member increased mid-single-digits. Now on margins, consolidated gross margins decreased 18 basis points with ongoing pressure from category sales mix globally. This headwind was partially offset by a reduction in supply chain and freight costs relative to last year's heightened levels. Category mix was a notable headwind across geographies and formats. Walmart U.S. general merchandise sales declined mid-single-digits while food and consumable sales increased low double-digits. Headline inflation and food and consumables came down over 400 basis points from the start of Q1 to the end of the quarter. But prices remain high and customers are being cautious with their spend in discretionary categories. And while we make attractive margins in food and consumables, they have a lower margin than general merchandise. We expect category mix to remain a gross margin headwind for the balance of FY 2024. The higher margin initiatives that are connected to our core Omni retail business, including marketplace, advertising, and membership continue to meaningfully outgrow the base. I'll discuss each of these. First, marketplace and fulfillment services. We're growing our marketplace with new items and sellers and an improved experience. We've increased seller counts in the U.S. by more than 40% year-over-year and the number using Walmart fulfillment services has more than doubled. We're adding higher profile in demand brands that our customers are searching for but not typically distributed at Walmart elevating our profile as a digital shopping destination. And in India, Flipkart's e-commerce platform continues to scale, growing first time e-commerce customers and expanding its reach in tier 2 and tier 3 cities. Flipkart's e-cart business now includes more than 35,000 Kirana partners as well as providing fulfillment services for Flipkart sellers and other third parties. Moving to advertising, our global advertising business delivered strong growth of over 30% in Q1. In the U.S., Walmart Connect advertising sales increased nearly 40% as we experience strong momentum and new advertisers, particularly from marketplace sellers. And the number of three piece sellers utilizing our ad capabilities has doubled over the past 12 months. Sam's Club ad business called Member Access Platform grew double-digits with the number of active advertisers up more than 50% versus last year. Advertisers are responding to our recently launched in club sales attribution feature which provides advertisers with clear insights on the returns of digital ads been both online and in clubs while enhancing member experience. And in international, the advertising business continued to show strength, led by Flipkart ads, which was up over 50%. And lastly, membership. Sam's Club member counts have had a multiyear run of robust growth with another record high achieved in Q1. Member counts have grown nearly 30% over the past three years and we're increasingly attracting greater numbers of millennials and Gen Z. We also like the trends we're seeing from Walmart Plus members. Nearly 50% of our Walmart Plus members are coming from the online pickup and delivery channel. Members spend more than non-members. They shop with us more frequently and the membership deepens engagement, helps enable personalization, and allows us to offer more services and to provide more offers on things that are important to our customers. Turning back to the middle of the P&L, SG&A expenses leveraged 58 basis points aided by strong sales growth across the enterprise, a continued focus on managing cost into moderating sales growth as inflation lessens, and lapping some COVID related wage cost in the U.S. last year. Taking all this together, our operating income grew more than 17%. This is relative to sales growth of nearly 8%, which resulted in operating margin expansion of 34 basis points, reinforcing the financial framework that we laid out at our Investor Day. As signaled when we issued FY 2024 guidance in February, several below the line items impacted our Q1 earnings results including higher net interest expense. Q1 net interest expense was more than $550 million and we issued 5 billion of debt at favorable rates. Non-controlling interest was also higher in the quarter due in part to stronger results from Walmex. Adjusted EPS of $1.47 was better than we expected as sales outpaced our plan and cost leverage exceeded plan. GAAP EPS was $0.62, the difference between adjusted and GAAP EPS reflects an $0.85 impact from unrealized gains and losses on equity investments. The team continued to do a good job managing inventory and we ended the quarter down 7%, including a more than 9% decline in Walmart U.S. Managing cost and inventory are two of the key controllables as we navigate an uncertain macro environment. We're improving inventory efficiency and merchandise flow and addressing placement in order to better serve customers, improve store in stock levels, while also mitigating future risks if demand softens. Let me take a moment to discuss our returns or specifically return on investment or ROI which declined by 120 basis points this quarter. We calculate ROI on a trailing 12-month basis. As such, the decline in Q1 is a result of nearly 4.2 billion in charges we incurred in Q3 and Q4 last year related primarily to the opioid legal settlement framework and the separation of Flipkart and PhonePe. Together these negatively impacted the first quarter ROI by about 140 basis points. These will again be a headwind in Q2 and to a lesser extent in Q3. As we lap these charges, we expect meaningful improvement in ROI in the back half of this year. When you look beyond these unique items, our underlying operational ROI is steadily moving higher. At our Investor Day in April, I said that we want our ROI to go up every year and I still believe that will be the case this year. Let me briefly reference key segment highlights for Q1. For Walmart U.S. comp sales were strong, up 7.4% reflecting higher store traffic trends as well as strong growth and store fulfilled pickup and delivery. From a category perspective, comp sales were driven by strong growth in food and health and wellness, partially offset by a decline in general merchandise sales. Unseasonably cooler spring weather negatively impacted sales in certain seasonal hardline categories including lawn and garden. Gross margins decreased 41 basis points primarily due to ongoing pressure from category mix shifts. As mentioned previously, supply chain costs and transportation were lower as we lapped last year's elevated levels. Inflation remained high, up low double-digits in food categories. It's important to remember that while year-over-year inflation started to moderate as the quarter progressed, this is largely due to lapping higher levels from last year. On a two-year stack basis, food inflation remains over 20% and continues to pressure discretionary wallets. Share gains and grocery continued, including from higher income households as our strong price gaps resonate with customers who are increasingly prioritizing value and convenience. We're also seeing market share gains in the areas of general merchandise where we've invested to improve the customer experience such as entertainment and automotive. In this environment as customers manage household budgets more tightly and are biasing spending toward everyday essentials, we're reinforcing our value proposition across the merchandise offering, including seasonal event savings, featuring high quality owned brands, and leaning into opening price points. For the Easter holiday, we offered customers a curated Easter meal along with a traditional Easter basket for the same price as last year. Private brand penetration and grocery categories increased nearly 110 basis points in Q1 following a 160 basis points increase in Q4 and 130 basis point increase in Q3. E-commerce sales were led by continued double-digit growth and store fulfilled pickup and delivery. Customers increasingly value convenience and speed of delivery. We have an advantage here as we leverage the proximity of our stores to fulfill and deliver digital orders to customer homes. In many cases, we can get orders delivered faster to customers while building a sustainable Omni economic model. Strong flow through on higher sales contributed to SG&A expense leverage which offset gross profit pressure, resulting in strong operating income growth of 11.7% relative to comp sales growth of 7.4%. Our international segment delivered an outstanding quarter with strong growth in both sales and profit, continuing the momentum built in the back half of last year. International grew both the top and the bottom line faster than the enterprise. Sales grew nearly 13% on a constant currency basis, led by double digit growth in China, Walmex, and Flipkart. Impressively, operating income grew more than three times faster than sales, up 41% with each market delivering year-over-year improvement. The strong profit flow through is particularly encouraging as the team has been delivering operating efficiencies on top of strong sales growth. In China sales increased 28% as the team executed well during the Chinese New Year season and also saw increased traffic as the Chinese economy reopens. Results were strong across formats and channels with continued member growth and higher member retention at Sam's Club, improved trends in hypermarkets, and more than 50% sales growth in e-commerce. Walmex had another good quarter with sales strength in Bodega stores, Sam's Clubs, and e-commerce. We continue to take advantage of opportunities to expand our physical footprint, opening more than 120 stores over the past 12 months while also scaling our omnichannel capabilities. As customers desire for convenience increases, the team has rolled out a 60-minute delivery option to 80% of Walmart Supercenter and Express stores in Mexico. In India, Flipkart had strong top line results and improved its contribution profit. The team continues to expand their products and services. As an example, Flipkart Travel added to its portfolio of offerings by launching bus reservation services during the quarter through its Cleartrip platform and already is capable of offering 1 million bus connections to customers. And we continue to be pleased with PhonePe's great performance. During the quarter, we reached an important milestone with annualized total payment volume, or TPV, eclipsing the 1 trillion level for the first time. For Sam's Club, U.S. comp sales were strong, up 7% in Q1. In addition to solid increases in both transaction and ticket, Sam's e-commerce sales were up 19%, led by strong growth in curbside. Sam's delivered another quarter of record member counts and membership income growth was 6.3%. Plus member penetration also hit an all-time high during the quarter. And it was terrific to celebrate the 40th birthday of Sam's Club during the quarter with member promotions and events. We saw incredible response from our existing and new members including the largest quarterly membership sign-up on record. Operating income declined slightly as a result of an inflation-related LIFO charge of $48 million. Without that charge, operating income would have increased 10%. At our investment community meeting in April, I outlined our plan to grow operating income faster than sales centered on three strategic building blocks of our financial objectives. First, we're focused on driving organic sales growth from our omnichannel business model. It's clear, our omni model is resonating with customers across income demographics who are seeking out Walmart digitally and in stores, curbside and via delivery, and we're growing mine share for our convenience, which nearly matches our mine share for price. As we continue to scale digital capabilities in our markets around the world, we have an opportunity to drive significant growth in the top line over the coming years. The second component of our financial model is to diversify our earnings streams through improved product and business mix. To improve product mix, we're focused on increasing sales penetration in higher-margin categories like apparel and home through the expansion of our e-commerce marketplace assortment and an upgraded presentation and experience in our remodeled stores. Our e-commerce assortment has grown to include over 200 million SKUs in apparel and nearly 60 million in home categories. In our newest remodeled supercenters, take a differentiated approach to showcasing general merchandise with more brand shops, digital displays, mannequins, wider aisles and updated fixtures. We're very encouraged by the early reads on customer response to these initiatives, and we plan to update 300 stores with these features this year. In addition, as I mentioned earlier, we're making progress in improving our business mix as we scale a portfolio of highly attractive growth initiatives that reinforce our core retail model and will directly reshape our e-commerce and enterprise profit trajectory. This set of initiatives drive stronger returns and includes advertising, data, and membership in many markets. Collectively, these initiatives generate operating margins that are appreciably higher than our core business, and we expect we'll begin to positively influence operating profit growth relative to sales growth this year. The third building block of the model includes improving returns by scaling proven high-return investments in our supply chain that drive operating leverage and improve incremental margins. We're investing capital to optimize our distribution and fulfillment nodes with automation that we expect will drive a significant improvement in unit economics in the coming years. Our capital structure and cash flow generation are an advantage, and we're allocating capital responsibly with a bias towards increasing returns. I'll reiterate what I said at our Investor Day, we like our strategic position. Over time, we expect revenue growth across a diversified set of drivers, improved category mix, and increasingly accretive business mix, coupled with improved unit economics. This is all fueled by supply chain investments with attractive payback cycles. We expect the outcome will be operating income growing faster than sales. Turning to guidance. There continues to be a great deal of uncertainty looking out over the balance of this year as macro pressures on the consumer have gradually intensified. As such, we continue to maintain a prudent approach to our outlook while, at the same time, having a high level of confidence in what we can control. It's also not our historic practice to always update guidance exiting Q1, and we don't necessarily want to establish precedent. But we think in this unique environment, it's important to provide an ongoing framework as our views evolve. We're raising our full year guidance to reflect Q1 performance and our expectations for Q2. We now expect net sales in constant currency to grow approximately 3.5%. Our expectations are for Walmart U.S. and International to grow slightly faster than our prior view, and for Sam's Club growth to be consistent with our February guidance. We expect operating income and constant currency to increase approximately 4% to 4.5%, including an expected 100 basis point impact from LIFO charges. And we estimate adjusted EPS to be in a range of $6.10 to $6.20, including an expected $0.14 impact from LIFO. There are also a few changes below the line. Our recent debt issuance yielded a more favorable interest rate than estimated, and as such, our net interest expense is expected to grow $600 million versus last year. NCI or non-controlling interest is expected to be closer to a $0.20 drag to EPS year-over-year, including strength in Walmex. And our tax expectations have moved toward the upper end of our prior range at approximately 26.5%. Looking at Q2, we're offering the following view

Michael Lasser:

Good morning, thanks a lot for taking my questions. Given the prospect of this inflation and the increasingly difficult traffic comparison and consumer environment that you're facing over the rest of the year, how much do you expect you will need to invest in price and other actions in order to maintain an overall stable comp in the U.S. in the coming quarters? And has -- how have you factored these investments into your updated guidance and is it fair to think that given your commentary around doing better than the 2% to 2.5% prior expectation for the Walmart U.S. comp that it could be as high as 4% to 5%, just given the momentum of that business? Thank you so much.

Doug McMillon:

Michael, this is Doug. I'll just add to what John said to remind everybody when we were together in Florida, we talked about this being a bit of a pivot where our investments are more focused on capital investments than income statement investments. And we'll continue to proceed to invest in the supply chain, things we talked about a few weeks ago, of course, but also remind you about our remodel investments. So I think that when I think of the word investment, I think more about those things than I do necessarily income state investments -- income statement investments. I think the other thing I would say is it's a great time just to be a really good merchant. Like in our stores, when I think about general merchandise, whether that's apparel or hard lines, we're focusing our store leadership and our store associates on standing tall in those areas. And because inventory is in a better spot than it was last summer, for example, they can focus more on that rather than just dealing with the flow of inventory that was coming in. So we can impact mix and do other things to drive our business beyond just considering income statement investments.

Katharine McShane:

Hi, good morning. Thanks for taking our questions. We wondered if we could ask around quarter-to-date trends for sales and if the moderation from Q1 has continued? And can you remind us when the mix lap starts to get easier with consumables?

Doug McMillon:

I think the persistent inflation in dry grocery and consumables is the biggest issue. When you think about what we're up against and what will lap, we started to see inflation occur in the back half of 2021. It accelerated in the beginning of 2022 much faster than what we expected to get to a higher level than what we expected. Since then, you've seen general merchandise start to come back down, but dry grocery and consumables have held. And so as a customer, particularly if it's a customer living paycheck to paycheck, they now have a two-year stack that's a problem and eventually becomes a three-year stack that's a problem. So working with those suppliers that are on the prepared foods and consumable categories to get costs down more as fast as we possibly can would help them drive unit volume, would help us with mix and free up cash for customers to use for discretionary goods. And that's what we're focused on, have been focused on, and it's just taking longer in those categories than we want.

Oliver Chen:

Hi, thank you. The tech-enabled retail ecosystems continues to scale really impressively. What are some of the key priorities for advertising in marketplace and how they may intersect with artificial intelligence as well as -- helping the margin mix? And a follow-up for Judith, China continues to be really impressive on sustained momentum as well as better margins. Just highlights about how that reopening has gone relative to your expectations and any thoughts on India as well? Thank you.

Judith McKenna:

Hi Oliver, just on that first point on the kind of tech-enabled ecosystem and marketplace. We've seen some really strong progress on that internationally with a lot of leverage from U.S. learnings that we've been able to apply particularly from a marketplace perspective where we're building out a global marketplace capability. We've just launched Walmart fulfillment services in a number of our markets. So that's really been enabling that on the ecosystem. India is probably one of the better examples that we have, although Walmex has been another great example of building out that ecosystem. Putting the customer at the center of it and using our digital capabilities to figure out how we serve them best in a simple and effective manner. And you heard John David talk about the work that we're doing, for example, in travel, where we can also cross-sell in India for products well in our marketplace at the same time is selling tickets for people, whether that be for air or for buses, which we've just launched. And as far as China is concerned, they undoubtedly had a very strong quarter. It was one of the important drivers of the quarter performance for International, although we saw strength across the board from most of our markets. In particular, as you commented, the reopening of Chinese New Year, for Chinese New Year made a profound effect on the quarter. Just to give you an idea of the scale of what happened there and the response of our teams, we had all of our product positioned for a Chinese New Year event based in the cities where most people were. What happened is actually everybody went home into the more rural areas. And our team had to pivot completely within a 10-day window and reallocate all of the inventory that we had around the country. It was a remarkable asset, which just demonstrated their agility and resilience. The Chinese economy is still patches. Undoubtedly, consumer sentiment, if you look externally, is better than it was, not all the way to bright yet pre-COVID, but both of our businesses there are benefiting from the reopening. So Sam's Club continues to do well. We have six new clubs opening this year. And then on hypers, really focusing on doubling down on how we think about fulfilled -- store fulfilled for e-commerce. That e-commerce penetration remains at about 40%, which is a slight softening from where it was, but that's also partly seasonal because of the Chinese New Year time. On India, as Doug commented, we were there recently, both Flipkart and PhonePe continue to impress us and meet our expectation. The build-out of the ecosystem for Flipkart, I think we've talked about, but it's PhonePe, it's really impressive to see their results as well, leveraging over the 1 trillion TPV mark, 36 million merchants online, and enabling those merchants to be able to grow their businesses as well was really impressive to see. What we're seeing in India is a build-out of an ecosystem in its own right between our tech capabilities, between our sourcing capabilities, Flipkart and PhonePe, it's becoming a mutually reinforcing flywheel of strength for that market, and we're excited on what they're going to do in the future.

Simeon Gutman:

Good morning. I have a question for John David. The Q2 outlook, can you share if expectations has changed at all since you guided the full year and relatedly, you talked about how the second half spread with EBIT for sales growth should be stronger than the first half, can you talk about does that shape or that spread change at all, does it widen, or roughly stay the same?

Operator:

Our next question is coming from the line of Kelly Bania with BMO Capital. Please proceed with your question.

John David Rainey:

Sure. I'm writing down all these questions here, Kelly. So first on mix shift, I don't think it's fair to assume that the first quarter is necessarily going to be the peak. When we gave our full year guidance, you might recall that we talked about an additional incremental impact relative to the 330-ish basis points we had last year. And so I think we'll continue to see that through the year. A lot of that too, depends upon consumer behavior, which is difficult to predict at best right now, and our guidance assumes a rather cautious outlook there. On units, if you just take the first quarter and you break it down by segment, both Sam's in the U.S. where if you look at it like, say, real sales, they were basically flat. The International segment, I believe, was up around 6%, 6.5% inflation adjusted. So certainly, we're seeing the impact of higher prices and the effect of consumer behavior on purchasing as it relates to units. And then with respect to the stores that we're remodeling, before I answer this, I just want to caution that we're early on here. We've only done a couple of stores, but very excited about the results. We've seen a quite sizable increase, couple of percentage points in terms of uplift of sales. Now to be clear, that would be expected in any store where you do a remodel, you're going to see that initial uptick. I think what we need to continue to monitor is how that levels out over time. But when -- if you got the chance to go into one of these stores, you certainly recognize the difference that it is versus the rest of the network and so we're quite excited about this and the early response.

John Furner:

Well, we have a couple of dozen now that are around the country. And what we did is piloted here in Arkansas, then we went to the Northeast, and we put these now in a number of markets. And additionally, what's encouraging beyond just the merchandising, whether it's the great brands that you see in apparel or layouts, a lot of really exciting changes. What we see is success in a number of markets. So we think this has more broad appeal than perhaps what we may have believed when we did the first one. So the program is going well, and we see several hundred of these in construction and on the way this year.

John Furner:

Yes, definitely some interesting points when you dig into that, Doug. General merchandise is certainly stronger in e-commerce and stronger in the marketplace. The trend, as John David said, for the quarter to date was just a couple of weeks is very reflective of what was happening at the end of the first quarter. But where we have new items, new brands, we have a lot of examples of digitally native brands that we found somewhere in the media or social media that are doing well, that actually is inclusive in food as well. And so the mix right now, as I said earlier, has some positives between supply chain. Food has definitely grown faster along with the consumables. The health and wellness growth is something that we didn't really expect going into the year that has accelerated quite a bit over the last couple of months. And so as we look forward, some of the things that are harder to tell right now, the general merchandise impact has been going on for the last three quarters or so, but there are impacts from other things like tax refunds, the weather, some funds out there. So a little unclear how much of this is temporary in the month that we're in versus what we'll see the rest of the year. But I certainly expect that just the trends in food and consumables and the strength that we have in those as well as health and wellness will persist over the next few quarters. I think that if anything, health and wellness, the impact that it's having on the mix and penetration could get larger based on the growth rates you're seeing in these drug types that John David mentioned.

Rupesh Parikh:

Good morning and thanks for taking my question. I also wanted to go back to your U.S. e-commerce acceleration during the quarter. What are you seeing from a category perspective and then for the balance of the year, do you also expect to continue significant contribution to your U.S. comp from e-commerce?

Operator:

Our next question is from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

John Furner:

Hey, good morning, Scott. First, let me take all three of these. First, brands, we really like the brand shops that we set up physically in stores that are in the remodel. I know you've seen a few but the results are really encouraging. I think additionally, in apparel, what I really liked that the team did is they brought everything together for the customer. So if you're in the men's shop, you'll see the brands at the front of the department, men's denim just behind it; shoes, accessories, all there together, so we're traditionally we've broken these things up by category. Now they're more holistic. Pets are certainly exciting with some of the things that are coming. Then online, you'll start -- you will see now and you'll see a lot more in the future, a lot of branded shops inside the digital experience, which enables brands to be able to put their entire assortment online whether it's first P -- 1P that's online or sold in the store, the rest of the assortment there can be shop by brand. And I think these are -- they're going really well. The first dozen or so are pretty exciting. Walmart Plus continue to make progress. It's an important part of the offers. It's not the only thing that we're doing, obviously, but it's an important part of the offer. We're encouraged by the growth of new members. And importantly, what we are really ensuring on these new members is that we are helping them see the entire path to get to all the benefits we offer. The core offer of course, is based in deliveries that are unlimited without cost once you buy into the membership, that's the most important thing that we get right. We measure ourselves really carefully in something we call the perfect order, which is exactly what you ordered on time. And then we continue to work on things like substitutions. And then the last thing on grocery, we're focused on ensuring that our stores are in stock each and every day. We feel better about the supply chain versus a year ago. That would include in-stock availability, but also include the cost of supply chain. Stores I've been at recently from Virginia to New Mexico and Texas and Tennessee are seeing much better execution in grocery and in stock availability, which does help the order fillers and order pickers, which makes the Walmart Plus experience much better. So we'll really continue to focus on merchandising and pricing. Just the other day, I was with the team and saw this item called Bachan's Barbecue Sauce, which is a digitally native Japanese flavor barbecue sauce. It's just doing really well. So also, I'm just personally encouraged by the way the merchants are looking at new ways to find new items, bring those to life and drive sales across the country.

Seth Sigman:

Hey everybody, good morning. My question is really on advertising. I think it's a relatively small quarter for this, but the 40% growth obviously it's accelerating. It's very impressive. Can you elaborate on that and what you're doing to drive that? And then maybe more specifically for Sam's, the advertising opportunity there, seeing a lot of growth in sellers on map there so can you see the opportunity? Thank you.

Judith McKenna:

Yes. So same story really, which is, as the eco system builds out, it continues to be better strength in our advertising businesses everywhere. So the Flipkart growth is about 50% year-on-year, but Walmex equally had very strong growth at about 64% year-on-year. So those businesses continue to grow. We continue to learn and learn new skills about how to best serve the advertisers who wants to come on to our platform. And I think that's one of the areas that we've seen a lot of good global leverage and global learning as well to really help reinforce that.

Operator:

Our next question is from the line of Edward Kelly with Wells Fargo. Please proceed with your question. Mr. Kelly, please proceed with your question.

John Furner:

Yes, I'll take it. Good morning. First, supply chain. In the first quarter, we definitely felt a tailwind from supply chain versus prior periods and including the execution all across the business. It becomes more of an issue as we lap Q2 last year. Q2 last year and late Q1 last year would have been the peak of inventories. We worked through a backlog of something like 100,000 containers that had been delayed at ports. So lapping those costs gets bigger as you look forward to the next quarter or so. And then as you get into the back half of the year, things tend to normalize a bit. As far as markdowns, last year, we had markdown pressure throughout the entire year as we unloaded that freight and moved it from the ports to the distribution centers, to the stores and through the entire chain. So the markdown comparisons will moderate slightly forward. But every year, including this year, we always leave room for seasonal markdowns and at the end of each season, we want to ensure that we are clean on inventory so that we don't carry any liabilities for it. And what happens when that happens is it makes it harder to set the next season, which backs things up. So we'll stay really focused on taking markdowns on time. In fact, in some categories like apparel, we're pulling some markdowns forward within the quarter to take advantage of the traffic that we'll see over the Memorial Day holiday. So this is something that we pay a lot of attention to. The last part of your question, can you repeat again, please?

John Furner:

Shrink. Sorry, there were several in there. On Shrink, no, it is a factor -- mix as I said a few moments ago, is affected by supply chain, it's affected by food, consumable, general merchandise mix and then health and wellness. So below that level, there is a core shrink. And as we've said in the past, it's been challenging for us. It's been challenging really for all of retail. So we're going to actively manage this issue. We always do, we always have, and we're going to continue to take the steps that are reasonable and required to make sure we're protecting our customers, protecting our associates, and protecting our assets and inventory. We know a lot of communities have been affected by this, but it's also important to note that retail can't solve this issue all on its own. It will take communities stepping up and enforcing the law to be able to bring this issue back under control.

Karen Short:

Hi, thanks very much. I had one clarification and then one question. John David, I think in your remarks, you made a comment that alternative investments will protect profits and that comment is a little different from the Analyst Day where I believe it would be additive and not subsidizing, I guess, for a lack of a better word, so wanted to clarify that? But then bigger question I had is, could you maybe give a little color on what the spend pattern is with the higher income demographics and maybe you could quantify what you think their share is today versus -- what your share is with them today versus prior to the pandemic?

John Furner:

And we spend a lot of time, of course, working on ensuring that we have flexible options for any customer. And in the case of the group that you asked about, we definitely see in the data that there is a higher usage of e-commerce and pickup and delivery. And then when you click into the things they're buying, you do see some differences. So we do see within pickup and delivery, higher purchase rates of categories like [indiscernible] versus regular Grade B. So you see trade-ups and then if we see it in apparel, definitely seeing some growth in apparel and marketplace. And that is definitely being driven by some of our newer higher income customers. I'm really excited about the growth of not only transactions, but the number of digital users that we have on year-on-year which is accelerating.

Operator:

Our next question is from the line of Greg Melich with Evercore ISI. Please proceed with your question.

John Furner:

Yes, as you look forward, it's important to compare what we've been up against the last couple of years. And if you go all the way back into late 2021, that's when we started to see prices starting to rise. And then in 2022 February, March and April it was quite acute, obviously, and rose at a rate that we weren't expecting going into the year with the peak of inflation. And in year [ph], in July and August of last year, we saw high double digits in categories like food and consumables. And as you get into the period that we're in now, we're still seeing around high single digits to double digits in parts of dry grocery and other places. But when you add that up over the three years, it gets to be a really high number, which is clearly driving part of the shift. The way we think of value, first, we are always comparing ourselves to the prices that are out in the market. We feel good about our price positioning. The second, we've been able to look at key holidays like Thanksgiving last year, Easter that we just went through, and we've been able to keep a number of items on either a rollback program or base prices where customers can buy key important holiday meals at the same price that they bought them for the year before. As you look forward, it's not easy to predict. Clearly, we are not happy with the inflation that we see in categories like dry grocery and those persist as you get into the later part of the second quarter and third quarter, the in-year number may look lower because we'll be comparing to get such high numbers last year. But it's important to keep in mind that the two year stack at that point, we still think will be in the mid-20s. So consumer is under a lot of stress. Therefore, we see the shift to private brand that John mentioned -- John David mentioned in his earlier remarks, so shift this year than the year before and the year before, there was more of a shift than 2021. So that trend continues.

Operator:

Thank you. Our last question will be from the line of Paul Lejuez with Citi. Please proceed with your question.

John Furner:

Sure. Good growth in the marketplace in the U.S. and there may be other comments on other markets. But a lot of growth last year. SKU count, as I mentioned late, I think it was Q4, Q1, both in the $400 million range. We expect that to grow probably not at the rate that it grew last year. We made a lot of progress in both SKU count and seller count. And there is continued acceleration with a number who are using fulfillment services and advertising. What's important about both of those services is, let me start with fulfillment, it helps with the customer time to promise and it helps customers know when they're going to receive their item. Customers want to get their delivery when they ordered it. They don't want it early. They don't want it late. They want it the day of. And when sellers move their assortment, their inventory, into our fulfillment channels, then it's more certain for a customer that it's going to be next-day delivery or two-day delivery. And that just helps with conversion rates. So if you're a marketplace seller and you want to know how to drive business at Walmart, it's to list on the marketplace, the inventory and fulfillment services. And then Walmart Connect is just a great way for the seller to be able to find audiences, targeted audiences who are looking for products in categories like the ones they're offered. So it's really the three of those things that are put -- that they all come together that make the customer experience much greater and the data supports everything I just described.

Doug McMillon:

This is Doug. I think I'll go ahead and wrap up here. We ran a little over. I hope that's okay. I appreciate your questions. I'm grateful to work with such a strong team, the people that have been on this call, but all those that are work in our stores and clubs and throughout the company. I think you can see in our results that we've got a very strong and capable team and one that can adapt to environments. There have been a lot of pivots over the last few years, in particular, and they've done a terrific job of navigating all of that. We feel strong about our position to grow the top line. We're positioned to serve customers and members how they want to be served. I think the e-comm growth this quarter being up 20% -- 26% is an example of that. But if they want to come to stores and clubs, we're there. If they want to do a pickup order, we're there. If they want to have it delivered, we can do that. We are positioned to grow profit faster than sales through productivity and through the mix of businesses, caring in an additive way. And then on ROI, we'll be disciplined with capital, but we are excited about our opportunities to invest and really grateful that you all came down to Florida. So many of you and saw what we were doing there. And we'll just wrap up by inviting you to comment in a couple of weeks. We'll show you an MFC. We'll go to a store. We'll go to a club. We'll answer more of your questions. We feel like we're in a position to outperform and to continue to outperform because of the work that's been done to date and our ability to manage the business and pivot as we need to looking forward. Thanks for your attention today.

Doug McMillon:

Good morning, everyone, and thanks for joining us. We're excited about our momentum. The team delivered a strong finish to the year. And as our results in the last 2 quarters show, we acted quickly and aggressively to address the inventory and cost challenges we faced last year. We built momentum in the third quarter, and that continues. We're well positioned to start this fiscal year.

Operator:

[Operator Instructions] And our first question comes from the line of Oliver Chen with Cowen and Company.

Doug McMillon:

Oliver, you did a great job working in like 6 questions, 5 questions? No. This is Doug. We'll try to make sure we cover all of those. You may have to remind us of 1 or 2.

John Furner:

Oliver, thanks for the question. First, I just want to say thanks to all of our associates for delivering a great quarter and everything they did last year. There are so many things that they went through collectively, and they just did a great job building momentum as the year went on.

Judith McKenna:

Yes. Maybe, Oliver, for International, it actually was a strong quarter, which ended a strong year for us with that top line and bottom line growth of around about 9%. That strength came out of a number of our markets. And you touched on Mexico and China, but India as well had a good year.

Simeon Gutman:

One theme of a question is the flywheel and the balance between investments and bottom line growth. The near-term question of the theme is the '24 outlook looks like it's burdened by some maybe fleeting items, LIFO in particular, some of the bottom line. So what's the right way to think about it? Are these good guys into '25 and/or the house money that you invest?

Doug McMillon:

Simeon, this is Doug. I'll kick it off and then John David can add.

John Rainey:

Sure. And I'll add, Simeon, that we do expect to see our return on investment improve marginally this year. That's what's in our plan. But that's really before we expect a sharper acceleration in the years to follow. And we'll give you more insight into that at our Investor Day, but we're very mindful that we need to show a return for these investments, but the good news is the early reads on some of the things that we're doing are really exciting and support that continued level of investment.

Operator:

Our next question is from the line of Chris Horvers for JPMorgan.

Kathryn McLay:

And if I just pick up on the Sam's growth. I think we've talked quite a bit about the 12 quarters of double-digit comp growth. But if you look underneath that strength and growth across traffic every single one of those quarters, across ticket, our membership income has grown solidly across those 12 quarters. We've grown in e-com. We're growing with Scan And& Go. If I look at the actual membership composition, we're growing with mid- to high household income groups with share of wallet. We're growing with millennials and Gen Z as the largest growth area in our membership base. And then if I look at market share, we're growing market share in our club channel despite no opening clubs while our competitors were opening clubs.

Operator:

Next question is from the line of Michael Lasser with UBS.

John Rainey:

Michael, this is John David. Yes is the short answer. It's absolutely realistic to assume that. But when we put out multiyear targets, they're not designed or not intended to suggest that we can hit that in any economic environment, in any year. And so we're certainly -- our guidance this year reflects some of the pressures that we see broadly in economies around the world.

John Rainey:

If I can just say one more thing, Michael, what we're fundamentally focused on is growing the absolute dollars of free cash flow each year. It's -- when we look at the composition of our business and how it's changing and the returns related to some of these initiative areas, it's just such that the financial architecture suggests that the operating income should outperform sales growth over the next several years. But fundamentally, we understand what creates value for shareholders, and we're focused on growing the absolute dollars of free cash flow.

John Rainey:

Yes, it's a good call out. I appreciate the opportunity to address that. You're right. If you look, particularly for the U.S. business, the incremental margins will be higher year than what you typically see, and in large part for the reason that you mentioned. We're lapping -- like even in the last quarter, we lapped $500 million of COVID costs alone in that quarter. But when you look at it on a full year basis, that creates a tailwind in terms of incremental margins.

Katharine McShane:

We were just wondering, with regards to the promotional environment within grocery, are you still finding the promotional environment rational? Are there any areas that maybe aren't as solid as others? And I think you've alluded to this on the call today, but your view on the need for price investments in food going forward and the possibility of that being incorporated in your guidance for this year.

Paul Lejuez:

Curious if you could talk about what the net impact of Flipkart and PhonePe was on consolidated results this past year, and what your expectations are built in to guidance for the upcoming year. I'm also just curious what the plans are for that business and your ownership of those businesses?

Doug McMillon:

We had a difficult time hearing you. The question was about Flipkart and PhonePe and is it reflected in our guidance for the year forward. That's all we got. Can you clarify a little bit more for us?

Judith McKenna:

Maybe just comment on the separation of the 2 businesses. So you have to remember, we've -- when we first invested into Flipkart, PhonePe had only just launched. It was 4 months old, and it had an annualized TPV as kind of like in the tens of millions of dollars. As that business has grown and as the Flipkart business has grown, whilst there are partnerships between the 2 commercially, actually, we recognize that each has been successful, and we're setting them up on a path for long-term success.

John Rainey:

And I believe the last part of your question related to share count assumptions for this year. Let me take the opportunity to just talk about capital allocation broadly in answering that question.

Karen Short:

Just 2. First of all, I wanted to talk about the Walmart U.S. EBIT margin structure specifically within your guidance. Obviously, '22 or your fiscal '23 had its own separate challenges, and we know there is a LIFO headwind in fiscal '24. But I guess I want to talk a little bit about what the U.S. EBIT margin structure could be like going forward in fiscal '24 relative to pre-pandemic.

John Rainey:

I'll start, Karen. And it's good to speak with you. John may want to jump in. But I'll start with the first part of your question. So the EBIT structure related to the U.S. business, there's a couple of factors there. One is, if you look over the last 12 months, we had a mix shift in our business from GM to food and consumables of over 300 basis points. And we actually don't expect that to improve this year. In fact, we expect it to get a little bit worse, not by the same magnitude, but slightly worse. So that affects the margin structure.

Operator:

The next question is from the line of Robbie Ohmes with Bank of America.

John Furner:

Yes, I think that's a great way, Doug, to describe it as an important part of what we're building. And it's a way that customers can access an interesting combination of all of our assets from our digital front end, which has become one experience over the last couple of years. The fact that we have inventory within 10 miles in 90% of the population is another way that this all comes together.

Operator:

Next question is from the line of Rupesh Parikh with Oppenheimer.

John Furner:

And generally speaking, food inflation has been the most stubborn of all the categories. We were in mid-double digits in Q3 and Q4. Hasn't come down all that much. A little bit, I guess we could say, has come down the last couple of months, but it still would be a high level of disinflation at this point. So this looks to be a little bit higher than what we were expecting going into the year, but this all leads back to the comments earlier on uncertainty. We would have hoped and expected it have -- to have come back more than it has going into this year.

Doug McMillon:

The way to think about it is dry grocery and consumables are stubborn mid-double digit, and those are going to just be with us for a while. And it will get a little confusing because you'll probably hear inflation numbers that start to sound lower, but you'll have to remember that's on a 2-year stack. So if inflation in dry grocery and consumables is only 3% or 5%, that's on top of 15%. And that's still a problem for the customer and still a pressure to their wallet.

Kelly Bania:

Just wanted to understand a little bit more some of the factors that were pressure or that were cycling from fiscal '23, including the pressures from markdowns, mix and supply chain. Wondering if you can just help us understand the magnitude of those pressures this year and what is baked into your guidance for fiscal '24.

John Furner:

And on the -- great point, Doug. And on the 300 basis point, that comment was related to last year, the shift -- the difference in mix between food and GM in the year that we just experienced. So we do think we'll have some mix impact going into this year, which we stated. But we don't -- we didn't say it was 300 for the year we're going into.

Gregory Melich:

Really, I had a follow-up on the U.S. traffic trends and then on Sam's Club.

Gregory Melich:

If I could, I'd love to follow up on the e-commerce part of the U.S. You talked about margin drivers with advertising, gave us some numbers there. Do we -- can you tell us what 3P is now as a percentage of that e-commerce business, or shipments, or any insight there?

Operator:

At this time, we've reached the end of the question-and-answer session. I'll turn the call over to Doug McMillon for closing remarks.

Steph Wissink:

Thank you. Welcome to Walmart's third quarter fiscal 2023 earnings call. I'm joined by members of our executive team, including Doug McMillon, Walmart's President and CEO; John David Rainey, Executive Vice President and Chief Financial Officer; John Furner, President and CEO of Walmart U.S.; Judith McKenna, President and CEO of Walmart International; and Kath McLay, 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 third 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-GAAP reconciliations on our website at stock.walmart.com. It is now my pleasure to turn the call over to Doug McMillon.

John David:

Thanks, Doug. I'd like to start by thanking our customers, associates and partners for helping us deliver a strong quarter. I will focus my comments on the themes Doug mentioned. First, our sales momentum and share gains. Second, operational actions we're taking to improve inventory and supply chain. Third, progress we're making to further connect our alternative value streams to our core business. And lastly, our guidance for the balance of the year. Our Q3 results exceeded our expectations due to sales upside with operating expense leverage across all 3 business segments. While we're encouraged by our position and our confidence in our business remains high, the macro backdrop remains challenging as persistent inflation is impacting the consumer and our business. As I discuss our results, it's important to note the charges related to the opioid legal settlement framework affect year-over-year comparisons. So my comments regarding Q3 results will focus on the business, excluding adjusted items. Total constant currency revenue grew 9.8% as our omni model and strong value proposition continue to resonate with customers during this period of broad inflationary pressures. Each of our segments delivered strong sales results. Walmart U.S. comp sales accelerated sequentially to 8.2% growth with increases in average ticket size as well as transactions. Constant currency sales in Walmart International were strong, up 13.3% led by Flipkart and Walmex, while Sam's Club U.S. delivered its 11th consecutive quarter of double-digit comps with growth of 10.3%, excluding fuel and tobacco. Our purpose of saving people money has never been more important as inflation remains consistently high. High fuel prices and mid-teens food inflation have forced consumers to manage household budgets more tightly, making frequent trade-offs and biasing spending toward everyday essentials. We continue to manage pricing in a way that preserves our price gaps while gaining market share profitably. Walmart is well positioned to serve customers and gain greater trip frequency during tougher economic periods, and we have even more tools to do so in this cycle. For example, we've continued to gain grocery market share from households across income demographics, with nearly three quarters of the share gain coming from those exceeding $100,000 in annual income. This quarter, our private brand penetration in food categories increased about 130 basis points, reflecting customers' increased focus on quality products at value prices. We observed incremental trade down in categories, including proteins, baking goods, baby and dog food. We're working hard to keep prices low and help ease the burden to make customers' lives better. This includes working with vendors to reduce product cost and minimize inflation impacts on final goods' pricing. Consolidated gross margin rate decreased 89 basis points. More than half of the decline was due to markdowns and sales mix in the U.S. The remaining headwind reflects a $113 million LIFO charge at Sam's Club due to inflation and the timing of sales events in International, including Flipkart's Big Billion Days. Notably, the rate of decline in gross margin improved from 2Q as inventory remediation efforts are progressing. We've been very targeted in reducing certain categories of inventory in our system and our actions included cancelling orders and increasing the level of markdowns. The team has done a really good job addressing our inventory situation, as reflected by Q3 inventory being up only 13% versus last year, including 12.4% growth in Walmart U.S. In aggregate, this level represents a more than 10 percentage point improvement versus the end of Q2. Notably, about 70% of the year-over-year increase relates to inflation. We feel good about our ability to sell through the majority of this in Q4 and expect continued year-over-year improvement even when including the effects of inflation. We saw stronger expense leverage this quarter as selling, general and administrative expenses leveraged 75 basis points due primarily to higher sales and lower COVID cost. We're focused on what we can control and continue to work down inventory levels and manage general and administrative expenses tightly. Taking all this together, adjusted operating income on a constant currency basis increased 4.6%. GAAP EPS was a loss of $0.66 but adjusted EPS was $1.50. The difference between adjusted and GAAP EPS reflects a $1.11 impact from unrealized losses on equity investments, primarily JD.com and a $1.05 charge related to the opioid litigation settlement framework. We're pleased that our adjusted EPS outperformed the guidance we provided in August due primarily to better operating expense leverage on higher sales across the business. Operating cash flow for the year-to-date period decreased $600 million to $15.7 billion primarily due to the timing of certain payments and a decrease in operating income, partially offset by moderated inventory purchases. During the quarter, we returned $4.5 billion to shareholders through dividend and share repurchases. We're committed to continuing to provide strong cash returns to shareholders while still appropriately investing in our business for the long term. And our Board has just approved a new $20 billion share repurchase authorization that we expect to utilize over the next several years. Let me briefly reference key highlights by segment. For Walmart U.S., comp sales momentum accelerated in Q3 with a 2-year stack of 17.4%, up 570 basis points from Q2. Monthly sales gains were relatively consistent throughout the quarter. Food sales continued to lead with mid-teens growth. We're particularly encouraged to see year-over-year growth in food units sold after experiencing a slight decline last quarter. We also continue to make good progress on improving in-stock levels in our grocery business despite the heavy volumes we're experiencing. Inflation remained high, up mid-teens percentage in food categories reflecting an 80 basis point step-up compared to levels at the end of Q2. We've seen incremental levels of inflation month-over-month be less significant, but it's not clear if this represents a sustainable trend. However, we believe our strong price positioning is contributing to share gains as we attract value-seeking customers across the household income spectrum. General merchandise sales declined low single digits with softness in electronics, home and apparel. E-commerce accelerated sequentially to 16% growth, even as store transactions continued to grow. We experienced strength in pickup and delivery from stores, Marketplace, fulfillment services and advertising. Gross profit rate decreased 77 basis points due primarily to higher markdowns and product mix headwinds, but the team delivered strong SG&A expense leverage of 60 basis points, reflecting higher sales and lower COVID costs. As a result, we delivered better-than-expected operating income growth of nearly 5%. Walmart International delivered strong sales results, with sales up 13.3% in constant currency despite continued macro headwinds. E-commerce sales on a constant currency basis were exceptionally strong. up 46% in the quarter. The earlier timing of Flipkart's Big Billion Days event was also a benefit to sales results. Currency negatively affected reported sales results by about $1.5 billion. Each of our major markets delivered positive comp sales, led by a great quarter from Walmex, with comp sales growth of 11.7%, reflecting strong performance in Bodega stores, Sam's Clubs and 17% growth in e-commerce. In China, comp sales were up 5.6%, reflecting strong e-commerce growth as well as strength at Sam's Club. E-commerce sales grew 63% and penetration reached 41% of sales. Canada comp sales increased more than 5%. And in October, we launched Walmart fulfillment services 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. The new offering will provide faster shipping of customer orders within a 2-day window to 95% of Canadians. In India, Flipkart had a great quarter with strong customer response to our Big Billion Days event, which moved forward into Q3 this year from Q4 last year. We had over 1 billion visits to our site during the 8-day event and, importantly, saw more than 60% of those customers coming from Tier 2 and Tier 3 cities. PhonePe also continues to perform well with annualized total payment volume, or TPV, now over $920 billion and reaching a record level of monthly transactions to about $3.6 billion. This was the first time PhonePe had a quarter with more than 10 billion transactions. International segment operating income was better than expected and increased 3.2% in constant currency, led by Walmex in China. In Sam's Club U.S., we had another strong quarter with comp sales up more than 10%, excluding fuel and tobacco, and an increase of more than 25% on a 2-year stack. Both comp transactions and average ticket increased about 5%. And e-commerce sales grew 20% with strength in curb side orders and ship to home. Membership income was up 8% with another record high quarter in overall member counts, at an all-time high, plus member penetration. Sam's leveraged expenses 68 basis points due primarily to higher sales. This helped offset a decline in gross profit rate due primarily to a 53 basis point or $113 million inflation-related LIFO charge. For the quarter, Sam's operating income increased more than 18% with fuel and nearly 8% excluding fuel and including the impact of the LIFO charge. Combining these results with my comments about International, you can see Sam's Club is performing well around the world, and we're pleased with the leverage we see across markets with Member's Mark as an example. As we navigate changes to our external environment, we continue to advance our strategic initiatives that were enabled by our omnichannel retail capabilities. Globally, as we're building a larger e-commerce business, we're scaling our Marketplace which unlocks and strengthens our fulfillment and advertising businesses and expands the number of families that choose to be members. Across our segments, e-commerce is enabling deeper engagement with customers and members that helps drive strategic growth in our alternative value streams. New sellers in our U.S. Marketplace are contributing to our advertising growth and we added more than 8,000 sellers in Q3. Third-party build-out helps diversify and strengthen our product assortment, which now includes more than 370 million SKUs. Strong digital advertising growth continued this quarter, increasing over 30% on a global basis, led by 40% growth in Walmart Connect in the U.S. and Flipkart Ads in India. As we focus on membership, our ability to leverage our data improves, so we continue to sign on more customers to our data ventures offering, Walmart Luminate, and the number of Walmart plus memberships continues to grow. We gained some of these new Walmart plus members after expanding our last mile delivery capabilities through a fourfold increase since January and the number of pickup points serviced by the Spark Driver platform. We're making good progress in fulfillment and automation. The Spark Driver platform now serves customers in all 50 states for more than 10,000 pickup points with the ability to reach 84% of all U.S. households. This coverage includes a growing revenue stream from businesses utilizing Walmart GoLocal, our delivery as a service offering, has already made over 1 million deliveries since launching last year. Building Walmart fulfillment services in the U.S., Mexico and now also in Canada has been an important asset in growing our seller base as they seek an integrated omni sales and fulfillment solution. For example, almost 30% of orders on Walmex' marketplace are now being fulfilled using Walmart fulfillment services which was launched a year ago. In September, we opened a next-gen fulfillment center in Illinois. This 1.1 million square foot facility features robotics, machine learning and automated storage, resulting in increased productivity and a better service for our customers at faster delivery times. And last week, we acquired Alert Innovation as we expand our market fulfillment center build-out. MFCs are positioned inside or attached to Walmart super-centers and use robotics and AI to fill online orders more quickly. We're putting the building blocks in place to deliver powerful, mutually reinforcing ecosystem that not only benefits customers and partners, but also shareholders, with more durable and diversified earnings streams. Turning to guidance. In this period of macroeconomic uncertainty, we believe that we are well equipped to continue gaining market share in an environment where consumers need to stretch their dollars further. We will continue to advocate for customers and work with our supplier partners to maintain strong price gaps and deliver lower relative pricing versus competitors. We're also navigating real inflation on our own cost structure and continue to seek ways to reduce cost and improve leverage potential. With these considerations in mind, we're maintaining a balanced approach to our guidance. incorporating a cautious view on the consumer together with our confidence in our ability to execute. We're updating fiscal year '23 guidance to reflect the Q3 upside and leaving our sales and profit assumptions for Q4 unchanged. Despite a good start to Q4, our guidance assumes that the consumer could slow spending, especially in general merchandise categories, given persistent inflationary pressures in food and consumables. Our guidance provides flexibility to compete in a promotional environment, accounts for pricing action to reduce remaining excess inventory and anticipates ongoing mix pressure. For Q4, we expect net sales growth of about 3%, including comp sales growth of about 3% for Walmart U.S., with food and consumables growth continuing to outpace general merchandise. We expect year-over-year operating income within a range of a 1% increase to a 1% decrease. And adjusted EPS is expected to decrease 3% to 5%, including higher year-over-year tax and interest expenses. For the full year, incorporating the Q3 upside, we now expect net sales growth of about 5.5%, including comp sales growth of 5.5% for Walmart U.S. On an adjusted basis, we expect operating income to decline 6.5% to 7.5% and EPS to decline 6% to 7%. Excluding the effect of divestitures and on an adjusted basis, this would translate into net sales growth of 6.5% and a decline in operating income of 5.5% to 6.5% and a decline in EPS of 5% to 6%. Looking beyond Q4, we know some of the unanticipated costs experienced this year shouldn't repeat next year. That said, we're planning our business with the assumption that inflation remains somewhat elevated. In addition, we've had significant currency headwinds this year. Based on year-to-date results and current FX rates, we estimate a year-over-year sales headwind for this fiscal year of $4.1 billion from currency and a potential sales headwind of about $3 billion next year. Also, as we've had $236 million in LIFO charges this year at Sam's Club, we're likely to experience LIFO charges in Walmart U.S. as well next year. Based on current assumptions, these LIFO charges next year for both Walmart U.S. and Sam's Club could approximate roughly $1 billion of gross profit headwind. It's important to note that inflation, inventory levels and additional factors that are challenging to predict will influence the aggregate amount. We're committed to providing you ongoing updates to the assumptions as we report our quarterly results. And with that, we'd be happy to take your questions.

Kate McShane:

We wanted to focus on inventories. We just wondered how much remains from the spring inventory, how you would describe your in-stocks for Q4 versus last year. And you also mentioned you'd be aggressive in some places when it came to inventories. Is that just in the shorter lead time categories? Or can it be anywhere else?

John Furner:

Sure. Kate, a couple of things on inventory. First, I think the team here and the merchants, supply chain teams have done a really nice job improving the year-on-year results from second quarter into the end of third quarter. As we said earlier, up about 12.4%. That's down from just over 26% in the second quarter. The first thing I think is important to consider, if you look back over the quarters of the year, in Q1 when we were the highest, the majority of the extra inventory was in supply chain and part of the backlog problem, then the second quarter that balanced more evenly between stores and the total, and in this quarter, at the end of Q3, what we see is an increase of 12.4%, but the stores are still heavy. So the inventory has moved from the supply chain to a balanced and now it's in the store. And when you look at the dollar amount that's up, about 70% of it, 3/4 of it roughly is inflation and the rest we can approximate to pretty significant improvements in in-stock over last year. Last year, we were quite low. So we see a really recent improvement in in-stock. And then specifically on your last question, probably around something just under $1 billion, around $1 billion would be what will we consider excess. That's down pretty significantly, about a third of where we were at the end of Q2. So we're making improvements. Apparel and certain categories in GM are the heavy categories, and we'll continue to work through those. And just a reminder, we said at the beginning of Q1, we needed a couple of quarters to work through the inventory and we continue to do that. And then John David did mention in his commentary that there is room in our forecast to continue making progress on inventory. But I was in an import center last week, and the inbound is in really good shape. The orders are in line. So I think the team have done a really nice job adjusting to the end of the year.

Kath McLay:

Yes. And from a Sam's perspective, our inventory is up 36%. I think 50% of that increase is actually being in-stock to your question. So as Doug and John David talked about, we've had 11 consecutive quarters of double-digit comp growth. We have been chasing in-stock for the last 2.5 years, and we're in -- we're finally in a great position from an in-stock going into the -- into the holiday event period. So strong in-stock, 50% of it. 30% of it is inflation. And the rest is kind of some big bets we did going into kind of Christmas. So we're really happy with the quality of our inventory and kind of leaning forward into the rest of the year.

Operator:

Our next question is from the line of Bob Drbul with Guggenheim. Please proceed with your question.

Doug McMillon:

I'll take the supplier question first. we're not really changing what we've always done. We are trying to find ways with our current suppliers to get costs down, provide value to customers and members, and we're trying to be creative about it. And in some instances, some suppliers are more aggressive than others, and we welcome that. And we're going to try to do the best job we can category by category, item by item of getting prices down as we head through next year. That's been consistent. That's the way we always behave, and there's not really anything different as it relates to that.

Operator:

Our next question is from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

Doug McMillon:

As it relates to the strong start, Robbie, this is Doug, and then I'll toss it to John. The quarter just started, and as John David said in his remarks, we're trying to build in some conservatism. I think the fact that we're strong in food and consumables is relevant here, and we mentioned that annual event activity that we've experienced so far is in the range of what we would expect generally. So it's just early days, we'll see how the rest of the quarter goes.

Operator:

Our next question comes from the line of Corey Tarlowe with Jefferies. Please proceed with your question.

Judith McKenna:

Yes. Let me start with the International business, and thank you for the question. Yes, we saw a really strong quarter for international at 13%. Sales growth was encouraging. The real stories in here are that we are really starting to see the benefits of the diversification and portfolio work that we did over the last few years. That's led us to being able to focus where it matters across the International portfolio. And I'm definitely seeing the benefit of that as we look across the last couple of quarters of growth and profitability that we've seen. For the quarter specifically, maybe 2 markets to call out. We called out Flipkart, but to give you a little bit of color on that. The Big Billion Days event fell into Q3 for this year. It was in Q4 last year. That created some kind of differences in our results between Q3 and Q4, which we've called out. But that is an event which is designed to try to bring new customers onboard for Flipkart. And it looks to have been successful in doing that again. A billion visits over the 8 days of the event shows you the amount of traffic that, that generates and those customers shopping many of them for the first time. So Flipkart continues to meet our expectations, and we've been pleased with the quarter. The other market I would call out is Mexico. So a really strong result from Mexico. They saw double-digit sales growth and strong profit growth as well. What's really encouraging there is not only their focus on their core business, but equally the focus that they're having on building up solutions for customers across their ecosystem. So their cash e-payment business that bites telecom business, the emerging health care businesses are all helping drive that customer connectivity back into the business. And they're proving to be a real powerhouse for the International segment. Across the other markets, maybe the only other market that I would highlight is China, which leads the way from an e-commerce perspective. So our e-commerce penetration for the quarter was 23%. But we also saw in China a 41% e-commerce penetration, and we're learning a lot from that market about how to deal with those kind of volumes, of deliveries and e-commerce as well in Sam's Club and is a real great format therefore in sharing much of the private brand and much of the innovation that Sam's Club in the U.S. is bringing through. I think it is that focus on the core business, making sure that our omnichannel capabilities around the world that are strong and also in looking at how we can make sure that we build out these ecosystems which are mutually reinforcing is what will help drive us for the future, too.

Operator:

The next question comes from the line of Kelly Bania with BMO Capital Markets. Please proceed with your question.

John Furner:

First, I think something you said that is really important, the traffic that comes from food and consumables is where a lot of our shopping journeys begin. And over the last few years, we've positioned the business to have a strong online pickup delivery business from stores, which includes an omnichannel approach, which enables customers to shop the entire business any way that they want to. In the last quarter specifically, I think there's been really good progress with a number of items that have come on to the Marketplace, including the number of sellers. The offering has grown pretty significantly just in the last quarter. The count of item's up about 50% which positions us well in categories like apparel as we look forward and also other strong categories like home. On the share point, I think the categories you mentioned, in one of our reports would show share gains and others, we feel pretty good about the overall market share remaining in a positive position through the quarter. So for the next 3 months, we're really focused on delivering and executing well for all of our customers. There will be a lot of holiday spending as people prepare for gifts. Doug mentioned earlier that our first annual event was basically in line with expectations. But there's a lot of daylight between now and the end of the quarter, still 75 days to go. So we're really focused on the next few weeks as we lead into December and get ready for the holiday period.

Simeon Gutman:

Two-part question. First, on the third quarter. You had set it up conservatively and this came in much better. Can you talk about what's changed? Is it clearing of inventory? Inflation definitely picked up but your transactions did, too. And maybe -- it seems like you have some pricing power. And then the second question is maybe to John David, the timing of LIFO. Is it -- a lot of companies experienced a lot of LIFO pressure during '22 because of how high inflation was. Why has it lagged? Is it because you lagged, the pricing that led, grew into your price? Is it other -- is there some other dynamic with LIFO that you had some reserves? Anyway, just wondering why it's hitting you next year.

Operator:

The next question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Doug McMillon:

Yes. I'll respond to the first one, and then John, you can help. As it relates to customers shopping with us more frequently, this share gain with people making more than $100,000 household income is what I was referring to. As you would expect, just about everybody, if I think about the U.S., it's probably true in Mexico and other places, too, shops at Walmart at some point. A lot of people may come to us for Tide or come to us for bananas, but they may not buy a T-shirt or a sweater. We've got really high market shares in some general merchandise categories which would tell you a lot of America shops at Walmart. And during a period of time when people are more sensitive to price, it makes sense that they would increase the amount of their wallet that would be coming to Walmart because of value. So that's what's happening. So that leads you to the second question, which is can you keep them? And I think some of the things John mentioned a minute ago, like pickup and delivery help. But as I mentioned in my remarks, fresh food and apparel are other areas, home's another one, where if we can stand tall during this period of time, we think they'll keep coming back to us because we do have quality, we do have value and we've created a lot more ways for them to save time in the store and we pick up in delivery. So that's what we're out to do.

Operator:

Our next question is from the line of Michael Lasser with UBS. Please proceed with your question.

Doug McMillon:

Yes, Michael, this is Doug. The algorithm is the first thing that came to mind when you asked the question about how we'll approach prices. The 4% and greater than 4% numbers are certainly on our mind, and that indicates that we think we can grow the operating income percentage of the company over time. As we navigate next year, that will be one factor that we're thinking about. Obviously, we'll be thinking about customers and members as well and driving top line and growing share. So we'll be navigating it basically week to week, month to month as things change. And commodities like protein categories have already started to respond. They moved quickly based on demand, there'll be volatility in categories like fresh food. The general merchandise categories have started to move as demand softens. And things like transportation cost change. We've seen some downward movement in general merchandise. And I think that will continue by the guess in the next year to some degree. And we'll manage margins in a price gap in general merchandise department by department, category by category as we always do, but have an eye towards leading down while protecting profitability as much as we can. I think dry grocery and consumables will be more stubborn. Wage rates have gone up, and that won't change. And some input costs have been high for those categories. That's the area where we need to partner even more with our suppliers and come up with more creative solutions and try to do the best we can of relieving that pressure for customers and members. When you add it all up, we'll watch our price gaps. We like where our price gaps are. As you've heard us say many times, we understand where price gaps need to be to drive our sales. And then we manage the rest of the pieces to consider operating income and return on investment.

Michael Lasser:

Could I clarify that one, please? If you're expecting the $1 billion headwind to gross margin from LIFO in, let's say, the next two or three quarters, does that mean you would get it back in the subsequent two2 or three quarters based on everything that you know today?

Operator:

Next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

John David:

Sure. I'll take the first part of that and then pass it on to John for the second part of the question. One of the things, Peter, that excites me the most about this business is the opportunity that we have going forward with a changing business model that is really reflective of where consumers -- consumer patterns are shifting to. We see in the world move more online. I think we are unique in our ability to be a skilled omnichannel retailer. And so when you consider things like advertising or fulfillment services, these are areas of our business that not only are faster-growing, they have a higher margin associated with them. And so that's included when we contemplate our growth algorithm. So hopefully, we look up a number of years from now and we've got a much more diverse and durable earnings stream that also there's a different multiple ascribed to those earning streams than what exists today. We're quite excited about the opportunity in front of us.

Doug McMillon:

I think what you guys have done on the Thanksgiving meal is a great example of how we're helping relieve pressure. There, Peter, a group of items that make up kind of the scratch cooking aspects of Thanksgiving, 25 items for $88, the same as last year, that's one basket. We've looked at Thanksgiving baskets in different ways and taking other actions on products that are more convenient, not scratched, like our $71 for 17 different items. That alleviates the need to switch. These are -- some of these are branded items. I think that's a great example of how we can step up and absorb some of this to help families that need it most. And I'm really pleased to see you guys take that action.

Scott Mushkin:

So I guess I wanted to get back to the idea of next year and what Michael was talking about with the inflation receding. I guess the big wildcard in that is if we get a big inflation going away, where does demand -- underlying demand would suggest maybe underlying demand is being destroyed potentially. And so how do you guys think of your business if we move through that type of environment?

John Furner:

Scott, the thing I would add, and I agree what John David said, really 3 parts of this. First, we have to focus on what we can control in any environment. And that would consist of great merchants, positioning our sales for value, which is relative value and taking a longer-term approach to the consumer; and then finally, strong execution. We've made some progress with inventory, as we said, quarter-to-quarter, from high 20s to just over 12% over the last year. So having an inventory position that's strong going into the year with some flexibility is a really important part to be able to manoeuvre any environment that we get into. So we'll continue to focus on those three, and we'll be ready for customers in any scenario that we find ourselves in, in the next couple of years.

John David:

We're not prepared to give guidance for next year yet. We'll talk about that more on the fourth quarter call.

Operator:

Our final question today comes from the line of Paul Lejuez with Citigroup. Please proceed with your question.

John Furner:

Hey, Paul. What's exciting about the rest of the season is we still have a couple of big events this month. We're excited about Thanksgiving next week because of the way we prepared in the food business. And then we have an event in December that we're looking forward to as well. The customers that are trading into the brand, as I said earlier, it's a mix, which is great. We're seeing more customers more often. We're seeing them in more categories. Historically, in the last quarter, we do see a lot of new customers who come in via food and consumables. And then through the digital experience, what we did over the last really 12 months was integrate the original Walmart grocery shopping app and the Walmart.com app into one place. So the entire assortment, up to 350-plus million items, are all there in one place. So I think we're positioned well to be able to navigate. As far as promotions, as we said earlier, the guidance would include the ability to react to a more promotional environment, but we don't know yet. It's still mid-November, and there's a lot of room between now and the end of the holidays, including New Year. So again, we'll be prepared for any environment that emerges over the next few weeks.

Operator:

Thank you. At this time, we've reached the end of the question-and-answer session. I'll turn the call over to Doug McMillon for closing remarks.

Operator:

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Dan Binder:

Thank you, Rob. Good morning and welcome to Walmart’s second quarter fiscal 2023 earnings call. I am joined by members of our executive team, including Doug McMillon, CEO; John David Rainey, Executive Vice President and Chief Financial Officer; John Furner, President and CEO of Walmart U.S.; Judith McKenna, President and CEO of Walmart International; and Kath McLay, 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-GAAP reconciliations on our website at stock.walmart.com. It’s now my pleasure to turn the call over to Doug McMillon.

John David Rainey:

Thanks, Doug. I’d like to start by thanking our customers, associates and partners for helping us deliver another strong sales quarter. We are moving a lot of volume through our business and I am proud of how our associate team has responded and serving customers as we manage through this unique period. We delivered strong top line growth with total constant currency revenue up more than 9% in the second quarter. Sales were strong across all segments, particularly in food and consumables. Customers are increasingly choosing Walmart to help them save money as they deal with broad inflationary pressures. As we navigate the current environment, we know that we are not immune to large macroeconomic shifts. We are facing similar cost pressures that others are seeing related to excess inventory, fuel prices and supply chain. But our business model is structurally sound and our market position is strong. As the year has progressed, we have seen more pronounced consumer shifts and trade-down activity. As an example, instead of deli meats at higher price points, customers are increasing purchases of hotdogs as well as canned tuna or chicken. Private brand penetration has also inflected higher. And in food category, specifically the private brand growth rate doubled compared to Q1 levels. We will continue to manage pricing for customers in a way that preserves our price gaps and allows us to earn market share profitably. We have been very focused on managing controllable costs and consequently achieved expense leverage across all three segments in Q2, even though we haven’t fully lapped the wage investments implemented last year. During the quarter, we also made progress reducing inventory, managing prices to reflect certain supply chain costs and inflation and reducing storage costs associated with the backlog of shipping containers. We are encouraged by the initial steps taken by some suppliers to help us reduce product acquisition costs. We have taken similar steps to manage our support and overhead cost too and we are achieving significant savings in procurement of goods not for resale. In our stores and fulfillment and distribution centers, we have seen labor productivity metrics improve. We are finding efficiencies and reducing expenses, while still focusing on operational excellence. I want to spend a moment discussing inventory. As a backdrop, the shifts that we have seen in consumer behavior through the pandemic shifting from in-store to online, along with big swings in the purchase of goods versus services and then the reversion back to pre-pandemic norms have been sharp and difficult to predict. These trends have been exacerbated by inflationary pressure on the consumer that many of us have not experienced in our lifetime, the effect of which has recently changed consumption patterns in certain categories for us, notably general merchandise. The result of all of this put pressure on our inventory levels that peaked in the last quarter. Importantly, the team has a deep understanding of our inventory levels in content and have made a lot of progress during the last quarter. In-stock levels have improved about 250 basis points since Q1 in our grocery business alone, despite the heavy sales volumes we are experiencing. We also made progress selling through excess inventory, especially in hardline categories. At the end of Q2, Walmart U.S. inventory growth was 26% versus last year, reflecting over 750 basis points of improvement from Q1 levels. Notably, about 40% of the year-over-year increase relates to inflation. General merchandise inventory growth rates are down more than 15 percentage points from Q1, but still with more work to do. We have cleared most summer seasonal inventory, but we are still focused on reducing exposure to other areas such as electronics, home and sporting goods. We have also canceled billions of dollars in orders to help align inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is still above optimal levels and our actions in Q3 will allow us to make significant progress toward rationalizing absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season. Despite the short-term challenges we are facing this year, we continue to advance our flywheel strategy and diversify our income streams. For example, the global advertising business grew nearly 30% in Q2, led by Walmart Connect and Flipkart as new advertisers turn to Walmart to deepen relationships with customers. We now have over 240 million items in our U.S. e-commerce assortment and our marketplace seller count has increased about 60% year-over-year. We continue to sign on more customers to our data ventures offering and the number of Walmart+ memberships continues to grow. We are also excited about the build out of automation and technology throughout our business and how it will continue to help drive greater efficiency. Through my first couple of months here, I have been able to get out and visit our stores and see our distribution and fulfillment centers and witness the supply chain automation and technology that we are putting in our stores and centers. One example is the Vizpick technology that we have rolled out to our associates across U.S. stores. This tool uses augmented reality to speed the inventory management process, enabling associates to get needed product from the backroom to the sales floor more efficiently. This not only saves associate time, but also helps avoid missing sales through side counter out of stocks. It’s a win-win. In summary, our business is resilient. And with the omni capabilities we’ve built, we are better positioned now than we were in prior periods of economic softness. Now, let’s get to some additional Q2 financial details. As mentioned previously, each of our segments delivered strong sales growth. Walmart U.S. comp sales accelerated to 6.5% growth, reflecting strong grocery sales at a higher average ticket size. International constant currency sales were up 9.9% with strength in Mexico, Canada and China, while Sam’s Club U.S. delivered comps of 10%, excluding fuel and tobacco. Consolidated gross margin rate decreased 132 basis points, reflecting increased markdowns and unfavorable mix shifts in our U.S. businesses. Sam’s Club gross profit was also negatively affected by a LIFO charge due to higher inflation. On the expense side, selling, general and administrative expenses leveraged 45 basis points, helped by higher sales partially offset by the U.S. wage investments implemented last year. Operating income decreased 6.8% and adjusted EPS was $1.77. Two discrete items positively affected our results. Operating income benefited from a favorable insurance settlement of $173 million during the quarter. Adjusted EPS also benefited from this as well as a $182 million special dividend from one of our equity investments. Operating cash flow was $9.2 billion, reflecting lower operating income, higher inventory amounts due in part to inflation and the timing of certain payments. During the quarter, we returned $4.9 billion to shareholders through dividend and share repurchase. Through Q2, we are ahead of pace on our original share repurchase plan for this year and now expect to repurchase $10 billion to $11 billion in shares for fiscal year 2023. Now, let’s discuss segment results. Walmart U.S. comp sales momentum continued with growth excluding fuel of 11.7% on a 2-year stack. Food sales were especially strong with mid-teens growth while general merchandise sales were soft, particularly in electronics, apparel and home. Transactions increased 1%, while average ticket increased 5.5%. We were pleased to see e-commerce sales growth improve sequentially, up 12% year-over-year in Q2 and 18% on a 2-year stack. SG&A expenses leveraged 21 basis points, reflecting higher sales and lower COVID costs, partially offset by the wage investments. The team did a nice job pivoting the expense structure, so the scheduling challenges from Q1 did not repeat. Gross margin pressure led to a decline in operating income of about 7%. International had another really good quarter. Sales were strong, up 9.9% in constant currency. Currency headwinds negatively affected reported sales results by about $1 billion. Each of our major markets delivered positive comp sales, with Mexico and China leading the way. E-commerce sales on a constant currency basis grew 15% on top of strong gains last year. Comp sales in Mexico increased nearly 11%, with strong growth in stores as well as e-commerce sales, which grew 18%. The team is doing a good job reinforcing our price message and positioning as customers manage through this inflationary period. In China, comp sales were up more than 14%, with strong growth in e-commerce sales, which increased 77% in the quarter and more than 150% on a 2-year stack. E-commerce penetration continues to climb in both our Sam’s Clubs and hypermarket stores as customers increasingly choose omni solutions to meet their shopping needs. Canada comp sales increased more than 10% even as higher levels of inflation are starting to pressure consumer spending in discretionary and general merchandise categories. Flipkart continues to meet our expectations and the team is gearing up for Big Billion Days. I traveled to India last month and was impressed by how the Flipkart and PhonePe teams are innovating for the customer and driving growth. PhonePe continued to see strong growth, with annualized TPV of over $830 billion, reaching a record level of monthly transactions of about $3.1 billion. International operating income in constant currency increased more than 28%, partially attributable to the previously mentioned insurance recovery for prior operational disruptions in Chile. Sam’s Club had another strong sales quarter with comp sales up 10%, excluding fuel and tobacco, an increase of more than 20% on a 2-year stack. Transactions increased 9.8%. E-commerce sales grew 25%, with strong contributions from both curbside and ship-to-home orders. Membership income was up nearly 9%, with another record high quarter in overall member counts and continued growth in Plus member penetration. Sam’s added more new members in Q2 than any other quarter in recent years, benefiting from membership campaigns. Sam’s leveraged expenses 131 basis points, including fuel and 72 basis points excluding fuel, due primarily to higher sales and lower COVID costs. But gross margins were down as elevated markdowns, supply chain and fulfillment cost and a 70 basis point inflation-related LIFO charge pressured profitability. As a result, operating income declined about 35%. Now, let’s turn to guidance. With the updated financial guidance we released last month, we outlined the pressures that led us to take a more conservative outlook for the current year profitability. Let me take a minute to provide you with more detail. When we provided guidance 3 months ago, we didn’t expect food and fuel inflation to accelerate to the levels that we experienced in Q2. In fact, Walmart U.S. food inflation was up double-digits year-over-year and we saw a nearly 400 basis points step up as the quarter progressed compared to levels at the end of Q1. The rising cost for essential items and customers’ reprioritization spending led to significant mix shifts in our business. 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. Higher fuel prices also pressured our supply chain expense. We finished the quarter on a strong note, however, and ahead of our updated Q2 guidance provided last month, and the Q3 back-to-school season is off to a solid start. Contributing factors to the better performance included strong sales at the end of the month with good flow-through to the bottom line and lower-than-expected supply chain cost. We’re 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. We’ve updated our fiscal year ‘23 guidance to reflect the better Q2 results versus the guidance we provided in July. We continue to believe the sales and profit guidance we provided at the time for the back half of the year appropriately reflects elevated uncertainty in this environment and is our best view of expected performance. For Q3, we expect net sales growth of about 5%, including comp sales growth of about 3% for Walmart U.S. We’re expecting operating income to decline 8% to 10% and adjusted EPS to decline 9% to 11%. For fiscal year ‘23, we expect net sales growth of about 4.5%, including comp sales growth of about 4% for Walmart U.S. We expect adjusted operating income and EPS to decline 9% to 11%. Excluding the effect of divestitures, this would translate into net sales growth of 5.5% and a decline in adjusted operating income and EPS of 8% to 10%. Before I close, I’d like to share my perspective as someone that is new to Walmart and meeting many of you for the first time. I’m excited to join the company at such an opportunistic and transformational time. Certainly, retail broadly is being pressured right now, but that shouldn’t detract from the incredible opportunity that we have in front of us. It starts with our mission of helping people save money so they can live better. We do that every day at a scale that is unmatched by helping people be able to buy the things that they want and they need. This mission permeates our culture in everything that we do. I’ve joined an exceptional leadership team. Their history of operational excellence, their strategy, the drive to win is simply something that I wanted to be a part of. And you combine that with the resources we have and the investments we’re making in things like supply chain automation, improving our e-commerce capabilities and diversifying our portfolio with higher-margin products and services like data and advertising that will result in more durable earnings streams as they scale. We have the potential to not only be relevant in the next chapter of retail, but help define it. And when we execute on these things, we have the ability to appreciably increase our shareholder value over time. I believe that some of the best days of Walmart are in front of us. I look forward to working with you, and now we’d be happy to take any of your questions. Thank you.

Bob Drbul:

Good morning. And John David, welcome. Congratulations.

Bob Drbul:

Maybe two quick questions, if I could. The first one, I think, Doug, you mentioned that sort of middle and higher income shoppers are choosing Walmart. Just wondering if you can elaborate some more on the trade into Walmart that is allowing you to take market share in grocery. And the second question is just wondering if you could give us a little bit more flavor on what you’re seeing, what you saw sort of with sales late in the quarter and what you’re really seeing so far early Q3? Thanks.

John David Rainey:

Yes, Doug, it was a bit different than May and June, for sure, and it led – it has led to the beginning of Q3 being stronger in places like back-to-school. Food and consumables continue their momentum. And I think the big [Indiscernible] changed in late Q3, early – sorry, late Q2, early Q3 was traffic count was a bit stronger than what we have seen in the businesses in 2 months.

Operator:

Thank you. Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Doug McMillon:

Hi, Kate, this is Doug. Thanks for the question. I think what we should do is hear from all three segments as it relates to that. We’ve made progress. John, why don’t you go first, but let’s also hear from Kath and from Judith.

Doug McMillon:

I think the fact that we were so lean last year, combined with how much inflation impacted the number, has kind of been lost in the story a bit. It’s true that we’ve got too much inventory and that, that created a markdown pressure, particularly in Walmart U.S. apparel. But when we look at the overall inventory, as John David has already commented today, it’s not like the vast majority of it is merchandise that we didn’t want. We just were turning goods 1 year ago and the year before that, frankly, at such a high level that we needed that inventory just to fill side counters and to fill our features.

Doug McMillon:

We’re repeating ourselves, but the level of and the pace at which inflation changed in the first quarter, and that continued in food and consumables into the second, just caused behavior to flip fast and that caused apparel to be more difficult than what we anticipated, and that’s where the dollars markdown pressure came from. Kath, do you want to go next?

Judith McKenna:

For International, we saw some good progress on inventory quarter-on-quarter, some of that helped by the FX position on that, but underlying as well. I think as I look at it, about 75% our increase year-on-year is absolutely planned for. And as you’ve heard that leanness that we had last year is really coming through. And I think that’s theme for everybody. We just didn’t have enough inventory at that time. That leaves about 25% of it, which is some GM categories in a couple of markets, specifically, which would be Chile and Canada. But I’m very comfortable with the way that the market has dealt with that. And just as a reminder, for at least Chile, our quarter end is a month earlier than the enterprise quarter end. So we’re already seeing some of that clearance happening for that market.

Peter Benedict:

Hi, good morning, guys. Thanks for taking the question. Just want to talk a little bit about grocery, the strength there, particularly in food. Can you talk about pricing, how you’re managing that? I know units, it looks like they were down for the quarter, but improving to, I guess, flattish as you exited the quarter. Just how are you thinking about pricing relative to units? What’s the promotional environment you’re seeing within grocery and just how the grocery strength is split in store versus online and curbside? Thank you.

Doug McMillon:

The unit story is, one, the transaction count being up a little in this environment is also important to call out. The average basket was way up, but it’s great to see transactions grow in the Walmart U.S. business also.

Steph Wissink:

Thank you. Good day, everyone. I wanted to follow-up, Doug, on your comments regarding how the basket is shifting for consumers. I think you mentioned in the proteins category and even some areas of private label strengthening. Maybe take us into the household budgeting that you’re seeing with respect to your transaction structure. And then as you’re looking at your guidance for the back half, maybe a follow-up would be what you’re assuming in terms of the basket composition class of good or even within private label versus national brands? Thank you so much.

John Furner:

Steph, as thinking back, one of the meetings we had in New York in 2020, we talked a lot about serving customers flexibly as we develop the different businesses. And so just to tag on to Doug’s comments, serving customers in store is something we have pressed ourselves on a long time. Our pickup business continues. Delivery is growing with Walmart. So the variety of ways that we can serve customers, I think it’s been helpful, especially given the number of ships customers that have had in their lives the last couple of years from working at home and then in many cases, back out into the workplace. So as customers change, we can serve them in a number of ways. When you then click into products, our wide portfolio of products, both in e-commerce and in stores, including the numbers you heard from John David earlier in Marketplace, gives us the ability to serve a wide range of customers. And then as Doug mentioned last week, we had all of our managers together in Denver, which is always a fun exciting experience to get the team together. But what I heard consistently is as the team is doing a very nice job balancing out how to improve quality and sell higher price points and remaining focused on opening price points. So having Thanksgiving meals in a position where you can buy an entire meal for under $50 for a family of four is exciting. So there is a value play, and there is a quality play. And wherever the customer goes and how things shifts, we will be ready to serve them and we’re building the capabilities to be able to do that at will.

Operator:

Thank you. Our next question is from the line of Michael Lasser with UBS. Please proceed with your question.

John David Rainey:

Thank you.

Doug McMillon:

Sure. I’ll take that, Michael. Thanks for the question. You’re right. Certainly, we’ve incurred some costs this year that are more, call it, one-time in nature related to the supply chain and higher inflation, but it’s difficult to predict how long that will persist. Certainly, the inventory situation has gotten better. But the effect on the mix changes in our business that are largely the result of higher inflation, and that may persist for some time. And so we’re being cautious with respect to the outlook. We’re obviously not giving guidance for next year right now. But look, what I’d point you to is the conviction that we have in our long-term plan has not changed, has not wavered. When you look at the long-term plan that was laid out by the management team previously in terms of what we’re doing with the flywheel strategy, the ability to grow operating income faster than revenue. And you look at that over a multiyear basis, we have as much conviction today as we did when we laid that out. So very excited about the future. But the short-term period, this is a moment in time, and we’re being cautious with respect to the outlook because there is a lot that we don’t know.

Edward Yruma:

Hi, good morning. Thanks for taking the question. John David, curious on your perspective, given your most recent stop on Walmart’s advertising and fintech businesses, you have a lot of experience from PayPal on that. How do you assess kind of where they are at today? And kind of how do you think about the longer-term growth opportunity? Thank you.

Judith McKenna:

Maybe it’s worth adding on Financial Services PhonePe in India. You heard that we were there recently, and John David, you were there with us as well and got to visit the business there. It was – you’ll have seen from the scripts that we had today that they grew their annualized transact TPV to 830 billion. Last quarter, that was 770 billion. So really good progress there, and they are also now got monthly transactions of 3.1 billion a month, which is incredible. I think what’s really encouraging way that they are approaching this space is they are looking not only at payments, but also merchant services, and that two-sided network is an important part of that, but equally, starting to expand into financial services as well with a real focus at the moment on insurance and pushing that. Their knowledge and the ability to share that knowledge around the world and help other markets such as Mexico from a best practices, what they should be looking at, has been incredibly invaluable and one of the real benefits of being a global company.

Doug McMillon:

Sure. I think you also asked about advertising. The relationship between digital growth, marketplace growth, advertising is something that we’re trying to take advantage of. In the case of the U.S. business, the ability to attribute sales later on to in-store transactions makes us uniquely positioned. And we’ve made a few enhancements lately for people that are consuming advertising from us.

John David Rainey:

I can’t remember a business with the margin structure of the advertising business here at Walmart and having 30% growth for the quarter was nice to have.

Kelly Bania:

Hi. Good morning. And I will add my welcome to you, John David.

Kelly Bania:

A lot of comments on the inventory, but just had a couple of more. Can you clarify the dollar amount of inventory that you estimate would be excess? And can you help us understand how much of that is in apparel or other categories and the magnitude of markdown that you expect to clear through that and the timing of when you expect to get back to a clean position? And I guess to follow-up on that, do you at all think that this discounting from you and others in the industry could pull forward some demand through from the second half? And have you considered that into your second half guidance?

Operator:

Our next question is coming from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Doug McMillon:

Sure. Simeon, I will take a stab at that as well, and John might want to jump in. So, if – I will just point you to the 132 basis point decline overall in gross margins. And there is really three things that I would say in order of magnitude that contributed to about, call it, two-thirds to 75% of that. So, number one would be markdowns, number two is mix, and number three is the LIFO charge that we talked about in Sam’s. And then there is all the various puts and takes that round out the balance of that. As it relates to markdowns in the third quarter, look, we feel like we are in a better inventory position and those are obviously very related. And so we would hope that we are not going to see the level of markdowns that we experienced in the second quarter. But we also – that’s assuming that nothing changes with the consumer. So, as we noted, we are being cautious on the outlook, and we will wait and see what happens.

Dan Binder:

I was going to say, Simeon, on your mix question, if you go into our filings, you will see our mix change year-over-year, and you will see that in Q2 as well when we file our Q. At the end of Q1, it was a fairly significant shift as we were lapping stimulus spending. We recalibrated our expectations at the end of Q1, and then it was even worse than we expected for Q2. So, that’s what you are seeing get reflected in our view as we look to the back half, we don’t want to kind of get ahead of ourselves just because sales have been strengthening at the end of the quarter.

Operator:

Our next question comes from the line of Robby Ohmes from Bank of America. Please proceed with your question.

John Furner:

Hey Robby, it’s John. I will take the first part of your question. In relation to – as it relates to food inflation, it definitely moved up in the second quarter and moved up in the months of the second quarter. So, July was higher than June. June was higher than May. I think it’s too early into the third quarter to try to make a call if this is where we will be, if it will go higher or go down. So, for now, we are assuming that this is the level we are at and it could continue. And some of the factors though to consider is one of the costs that are part of the way we price food is the cost of moving food. So, diesel fuel and fuel continue to move down, that could be a tailwind related to inflation. However, there are still some commodities up. We do see a few categories in the store where prices are starting to come down, but there are other categories where we are still rising. So, I think it’s just too early to call in the quarter. Certainly hope that some of these larger macroeconomic conditions would lead to lower prices in food, but we are not able to say that we see that happening just yet.

Doug McMillon:

Also a higher income member than the profile you would see in Walmart U.S.

Rupesh Parikh:

Good morning. Thanks for taking my questions. So, first on the markdown front, I was curious if you can at all comment on what you guys view – you view as excess markdowns as we try to think about next year? And then secondly, on Sam’s Club gross margins declined nearly 300 basis points. I want to get a sense of if you expect any of that to be structural, or do you expect that to recover the margin decline over time?

Kath McLay:

And for the Sam’s part of the question, I would say if you look at our GP rate, there is two major things going on there. One is the LIFO charge of $123 million, and the other one is what we had called markdowns. But there’s two things at a play there. The largest part of that amount is a strategic decision we made to create an inventory reserve for Q3. And so that’s really pulling forward those markdowns from Q3 into Q2 to set ourselves up for success and to make sure that we are really competitive going into Q3. So, I don’t see that as a trend. I see that as just this quarter, the impact on this quarter.

Joe Feldman:

Hey guys. Thanks for taking the question. Wanted to check in on what you are seeing with the supply chain these days. I mean I know fuel cost has come down, and we are hearing container cost prices have come down. But are you getting a more regular flow of inventory as you need at this point, or just your view of the global supply team would be really helpful. Thanks.

Doug McMillon:

Joe, I would just add from a P&L perspective and you think about the cadence of earnings from 3Q to 4Q. We started experiencing more pronounced supply chain costs in 4Q last year. So, from a cost side, that makes the comps a little bit easier and if you are thinking about operating income in the fourth quarter versus the third quarter.

Chuck Grom:

Hi. Thanks very much and welcome John David. When you unpack the factors behind the better back-to-school and strong finish in July, and it sounds like in August so far, I guess how would you rank the key contributors? Lower gas prices, there was a big uptick in state tax holidays this year versus last. And I guess has the improvement altered your view of the upcoming holiday season in any way in terms of how you think the consumer is going to react?

Doug McMillon:

John, I would add as it relates to better-than-expected performance for 2Q. As noted, supply chain costs came in better than we expected. And in any quarter, when you close, you are going to have some puts and takes at the end of the quarter. Some may fall in your favor. Some may work against you. In the first quarter, supply chain costs came in worse than what we expected when we closed the quarter. And so when we updated our guidance at the end of last month, we had a similar expectation. It actually fell the other way in our favor. And so that contributes to the better-than-expected performance relative to our guidance at the end of last month.

Operator:

Thank you. Our final question will be from the line of Ben Bienvenu with Stephens. Please proceed with your question.

Doug McMillon:

Yes. We certainly hope to hold share around the world, and I think this inflationary environment is going to last for a while. So, people are going to be value conscious, which plays to our strengths. The e-commerce experience end-to-end is a focus of ours. We want to continue to grow our pickup and delivery businesses around the world. We, of course, want to grow and maintain share of customer spend in the stores as well. Moving away, I think if any of you want to comment, you can, I think we are holding at the lower end and adding at the upper end, generally speaking.

Doug McMillon:

Planning to sell some more Walmart+ memberships to help solidify those relationships, and the Paramount announcement should help us do that.

Operator:

Thank you. At this time, we have reached the end of our question-and-answer session. And I will turn the call over to Doug McMillon for closing remarks.

Operator:

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

Dan Binder:

Thank you, Rob. Good morning and welcome to Walmart's first-quarter fiscal 2023 earnings call. I'm joined by members of our executive team, including Doug McMillon, Walmart's President and CEO; Brett Biggs, Executive Vice President and Chief Financial Officer; John Furner, President and CEO of Walmart U.S.; Judith McKenna, President and CEO of Walmart International; and Kath McLay, President and CEO of Sam's Club. In a few moments, Doug and Brett will provide you an update on the business and discuss first-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-GAAP reconciliations on our website at stock.walmart.com. It is now my pleasure to turn the call over to Doug McMillon.

Brett Biggs:

Thanks, Doug. In the first quarter, we faced some new challenges, as well as some that were more pervasive than anticipated. Of course, we've been in a very fluid environment for more than two years and I'm proud of the way the company has performed during that time. Q1 sales were strong across all segments and the strength has continued in the start of Q2n reinforcing Walmart wins with customers in even the most unique environments. The first quarter was one of the most challenging periods yet related to supply chain disruptions, increased cost, and persistently high inflation. There are some things that were unique to the first quarter like some labor scheduling inefficiencies as U.S. associates returned more quickly than expected from COVID-19 leave and some things that will likely be more persistent than anticipated when we gave guidance to start the year. As Doug mentioned, during the quarter, particularly in the middle of the quarter, we weren't able to fully address or pass along some of the cost increases that impacted profit more than expected. We're now managing those costs and passing them along, more effectively. The costs related to inventory and fuel prices in the U.S. will strike some into Q2, but the scheduling-related costs have been mitigated. Most of the increased inventory and related costs were related to buying over the past several quarters with a keen focus on in-stock, and now we're in a short period of rightsizing it. The current sales strength and warmer weather in the U.S. give us confidence in our ability to work through this fairly quickly and strategically. Our market position is strong and our business model was built to weather times like this when customers are making more real-time choices. We're there for them and we'll continue to provide great value while managing the business in a way that's also good for shareholders. We'll continue to reduce costs where we can and manage pricing in a way that preserves competitive price gaps while managing the bottom line and passing on costs where they appear to be less temporary in nature. Our expectations for the top and bottom-line growth algorithm remain structurally unchanged. As we navigate the current environment, we continue to make great progress in building our flywheel and executing our long-term strategy. For example, the global advertising business grew over 30% in Q1. I'm excited about what is ahead and what it means for customers as we more actively engage with them in different areas of their lives and deepen those relationships. Now, let's get into some additional Q1 details. As a reminder, my comments today will exclude the effect of last year's international divestitures. We delivered strong topline results in the first quarter with total constant currency revenue up more than 6% reflecting healthy growth in each segment. Walmart U.S. gained grocery market share and at higher average ticket despite lapping last year's significant benefits from U.S. stimulus. International was led by Mexico and Canada, while Sam's Club U.S. delivered the ninth consecutive quarter of double-digit comp growth, excluding fuel and tobacco. First-quarter gross margin rate decreased 89 basis points versus last year, due in part to pressure at Sam's Club from supply chain costs, fuel mix, inflation of markdowns caused by inventory delays. Walmart U.S. gross margin rate was down 38 basis points with more than 3/4of the decline related to higher-than-expected supply chain, fuel, and e-commerce fulfillment costs. While we did see some supply chain improvement early in the quarter, the war in Ukraine and ongoing COVID impacts in various parts of the world, including China, led to increased challenges. While sales were ahead of plan in Q1, the category mix in the U.S. was heavier in food and consumables as spending shifted somewhat away from more discretionary items, including categories impacted by unseasonably cool weather such as apparel, patio furniture, and landscaping supplies. We remain very bullish on our food and consumables business. Consumers are feeling inflation pressures as evidenced by an increase in grocery private brand penetration. The category mix shift, along with increased inventory, some of which was delayed in arriving led to higher than normal markdowns for general merchandise. In Q1, unexpected markdowns pressured Walmart U.S. gross profit by about $100 million. We expect the inventory position to improve as we go through Q2. SG&A expenses deleveraged 39 basis points, primarily due to increased U.S. wage costs, partially offset by lower total COVID costs versus last year. We expected higher labor cost at Walmart U.S. due to the hourly associate wage increase announced last year. As mentioned, Q1 profit declined more than expected with operating income down 20% and adjusted EPS down 20% to $1.30. Operating cash flow was also lower than expected at negative $3.8 billion. This is due to several factors, including higher inventory amounts with about half of the increase due to inflation, lower operating income, and the timing of certain payments and payables due to inventory delays. Given our confidence in selling through the inventory, I feel confident about operating cash flow getting back on track as we go through the year. Now let's discuss segment results. Walmart U.S. comp sales excluding fuel grew 3% and we're up 9% on two-year stack, reflecting strong food sales which were up low-double digits. As mentioned previously, general merchandise sales were softer but still increased high-single digits on a two-year stack. Transactions were flat versus last year, while average ticket increased 3%. E-commerce sales grew 1% against strong gains last year as customers continue returning to stores. We're making strong progress in many of our newer higher margin initiatives, the Walmart Connect advertising business continues to scale as we expand self-serve capabilities and offerings. Our new data monetization business, Walmart Luminate, continues to accelerate with over 75% growth quarter over quarter as more supplier partners collaborate with merchandisers to utilize new customer insights in our platform. We also continue to expand our Walmart GoLocal delivery as a service business with new partnerships announced during Q1. In addition, we held the grand openings of four new Walmart health centers in Florida and we'll open another one next month as we continue to expand access to affordable quality care. One, our strategic fintech partnership with Ribbit Capital closed in the One Finance and Even transactions, which sets the foundation for growth. Collectively, these initiatives represent large revenue and profit opportunities over the next several years. Gross margin pressure and expense deleverage led to a decline in operating income of about 18%. Inventory increased about 33% due to inflation and aggressive inventory buys over the past few quarters. International sales were strong, up 8% in constant currency with Mexico and Canada leading the way. E-commerce sales in constant currency grew 22% on top of strong gains last year with growth up 86% on a two-year stack. Comp sales in Mexico increased 9% with strong growth in stores as well as e-commerce sales which grew nearly 20% in Q1 and 185% on a two-year stack. In Canada, comp sales were up 7.7%, while in China growth was slower than expected but comp still increased more than 4% led by e-commerce growth of nearly 90%. Flipkart had another good sales quarter with solid trends in monthly active customers and users. We're also pleased with the strong growth of PhonePe with annualized TPV of over $750 billion as the team continues to launch new customer offers, such as the recent expansion of insurance offerings to include health, auto, and ATV coverage. International operating income at constant currency declined nearly 13%, primarily due to lower gross profit in China, reflecting increased markdowns and higher e-commerce penetration during the quarter as well as investments in e-commerce across the portfolio. Sam's Club had another strong sales quarter with comp sales up 10.6% excluding fuel and tobacco, an increase of about 21% on a two-year stack. Transactions increased 10% and ticket was slightly positive. E-commerce sales grew 22%, membership income was up 10.5% with another record in member counts. Operating income was down 20% as the gross margin pressure, I mentioned previously, was partially offset by higher membership income, fuel profit, and expense leverage. Now let's turn to guidance, which will be discussed ex divestitures. While we don't typically update guidance at the end of Q1, we felt it was appropriate given the current environment and the profit miss in Q1. We're behind for the year, but we're also just one quarter end of the year with time and options in front of us. The team's focus is still on the original profit guidance. Based on our continuing strong topline, we feel good about our ability to deliver full-year sales growth in excess of our original guidance. We now expect consolidated net sales growth excluding divestitures to be 4.5% to 5%. We expect Walmart U.S. comp sales growth of about 3.5% for the year versus the original guidance of slightly above 3%. However, as a result of the higher-than-anticipated costs we saw in Q1 and the expectation of some of that to continue, growing operating income on our original guidance of more than sales growth is challenging. We now expect operating income and EPS to be relatively flat year on year. As our usual practice, we will update you on our progress as we finish Q2. For Q2, we expect net sales growth of over 5%, including c of 4% to 5% for Walmart U.S. As our confidence builds on our ability to manage cost increases more efficiently, operating income and EPS are expected to be flat to slightly up. In closing, I'm pleased with the top-line momentum we're seeing across the business. While Q1 profit was lower than expected during this dynamic and challenging environment, I'm proud of how our teams continue to be laser focused on serving customers and taking care of shareholders. Now we'd be happy to open up the call for your questions.

Simeon Gutman:

Good morning, everyone. I have one question and one follow-up. My first question is on the health of the consumer. Curious what your assessment is if the consumer is getting marginally weaker, staying about the same? You mentioned there were some mix shifts in your quarter, but you also said that you're adjusting pricing and you raised your sales guidance. So it would seem that maybe the consumer isn't getting weaker?

John Furner:

Hi, Simeon. Good morning. It's John. Just to reiterate what Doug said, we do serve a wide range of customers and certainly have seen strength in the consumer. We see growth in high-ticket items like game consoles recently with warmer weather, strength in patio furniture, grills, gardening, and hardlines, but we do see some consumers switching. We see categories like deli, lunch meat, bacon, dairy, where we see customers trading from brands to private brands. So we see both of those things happening at the same time. But as we reported strong topline results, we see a wide range of consumer behavior.

Doug McMillon:

Yes, Simeon, it's more about the speed than it is the other issue. Things moved quickly in the back half of the quarter. And as you mentioned, it sometimes creates a timing issue. So life doesn't begin and end with the quarter dates beginning and end, and we'll manage this as we go through the year. But the mindset and the ability of the management haven't changed.

Karen Short:

Hi, thanks very much. I wanted to just ask a little bit about the inventory. And I ask in the context of how much you fully factored in the risk that the consumer further weakens. And therefore, in that context, how much ability going forward do you have to flex the P&L with respect to sort of manage, I guess, the P&L with respect to further markdowns, gross margin risk in the U.S. given your high levels of inventory, but also contemplating the risk of further SG&A deleverage if there is more weakening with the consumer? Thank you.

Brett Biggs:

Yes. Karen, it's Brett. I feel good about the timeliness of how we're handling inventory with rollbacks. The way we're looking at pricing, as we said in our prepared remarks, I think over the next quarter or two, we'll work our way through this, but I feel good about the way we're going to manage through this.

Bob Drbul:

Good morning and Brett, congratulations, going to miss you. Thanks for everything. On - my question would be, can you talk about just conversations with your vendors, given their strong results, are you leaning in more on negotiations? Can you just sort of help us understand your mindset at this point? Thanks.

Operator:

Our next question is from the line of Steph Wissink with Jefferies.

John Furner:

Yes. So on the basket, in the first quarter, we definitely had an impact due to the offsetting of stimulus from last year. We had a very strong quarter last year, one of the strongest quarters we've ever had. So expected an impact in general merchandise as we went into the quarter. And we did see increased strengthening in food as the quarter went along and then late in the quarter and then to the beginning of the month of May, we've seen strengthening in general merchandise. I think it's a combination of warmer weather across the country and the response to the rollbacks that we put in place. In terms of the consumer themselves, we've seen strong growth with higher income consumers, middle income, and lower income, but we do see a definite strength with high-ticket items, as I said, with some consumers than others, we do see some switching, which would include switching specifically from brands to private brands.

Greg Melich:

Thanks. My question was really about what's driving the basket and working down the inventory. So it's one question. But I guess if we look at this quarter, is there a way to say how much was inflation and mix? I think you mentioned units were down. Could you give us a number to that? And then really on inventories, just should we expect $100 million of markdowns in the next couple of quarters? How do we think about that cadence?

Operator:

Thank you. Our next question is coming from the line of Michael Lasser with UBS.

Doug McMillon:

Michael, this is Doug. I think it's more about market dynamics than it is relative to competition and I would expect to get these things back over time. As we mentioned earlier, things moved quickly in the back half of the quarter and it just takes a little bit of time to adjust. And as we mentioned in the prepared remarks, we're managing things at an item level from a pricing point of view. But below that gross margin line, there were costs related to fuel and then the staffing issue that we mentioned that just need to be resolved, but we see those as being isolated to the quarter.

Peter Benedict:

Good morning and congrats, Brett. So my question is just really on the profit guide for the year coming down clearly first quarter and then some in the second. Is it right to view the second-half profit guide largely intact here? Just curious kind of your view on the holidays later this year have changed at all? And if you've adjusted any orders accordingly? Thank you.

Operator:

Our next question is coming from the line of Kate McShane with Goldman Sachs.

John Furner:

Hi Kate, it's John. Let me take the first question. On price gaps, this is, of course, something that we look at every week, every day, and our role with our customers to make sure that customers can find values on everyday goods. I think that my team specifically in our supply base, we need to do more to control costs, to ensure that we can provide great value to retail for our customers. I mentioned a group of categories in proteins and dairy, where definitely see switching as we look at what's happening in the baskets. So I think we have some work to do in terms of ensuring that we're providing the right values and we're going to do that across the second quarter going into the rest of the year.

Christopher Horvers:

Thank you. I had a follow-up to that last question. So the price architecture across retail has been pretty rational in pretty much every category. Are you seeing any change from the traditional grocers in terms of maybe they're becoming more high-low than they had been in getting back to where they were pre-COVID? And related to - you mentioned rollbacks and being an advocate for the consumer, are the rollbacks focused in seasonal category where the inventory is heavy or is there some rollbacks also occurring on the consumables side of the business?

Operator:

Our next question is from the line of Robbie Ohmes with Bank of America.

John Furner:

Yes. In terms of e-commerce, we had about a 1% increase in the first quarter, which is similar to Q4 last year. We definitely had pulled forward in growth over the last year or two given all the stimulus and change in consumer behavior. Stores were strong in the first quarter but what we're seeing so far in the month of May is strength in both channels. So it's like the growth is more evenly spread at least up to this point. On advertising, we're pleased with the performance in the growth in the U.S. market. The Walmart Connect team continue to make progress and grow our advertising business and we feel like that's an exciting part of what we're doing. One of our things that we stay focused on is the reshaping of the business and building a flywheel that will serve customers but also help the company raise income at levels that enable us to lower costs for our customers.

Operator:

Our next question comes from the line of Oliver Chen with Cowen.

Brett Biggs:

Thanks, Oliver.

Operator:

The next question is from the line of Rupesh Parikh with Oppenheimer.

Doug McMillon:

Yes. I'll jump in. I think, John, you can add what you want. But on the food side, we're seeing double-digit inflation and I'm concerned that, that inflation may continue to increase. And then on the GM side, may see that turn faster during the course of the year. So when you look at our inventory numbers, part of what's driving the inventory up as we mentioned earlier, is that food is just inflated. So we'll manage in stock, we'll manage features and food. When you think about the general merchandise side, break that into apparel and hardlines. Apparel, we were appropriately aggressive as we started the year in terms of our inventory levels. And as we mentioned before, we can roll back prices in apparel as we've done and still be helpful from a margin mix point of view and we'll work through that as we go through the second quarter and beyond, if necessary. But the good news is we've got the summer in front of us. I'm not sure they have these issues in March and April and have them later in the season. And then on the hardline side, kind of the same thing. We've got basic side counter in stock that needs to be strong. And on the non-basic goods that we feature, we'll manage those inventory levels, take rollbacks, in some cases, to manage through the total. And as the customer pays more for food, their GM behavior is something that we'll watch closely. We'll not only watch kind of the opening price point and pack size change on the food side for some customers, the move to private brands, but we'll also watch what that means for the general merchandise side of the business.

Operator:

Our next question comes from the line of Michael Baker with D.A. Davidson.

John Furner:

Yes. Happy to talk more about that. When things like cost of goods increase and we make a decision with our supply base, if that's appropriate, then those types of increases do flow through retail pricing. But there were some things in the first quarter that happened very quickly. We mentioned the labor, after the Omicron variant, we had a significant number of people come back where we had been over-scheduling and overstaffing due to leaves, all came back at the same time. The fuel increase that happened so quickly at the end of February, early into March, those kinds of things, along with - we mentioned charges in supply chain and then we had this fire, which our team did a wonderful job, keeping associates safe and getting them out of the building, but we lost those centers, those were costs that came in very quickly that we feel are more isolated in the first quarter and some of those costs did not flow through because we believe they were short term in nature. So we'll continue to flow what we need to flow at the right timing. But Brett said something earlier that's really important. It's very difficult in an environment that's had so many dynamic changes to manage the margins quarter-to-quarter. Over the longer term, our team is very capable of managing this quarter, and we've done that for a long time, but not all the costs and changes happen when the quarter begins and when the quarter ends.

Operator:

Our next question is coming from the line of Robert Moskow with Credit Suisse.

Doug McMillon:

We'll manage both. I mean, price gaps matter, and we know where to put our price gap to grow profitable growth. So we'll manage both actively. And we do want customers to have lower prices on food, and we want to sell more general merchandise. And so, we'll partner with the suppliers on the food and consumable side to try and bring those costs down. The lead times in many general merchandise categories are longer. So Peter asked earlier about the fourth quarter, obviously, we're thinking about units by category right now. But as we make those unit decisions, many of those are inflated in some ways. So you're managing dollars at the same time you're managing units to get an outcome and we'll actively manage both sides of it.

Doug McMillon:

Not all of them can't afford to absorb this, that's where they need our help. And so we do, as we mentioned earlier, stay focused on opening price point food items, a lot for bread, a gallon of milk, a can of tuna, mac & cheese, protein categories. Are we helping a family that's at the lower end of the income scale, be able to afford to feed their families during this inflationary time. And given that stimulus checks happened last year, there was some benefit to some of those folks that is eroding over time. And as we look at the rest of the year, that's something that's on our mind.

Chuck Grom:

Brett, congrats again. Just on the digital side, up 1%. You talked about some capacity issues. Can you talk about that and flesh it out a little bit? And how we should think about the trajectory of digital sales over the next couple of quarters?

Operator:

Our next question is coming from the line of Paul Lashway with Citi.

John Furner:

I think on margins in Q2 versus Q1 and we still have this issue where we've got to make sure we're doing everything we can with our suppliers to manage our costs so that we can keep food pricing in a great spot for our consumers. We think about our price gaps every day. We talk about it every day, every week, and we manage those carefully. And what we need to do is work together with our supply base in categories like we mentioned, in proteins and dairy, where we see some switching from brands to private brands. And we see switching from gallons of milk to half gallons of milk as said this morning. We've got to do what we can in those categories to keep costs low.

Operator:

Our next question is from the line of Ben Bienvenu with Stephens.

Brett Biggs:

Thanks, Ben.

Doug McMillon:

Let's go back to Paul for just a second. I think we missed the second half of his question and then we'll come back. He asked about the higher-margin growth businesses like Walmart Connect and whether we expect those to continue to grow. We shared that Q1 was up about 30%. Those ancillary businesses in the U.S. and around the world are growing, and we expect that to continue. And we're excited about that. Frankly, when I look at the Q1 results, I understand the response to a miss, but I hope that some of the underlying improvement that's happening and the shaping that's taking place with the business model isn't totally lost on people because I think that's going to continue, and it will result in a company that's more resilient and more diversified on the bottom line.

Doug McMillon:

And Ben, you asked about the comment - I made the comment about being focused still on our original guidance. And I think that's the statement to what I see inside the company, what I've always known the company be high sense of urgency, really smart people able to work on - in any kind of challenge. We've seen that over the last 2.5 years. I think we've managed incredibly well in the last 2.5 years. So we're still focused on what we said at the first of the year, but felt it appropriate to reduce the guidance officially based on the first quarter. But it's one quarter to the year and there's still a lot of leverage to pull. So that's why I made that comment.

Scot Ciccarelli:

Good morning, guys. So the last time we saw consumer weakness in greater private label concentration, it's starting to become self-fulfilling, meaning consumers were focusing on private label and so you provide more shelf space to private label, which drove more private label sales, so on and so forth. So when you look at today's environment and the price increases vendors are trying to pass on, should we expect private label mix to continue to increase in the coming quarters? Thanks.

John Furner:

Yes. We have - I have exactly the same way. We serve a broad range of consumers and we serve in different places. We serve customers in the store, we serve them at the curve, they pick up. We serve them in their home in their refrigerator and we deliver direct. So I think we just have such a broad range of offering that we can serve all consumers well. And if customers buy one item more than the other, we'll replenish it that way. But I see us staying in a position to be able to serve a wide range of consumers.

Doug McMillon:

It's Doug McMillon. There are a lot of Dans around here though.

Doug McMillon:

No problem. No problem. I'll start by thanking Brett, and Brett has done an outstanding job for a lot of years all over the company. He's been a great partner, not just to me, but to all of us. His judgment, his character, his knowledge of the company, just who he is as a person, it's a great accomplishment to become the CFO of Walmart and you've done a great job, and we're going to miss you. And I wish we'd gone out on a great quarter and it still very tune you in that way. So you can chime in from the cheap seats when things get better. Speaking of things getting better, we're motivated to have a really strong year. I mean we are understanding the environment, trying to convey to you all what we see going forward. But we expect customers and members to come our way. We're going to keep growing overall. We're going to keep growing our share, and we're going to change the business model of the company to be more profitable. And there were some things that happened during the quarter that were different than what we expected, and we're trying to be very transparent about those things. And then with performance, earn your trust and just keep moving forward and make this as isolated of an issue as we can. There is a lot of uncertainty looking forward. Things are very fluid. I know you all are gathering information every day and so are we. And as I talk to people across the country and across the world, there seems to be more uncertainty now in a very fluid environment. And so we'll just - we'll deal with that. And we like the hand that we've got to play. We've got a great set of assets, we've got a great set of people, and when things are more difficult, we should outperform. And so our first-quarter performance is a disappointment to us, and we're going to put it behind us and have a strong year. Looking forward to seeing you in person, those of you that can make it to the meeting on June 3, we'll be down at Fayetteville, and we're going to have a bunch of associates and kind of get back to pre-pandemic type week, which we're all excited about and we hope to see you there. Thank you all.

Dan Binder:

Thank you, Rob. Good morning and welcome to Walmart’s Fourth Quarter Fiscal 2022 Earnings Call. I'm joined by members of our executive team, including Doug McMillon, Walmart's President and CEO, Brett Biggs, Executive Vice President and Chief Financial Officer and John Furner, President and CEO of Walmart U.S. In a few moments, Doug and Brett will provide an update on the business and discuss fourth quarter and full year 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-GAAP reconciliations on our website at stock.walmart.com. It's now my pleasure to turn the call over to Doug McMillon.

Brett Biggs :

Thanks, Doug. We wrapped up another great year with a strong fourth quarter and good momentum as we start the New Year. Over the last couple of years, each quarter has presented unique challenges, but I'm proud of how we've navigated each one of those. The fourth quarter was no different as we faced the rise of Omicron with its impact on the supply chain and our associates. This resulted in some significant unexpected expenses. But despite that, we delivered the top and bottom line results we expected. We continue to execute on our strategic initiatives to fulfill the vision we outlined last February. The U.S. flywheel is accelerating and is evident through initiatives like our pending fintech JV acquisitions, the launch of a new data business and acceleration of last mile delivery. Sam’s growth and membership income has been strong throughout the year as we expand Omni options including club pickup. These and other key initiatives represent large revenue and profit opportunities over the next few years. For the full year, we had record sales of $568 billion with increased traffic to stores and clubs. While e-commerce penetration approached 13% Walmart U.S. grew sales by more than $23 billion and saw strong market share gains in food and consumables. Over the past two years, our U.S. segments have grown sales by $67 billion, or 17%, and operating income by 25%. Now let's discuss Q4 results. As a reminder, the previously announced international divestitures significantly affect year-over-year comparisons. So my comments today will exclude the effect of divestitures. Total constant currency revenue grew 7.9% to over $153 billion and reached another important milestone with quarterly net sales exceeding $150 billion. Consolidated gross margin rate increased 5 basis points with Walmart us gross margin rate increasing by healthy 54 basis points, reflecting primarily price management resulting from cost increases in mix along with benefits from a growing advertising business partially offset by higher supply chain costs. Supply chain costs were over $400 million higher than expected, but we expect some of those costs to abate overtime. International gross margin rates were lower due primarily to format mix. SG&A expenses deleveraged 19 basis points as increased us wage costs were partially offset by strong sales and lower COVID costs versus last year. Although COVID costs were lower than last year, we have significantly higher associate lead costs in the U.S. than anticipated. In the first three quarters combined. COVID lead costs were about $600 million but increased over $450 million just in Q4, presenting an unexpected headwind of over $300 million. Despite these expense challenges, adjusted operating income increased more than 6% and EPS increased more than 9%. We're in a great financial position, enabling us to allocate capital towards both growth and shareholder returns. Free cash flow was $11.1 billion for the year, down versus last year due primarily to inventory build throughout the year, higher CapEx and cost increases. We increased share repurchases significantly this year with buybacks of just under $10 billion, a pace we plan to continue or increase in the coming year given our view of the long-term value of the company. In addition, we announced the 49th consecutive annual dividend increase this morning. ROI increased 90 basis points to just under 15%, the best level in 5 years due primarily to growth in operating income. Now let's discuss the quarterly results for each segment. Walmart U.S. had its first ever $100 billion plus sales quarter with sales of $105 billion. Comp sales grew 5.6%, up more than 14% on a two-year stack. We continue to grow grocery market share as food comps increased high-single digits, while Health & Wellness, apparel, seasonal and automotive categories were also strong. Transactions were up more than 3% despite COVID pressures. E-commerce sales grew 1% against strong gains last year, resulting in a 70% two-year stack. We continue to see elevated levels of cost inflation and have taken prudent steps to manage pricing while having slightly wider price gaps than pre-pandemic. We have a good balance of growing market share while managing price with both customers and shareholders in mind. We continue to make strong progress in some of our newer higher margin initiatives. Walmart Connect advertising experienced robust sales growth this year with a strong pipeline of new advertisers and large growth opportunities ahead. In fact, the number of active advertisers using Walmart Connect grew more than 130% year-over-year. And about half of the ad sales came from automated channels in Q4, more than double last year. We expect Walmart Connect to continue to scale over the next few years with plans to become a top-10 ad business in the midterm. Growing eCommerce marketplace at WFS have been a priority over the past couple of years as we've invested to expand fulfillment capacity, introduce new services for sellers and double the number of items available for customers. In fact, we expect to have over 200 million items in our e-commerce assortment by the end of the year. The expansion of WFS has also been a key unlock in bringing more sellers to Walmart's marketplace. Customers increasingly want home delivery, and we had a six fold increase in delivery in the fourth quarter versus pre-pandemic levels. We continue expanding capabilities, including announcing the acceleration of in-home delivery to 30 million households by year-end. We also announced our new fintech business ONE in January, with the pending acquisitions of fintech platforms ONE Finance and Even. SG&A expenses deleveraged 95 basis points as increased wage costs were partially offset by strong sales and lower total COVID-related expenses year-over-year. Still, as I mentioned earlier, COVID leave costs were much higher than expected. Operating income grew slightly, aided by strong margins as well as solid growth in membership and other income. Inventory increased about 28% overall, including higher cost of goods due to inflation, mix and higher-than-normal in transit shipments, reflecting continued efforts to improve in-stock. International sales were strong, up nearly 10%, led by China, Mexico and Flipkart as seasonal events, omni growth and good inventory position contributed to results. eCommerce sales in constant currency grew 21% on top of strong gains last year with growth of more than 75% on a two-year stack. China comps increased nearly 20% in constant currency with continued strength from Sam's Clubs as well as more than 90% growth in e-commerce sales. Comp sales in Mexico increased nearly 8% and grew faster than the market according to ANTAD. Flipkart had another good sales quarter, aided by strong holiday events and favorable trends in monthly active customers and users. We're also pleased with the strong growth of PhonePe with TPV of more than 130% versus last year with a current run-rate of $650 billion. In Canada, comp sales were up 4.6%, led by in-store shopping and comps increased more than 13% on a two-year stack. International adjusted operating income in constant currency increased nearly 3%, reflecting lower COVID costs, partly offset by gross margin rate decrease related to higher sales penetration from Sam's China and eCommerce. For the full year, International adjusted operating income grew 12.7%. And we feel confident about our international business as we head into the New Year. Sam's Club had another impressive quarter with comps up 10.8%, excluding fuel and tobacco, an increase of nearly 26% on a two-year stack. Transactions increased 7% and ticket was up 3.2%. eCommerce sales grew 21%, and we expanded the rollout of delivery capabilities of digital orders to nearly all clubs during the quarter. Sam's is leveraging Walmart's GoLocal last mile delivery service to provide more convenience to members. Membership income was up more than 9% with another record in member counts and strong Plus penetration. Operating income was up 41% as higher fuel and membership income as well as strong expense leverage were partially offset by gross margin pressure from inflation and supply chain costs. Now let's turn to guidance. We feel very good about the underlying strength of the business and believe we can deliver full year growth in FY '23 that aligns with the growth algorithm we discussed last year. As you saw in Q4, we're still challenged with increased costs related to COVID and supply chain disruptions. Our guidance assumes that we will see some relief from that as the year progresses and that the U.S. consumer remains in a generally favorable economic position throughout the year. The comparisons against last year is unique, primarily due to the timing of international divestitures and U.S. stimulus in FY '22. As a reminder, the divestitures of our businesses in the UK and Japan were completed near the end of the first quarter last year, contributing about $5 billion in sales and about $0.07 of EPS in Q1, FY '22. Our guidance will be ex-divestitures. We expect total company sales to increase about 4% with Walmart U.S. comp sales slightly above 3% for the year. Given the timing of stimulus overlaps, we expect about a 1% to 2% comp sales increase from Walmart U.S. in the first quarter, followed by somewhat higher comp sales growth throughout the remainder of the year. We expect FY '23 total company operating income to increase at a rate slightly higher than sales growth and EPS to grow 5% to 6% versus FY '22 adjusted EPS due in part to our aggressive share repurchase program. The quarterly profit growth cadence is expected to be quite variable due to last year's U.S. stimulus as well as lapping wage investments initiated in February and September 2021. As you would expect, the variability of the quarters looks less extreme when viewed on a two-year stack. We expect Q1 operating income and EPS to be down low-double digits to low-teens as we cycle the stimulus effects from last year that resulted in nearly 30% operating income growth, as well as increased wages this year. On a two-year stack, Q1 operating income would still be up a mid-teens percentage. Q2 and Q3 operating income and EPS are expected to increase at low to mid-single digit rates as year-over-year comparisons ease due in part to the moderation of stimulus benefits last year. We expect higher growth rates in the back half of the year, as we fully cycle wage investments resulting in fourth quarter operating income and EPS increasing by a high-teens percentage. Q4 operating income will also benefit from some timing versus FY '22, particularly in international as well as cycling elevated COVID leave costs in FY '22. Our effective tax rate is expected to increase to 25% to 26% due primarily to earnings mix. For the year, we expect gross margin rates to increase due to pricing, mix and new business initiatives. Although there will be variability quarter-to-quarter as is usually the case. For the first time in a while, we expect some expense deleveraging as we continue to see elevated supply chain wage and tech costs. We'll continue the multiyear journey of accelerated capital investment focused on increasing fulfillment capacity, automation and technology to enhance productivity. FY '22 CapEx was about $13.1 billion, lower than anticipated due to timing of projects impacted by supply chain challenges. Due to that and continued investment in strategic priorities, we anticipate this year's CapEx being at the upper end of the guidance we gave last year of 2.5% to 3% of sales. In closing, I'm really pleased with our FY '22 results. I'm very confident as I look to this year and to the future. The company is in an enviable position to serve customers and members and also to achieve our financial goals, benefiting shareholders. Now we'd be happy to take your questions.

Steph Wissink :

Thank you. Good morning, everyone. I'd like to double-click on one of the comments you made in your remarks regarding elevated levels of inflation. And I think you signaled that you are seeing slightly wider price gaps versus pre-pandemic. Can you maybe give us some sense of how much inflation you're observing real time? How much those price gaps have widened and then what your expectations are for the quarters as the year progresses.

Operator:

Next question comes from the line of Bob Drbul with Guggenheim Securities.

Doug McMillon:

Bob, you got one and you want both. That doesn't surprise me. I'll start with the advertising number, and John can add here. The business model is changing. I think that's the headline. We've got a business that's becoming increasingly digital, the eCommerce business, first party, third party is growing. It gives us the opportunity to grow advertising income. It's grown at a fast rate, and it's growing across markets. The U.S. is important in that number. But India, Mexico and other markets are going to have growth there, too. And the margins are helpful. They help us keep prices low for customers and they help us deliver the operating income number percentage. So we're excited about what the future looks like as it relates to the growth of the advertising business. We're not going to share Walmart+ yet. I don't really want to have the company defined by one metric. And with subscriptions being such a topic these days. Everybody gets really focused on that. Walmart is always going to be a business where you need to look across and see how the omnichannel business is playing out. There are going to be times when eCommerce grows faster than stores. And as we've seen recently, stores are attractive during certain periods of time. Walmart+ is important. It helps us grow our eCommerce business. It helps us deepen the relationship with customers and have more data. And at some point, we'll probably talk about that number. And by the way, there are other types of memberships, not just in Sam's Club across the world, but in some of our other businesses too, that are growing. So I think there will probably be a number of membership type metrics over time that you'll want to keep an eye on. But I don't think it would be good if we're going to get overly focused on Walmart+. Our ability to serve people with pickup and delivery has improved as we've made these investments. It's one of the reasons why we continue to tell you how much capacity we're growing to do that.

Operator:

Thank you. Our next question is from the line of Karen Short with Barclays. Please proceed with your question.

Doug McMillon:

Thanks, Karen. I think the biggest sources of risk are external. It's been an unusual last year or two and figuring out how you lap stimulus, what happens with inflation, both on the cost of goods side as well as on the operating side will cause us to have to be good managers. But I think we've demonstrated over time that we have a lot of really good managers at Walmart. In terms of upside, I'm excited about what's happening in our stores and clubs. We've got great momentum in Sam's. There's a lot to be excited about in international. India continues to be really exciting. Walmex is kind of going from strength to strength Sam's business in China is good. So I think that Sam's International can contribute. And then the Walmart U.S. side, John, you can jump in here too. I think we've got an opportunity to continue to improve both stores and eCommerce. And the fact that we're now up to 170 million items for customers is exciting and the way sellers are responding to fulfillment and seller services. And that relationship is really encouraging. So I think marketplace is one of those areas where we can see growth, including that last mile component that we're building out. I think that's exciting too.

Operator:

The next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Brett Biggs :

Hey, Simeon. It's Brett. I'll kick off. I think a lot of what Doug and John just said is if there were -- if we get to the end of this year and we've done better than we've laid out for guidance, I think it's a lot of what they just talked about. Our new businesses that are higher margin continue to grow. Sales momentum continues. We assume, obviously this is going to continue with a 4% sales growth. That's a big number on top of what we've already done. So it could be sales driven, and it can continue to be margin driven as well as these new businesses develop as our general merchandize business gets stronger, which helps with mix. It's all of those things. And we always talked about there's so many levers that we can pull at different times when we need to. It's also all those levers that can actually play to our advantage in any given year at any given time. So I just feel good about the momentum of the business. I'm as -- I said this this morning, I'm as optimistic as I've ever been about the business and the shape of the business model. To answer Q4 specifically, there's a couple of things. There's some holiday timing in international. We also had some impacts of some impairments this quarter, some of that was adjusted out. But it's those things, but also the cost. When you look at the supply chain costs and the COVID costs in Q4, that's big change. And we do expect some abatement of costs over the year. When that happens how that happens, obviously is to be seen. But it’s those things that help that Quarter4 operating income.

Michael Lasser :

Good morning. Thanks a lot for taking my question. Your customer base looks a lot like the overall U.S. consumer. There is a lot of concern around the low to mid-income consumer. The outlook for that consumer this year, given the stimulus lap, the inflation and other uncertainties. How did you factor all of that in as you were planning the year ahead? You probably could have gotten away with guiding to something less than your algorithm excluding divestitures. So is there a risk that you have a recently bias where the business in January was good. And hopefully, this doesn't come across as snarky, but do you think you have more visibility into the macro than the investment community or others? There's just a lot of uncertainty out there right now.

John Furner :

Something that Doug said is really important about improvement. One of the most fun parts of working at Walmart is having such a large team just every day get up and try to be better than they've been and run a better business. And I've enjoyed that for almost 30 years. But one of the things that's really important in your question is, as we serve really all income groups across all geographies in the U.S. and last year, we saw growth amongst income groups and geographies. So I think that's a clear reflection of the number of choices that we offer customers. We offer customers experience through Walmart.com and e-commerce. We offer customers pickup experiences, we offer in-store and just about everything in between, including home delivery, which will expand to a significant number of households up to 30 million households this year. So I think our ability to serve all across is quite important going forward. And for the team this year, we'll be really focused on execution. I know Sam's would say exactly the same thing, but across the geographies and income, we're well represented. And we're going to fight really hard to deliver great execution for customers all across the year.

Operator:

Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

John Furner :

Good morning, Kate. This is John. Let me talk about Q4, and then I'll come back to the supply chain. I think in general, we were seeing really nice improvements in in-stock late in Q3, early Q4. We're happy with how the holiday season turned out, including the ability to deliver seasonal and hard lines across the quarter which you saw. A couple of strengths that really stood out were the apparel business and our Health & Wellness business were both strong throughout the quarter. Those resulted -- due to demand, those resulted in pretty decent sell throughs. And then in January, with the effects of Omicron we took a step back in in-store in-stock and the line. But what we're seeing right now is better flow through all across the supply chain. You heard the increase in inventory, a large reflection of what is inbound. So we see recovery is pretty quick. There are a couple of categories in the store that you'll see some out of stocks that are really national issues. And as far as the supply chain, we talked about it in Q3. There were some significant improvements in flow through at ports, changing lead times, getting containers moved into the country and that's all helped. But just a reminder, about two thirds of what we sell is manufactured or assembled here in the United States. And we see growth across those categories as well. So I think we’ll see much flow in the next few weeks and months and get us into a really good position as we lean into the first and second quarters.

Chuck Grom :

Hey, good morning. Congrats on a great year and hats off Brett on a wonderful career at Walmart. My question is on the consumer again. And I guess I'm curious if you're seeing any noticeable changes in spending patterns by income cohorts in light of inflation, a lap of the stimulus. You talked about January being the best on a two-year basis, but just wondering if you could unpack it a little bit by income level.

Doug McMillon:

He's not done yet.

John Furner :

But definitely he has made a nice impact. Chuck, a couple of things. We said a second ago, we do serve the country broadly, we see the ability to serve all income groups. And things like private brand versus brand, we don't really see this point. We see really strong demand. Private brand penetration is about flat. So at this point, we see really strong demand and the customer who's in good shape with a strong balance sheet. So we're optimistic that the inventory pull-throughs that we have done and have in transit will get us in great position to be able to serve customers as we get into this fiscal year.

Operator:

Thank you. Our next question comes from the line of Kelly Bania with BMO Capital Markets.

Doug McMillon:

Okay. Kelly, we all want to answer that. So the business model, the income statement is just changing shape. And I think that kind of the headlines are the company is becoming more digital. It is starting to become more automated and overtime will become even more automated. And when you look at the gross margin number, we can manage it. Now some of you like to watch gross margin as, I guess makes sense quarter-to-quarter. As Brett was reminding us yesterday, you can drive yourself crazy doing that. Gross margin overtime -- I mean, look at our track record. We can manage gross margin. Now then below gross margin, we've got productivity opportunities and technology, whether it's an app in a store for an associate on the sales floor or robotics in a distribution center creates an opportunity for productivity overtime. That is helpful. And then you get to these other businesses like the advertising business, the last mile delivery business, fulfillment services for eCommerce, the marketplace itself. And these are helpful businesses from a margin point of view. And as they become a larger percent of total, the shape of the income statement changes. And our confidence in that, not only in the U.S. but around the world in the markets we operate in is high. And so that's why you sense that confidence from us. Brett, do you want to go next?

John Furner :

And I'll just add a couple of things there. First, having digital relationships with customers is so important. More and more, we fulfill from stores to stores -- our stores but they also act as fulfillment centers, as we said earlier. So this ability to interact with customers digitally is important. Our workforce is becoming more digital. You got over a million associates who have a device in their hands from the minute they walk in until they leave, so that's saving them time. And then finally, I'll just reiterate what Doug mentioned is automation and supply chain and using automation to augment the things that our associates don't want to spend as much time doing so they can spend the time on the things that are value added, like in-stock and availability. And I'll just close by saying our optimism and improvements this year is we've got a lot of room to improve in in-stock and customer ability that we've seen over the last couple of years. We're really proud of the growth. We know we could have done a lot more had we had the inventory position at the right time and the right place. So I'm really optimistic that there is upside on the top line.

Operator:

Our next question comes from the line of Oliver Chen with Cowen & Company. Please proceed with your question.

Doug McMillon:

Oliver, you covered a lot there, and your voice was breaking up a bit. But we think we got it. On the future of shopping, it's really exciting. I mean there are so many things that we can imagine. One of our challenges is just setting priorities and not trying to do too much. But we've got, obviously, a great strength in stores, and I think that that's clear. The pickup business has been terrific in the U.S. for many years now. Delivery is growing around the world. This delivery that's happening that's unattended is exciting and this Walmart InHome business, which leads towards just keeping people in stock and they don't have to really think about buying the items they buy all the time and we then use that data to serve up impulse items will be part of that future. We do think that social commerce around the world and what happens with wearables and AR and mixed reality will be part of our future. And we're obviously thinking about that and working on that. And this key, as I mentioned in my remarks, of stitching it together whether it's fintech or health care. And John, you should jump in on future shopping, fintech and health care, too. The way you stitch that together so that one business becomes a default for the other is the magic of it. I mean if we can really become great from a financial services point of view, we can take out friction and cost for customers, make it more delightful to transact with us. Not even really think about transacting, John, as we've changed shopping experience as it relates to checkouts in the future as well as on our app and in other digital forms.

Operator:

Our next question is from the line of Ben Bienvenu with Stephens. Please proceed with your question.

John Furner :

Hey, Ben. It's John. Thanks for the question. On the rollback, this is all about making sure the customers see value. At a time when prices are rising in so many parts of the economy, being able to offer customer value and find inflation is what we do. It's what our merchants do. And that will continue. As I said earlier, the counter rollbacks today is up pretty significantly from the end of the third quarter and about to where it was at the end of the first quarter last year. So I'd say I was just -- I was in the store across the street early this morning, and we've got rollbacks in consumer electronics and parts of dry grocery. And those values really matter as customers become more concerned and they think more about inflationary pressures. So we'll continue to be an everyday low price retailer. That’s our platform. We want to offer great values with price gaps to deliver for shareholders as well each and every day that we operate. But we’ll make sure that customers see value in key categories as we get into this year.

Scot Ciccarelli :

Good morning, everyone. I guess a bit of a follow-up on that question. As you guys hold down prices despite higher procurement costs to drive price gaps, are you seeing any kind of competitive response? Or do you find you're almost competing against yourself because other companies just can't hold down prices the way you can?

John Furner :

It is -- I just refer to things that we said in the past. A merchant here has so many levers between mix in categories, what they feature on the home page this morning at the top of the home page is a section on rollbacks. They can change that, they can change modes, they can change features. There are just so many things that they can do to manage mix overtime that it puts our team into a good position to do this. We've got experienced people who know how to do this. And we have a number of associates here in the U.S. have worked in other markets where inflation is quite common, and that's really been helpful this last year to have that expertise inside the business.

Christopher Horvers :

Thanks. Good morning, everybody. I wanted to take a shot at some of the comp questions that have been asked prior. You talked about 1% and 2% in the U.S. in the first quarter, sort of 3% in 2Q and 3Q. That would suggest you accelerate roughly 4 in the fourth quarter. So I guess my question is you'll be going again sort of peak food-at-home inflation, some elevated SAP benefits. So I want to get into like sort of how you're thinking about getting there? Do you expect any deflation to occur expect share gains in grocery to accelerate as some of your customer base sort of seeks out more value? And then embedded in that, is that -- is there accelerated growth in general merchandize as you fill out the assortment and the fulfillment options?

Brett Biggs :

No, I'd say, Chris, as you can imagine, the quarterly phasing is more challenging than normal just given the comparisons that we're up against. But I think, as John said, there's a number of different things during the year that make us feel confident in the total year. And we've given you as good as we feel like we can today and where we think it will stack up for the quarters. But there's going to be some quarterly variability certainly during the year.

Doug McMillon:

Thanks again for your time and attention. I'd just summarize by saying it's great to have momentum in all three segments as we start this year. I think it's clear that we're changing to serve customers and members in the way that they want to be served and having stores and in eCommerce business, pick up, delivery, fulfillment centers and marketplace, all of those things are helpful as it relates to that. And the great thing about it is the way that we’re building these and designing them is that the company can grow earnings and grow the bottom line while we’re doing it. The business model changes and it enables the customer, a member to benefit and our business to benefit at the same time. So I’m excited about the short-term momentum and looking forward to the year. Thank you, all.

Dan Binder:

Thank you, Rob. Good morning and welcome to Walmart's third quarter fiscal 2022 earnings call. I'm joined by members of our executive team, including Doug McMillon, Walmart's President and CEO; Brett Biggs, Executive Vice President and Chief Financial Officer; John Furner, President and CEO of Walmart US; Judith McKenna, President and CEO of Walmart International; and Kath McLay, President and CEO of Sam's Club. In a few moments, Doug and Brett will provide an update on the business and discuss third 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-GAAP reconciliations on our website at stock.walmart.com. It's now my pleasure to turn the call over to Doug McMillon.

Brett Biggs:

Thanks, Doug. In the third quarter, momentum continued with strong sales and profit growth in each of our segments while continuing to accelerate our strategic priorities. We're off to a good start for the holiday season and in good position to continue delivering strong results. Despite the various macro and industry challenges, our inventory position is good. Stores and fulfillment centers are well-staffed and our price position remains strong. Customers should expect to find the items they want at great values, and we are ready to serve them however they want to shop. Our omni model is a substantial competitive advantage as shopping behaviors continue to evolve. Customers want choices in how they shop and our unique set of assets with a network of stores, expanding digital capabilities, robust distribution networks and innovative services very effectively serve their evolving needs. Walmart US comp sales grew 9.2%, including nearly 6% growth in transactions, with in-store shopping leading the way. E-commerce sales growth was up 8% in Q3 against strong sales gains last year, resulting in an 87% two-year stack. We continue to see strong market share gains in grocery this year as well as unit share gains on a two-year stack. Sam's Club had another outstanding quarter with comp sales growth, excluding fuel, of 15.5%, including more than 10% growth in transactions and 32% growth in e-commerce. Membership counts had another record high and renewal rates remained strong. International results were impressive, including e-commerce penetration of around 19% as omni services scale across key markets. For example, Canada has expanded online grocery pick up from stores nationwide, while in Mexico, customers' express delivery orders can be shipped via gig drivers in under 90 minutes from 120 stores. We continue to make good progress on accelerating the flywheel. We're seeing increased contributions from growth businesses such as advertising, e-commerce marketplace and Spark last mile delivery. Our delivery reach is expanding and our scale enables us to monetize this capability by offering same day services to other merchants through our Walmart Go Local's B2B initiative. Now let's discuss Q3 results. As a reminder, the previously announced international divestitures significantly affect year-over-year comparisons. So my comments today will focus on the underlying business, excluding the effect of divestitures. Also COVID costs remained elevated globally, although lower than last year in most markets. In addition, EPS includes a $0.67 negative effect from premiums paid for bond tenders, which allowed us to retire higher rate debt to reduce interest expense in future periods. Total constant currency revenue grew more than 10% to over $139 billion. Walmart US comp sales momentum remained strong; up 15.6% on a two-year stack, due in part to strong US consumer spending and some inflation. Strength in China, Mexico and India led to international sales growth of more than 10% in constant currency. Strong trends at Sam's Club continued with comp growth of nearly 31% on a two-year stack, excluding fuel and tobacco. Currency benefited sales by about $1.3 billion. Gross margin rate declined 51 basis points due primarily to increased supply chain costs and headwinds from fuel mix in the US segments as well as format mix shifts in International. However, total gross margin dollars grew 9.6%. SG&A expenses leveraged 13 basis points, reflecting strong sales and lower COVID costs, partially offset by increased wage investments in the US. As a result of these investments, we've seen a great response to our holiday hiring programs, with the addition of over 200,000 new store and supply chain associates. Operating income on a constant currency basis was up 6.3%, leading to adjusted EPS of $1.45. As anticipated, free cash flow for the year is about $8 billion lower than last year, primarily reflecting inventory increases and higher capex. We repurchased $2.2 billion of stock in Q3 and $7.4 billion year-to-date, up significantly from last year. I'm pleased with the improvements in ROI, even as we've made strategic investments, with reported ROI increasing 80 basis points to 14.5%, which is among the best level in four years. Now let's discuss the quarterly results for each segment. Walmart US had another good quarter, aided by strong consumer spending, stemming in part from government stimulus and inflation. Strong sales trends were led by grocery, health and wellness and apparel. Back to school categories also performed well, along with automotive and holiday decor. We're pleased with the strong momentum in the grocery business as our strong price positioning and omni offerings resonate with customers. Grocery sales were up nearly 10% as strong unit growth and low to mid single digit inflation benefited results. In fact, food sales grew $3.6 billion during Q3, which is the strongest quarterly growth in six quarters. We're continuing to enhance and scale our strategic growth businesses. Both national and local partners have shown strong interest in our new Walmart Go Local business, while the Spark Driver platform continues to expand nationally. Walmart Connect advertising sales have increased nearly 240% on a two-year stack, and in Q3, we launched a new demand side platform in partnership with the Trade Desk to expand offsite media offerings. We also added around 21 items to our e-commerce marketplace assortment during the quarter, significantly increased the number of items available for expedited delivery and saw continued strong growth in Walmart Fulfillment Services' penetration. Walmart US gross profit rate declined 12 basis points, reflecting increased supply chain costs. We're seeing inflationary cost pressures in some areas, and our merchants remain laser focused on taking the necessary steps to mitigate supply chain congestion while working with suppliers in monitoring price gaps to manage margins appropriately. Lower markdowns and increased contributions from advertising revenue have helped offset cost pressures. SG&A expenses deleveraged 20 basis points due primarily to investments and wages. But operating income was strong, up almost 6%. Inventory increased 11.5% in preparation for what we expect to be a strong holiday season. The steps taken to mitigate transit and port delays have positioned us well, including adding extra lead time to orders, chartering vessels for Walmart goods, rerouting deliveries to less congested ports and expanding overnight hours at key US ports. International had a great quarter, with double-digit sales growth, strong momentum in e-commerce across key markets and operating profit growth outpacing sales. E-commerce sales in constant currency grew 33% on top of strong gains last year, with growth in China, Flipkart and Mexico particularly strong. We've nearly doubled e-commerce sales in international over the past two years, and it's encouraging that our ecosystem is expanding and developing in areas such as digital advertising. China comps were quite strong in Q3, increasing 16.5% with continued strength from Sam's Club as well as more than 90% growth in e-commerce sales. During the mid-autumn festival, sales were terrific and we saw an acceleration in omni performance with nearly all hypermarkets setting online sales records during this event. Flipkart had another good quarter, with strong sales growth and favorable trends in monthly active customers and users. In anticipation of the holiday season, the team has doubled fulfillment capacity versus last year, with dozens of new fulfillment center locations, more than 1,000 last mile delivery hubs, and expanded relationships with Toronto partners to handle a large percentage of last mile deliveries. Comp sales in Mexico increased 6% and grew faster than the market according to ANTAD, with strong consumer spending on categories related to back to school and seasonal celebrations. Customer adoption of omni offerings continue to grow, and we're seeing a strong response to the launch of Walmart Fulfillment Services with one-fourth of Marketplace sales fulfilled through this network. In Canada, comp sales were up 6% and increased more than 13% on a two-year stack. Seasonal sales events were especially strong and omni sales continued to increase. Online grocery is now available in nearly all stores, and we've launched Express pickup within two hours in a couple of stores in Toronto. International operating income at constant currency increased 17.5%, reflecting strong sales and expense leverage. Sam's Club continued to deliver excellent results, with strong growth in sales, membership and profit. Membership income was up more than 11% as we achieved another record in member counts, strong renewal rates and increased Plus member penetration. Sam's operating income was up more than 10% as strong membership income and expense leverage more than offset gross margin pressure from supply chain costs, fuel and inflation. Now let's turn to guidance. We anticipate Q4 Walmart US comp sales, excluding fuel, increasing around 5%, resulting in over 6% gain for the full year. Annual adjusted EPS is expected to be around $6.40 for the year, representing 17% growth. We continue to make good progress on our capital investments, but we now anticipate the timing of some investments originally planned for this year will flow into next year. As a result, we expect full year capex to be around $13 billion versus our original guidance of $14 billion. In closing, I'm very encouraged by the Q3 results, and I'm optimistic about Q4. I continue to be very excited about the evolution of Walmart into a one of a kind omnichannel company. Thank you for your interest this morning. And we'd be happy to take your questions.

Michael Lasser:

Good morning. Thanks a lot for taking my question. When you laid out your algorithm of generating 4% top line growth and better than 4% operating income growth, inflation wasn't nearly as hot as it is today, particularly with respect to wage inflation. So looking out over the horizon over the next several quarters, how does the current environment impact Walmart's ability to sustain to generate this algorithm into next year, especially, Brett, as I think you just mentioned that some of the investments you were going to plan to make this year have been delayed into next year?

Michael Lasser:

Okay. And my follow-up is for Doug. Walmart built a lot of new capabilities in the last couple of years like growing digital ad business, the driver delivery network, My Membership program. These new muscles are driving significant growth, but they're coming off a relatively low base. So, does Walmart need to make any substantive changes culturally operationally and how it deals with stakeholders like consumers or vendors or influence the ability to further gain scale in these areas? Are they operating at the level that you would expect at this point?

Operator:

Thank you. Our next question is from the line of Steph Wissink with Jefferies. Please proceed with your question.

Doug McMillon:

This is Doug. I think for that answer, we need to get John, Judith and Kath to respond because the supply chain and hiring challenges are around the world. John, you want to kick it off?

Judith McKenna:

From a supply chain perspective for international, clearly each of our markets is in a slightly different position, but many of the actions that John described apply globally around the world. But I take something like Mexico. That market is about 93% domestically sourced. So those pressures are slightly different depending on the category. We spent the last couple of years expanding some of our supply chain capabilities and that's really stood us in good stead. And then, you've seen us ramping up our hiring in places like Canada pre the holiday season as well as quite normal for us, and we've had no issues with being able to do that. We're doing some good work tugging on some of the chartering of the vessels that the US is doing, and I think this is where our scale and capabilities really come in to play. And from an inventory perspective, we're up about 10% year-on-year but that's ex divestitures. Actually -- sorry, that's inc divestitures. Ex divestitures, it's even higher than that. And for the first time, I'll tell you that's a good thing because it actually positions us well as we're going into the peak of the holiday season.

Operator:

Thank you. Our next question is from the line of Karen Short with Barclays. Please proceed with your question.

Brett Biggs:

Yeah. Karen, this is Brett. But I think -- I think probably you answer your question a little bit as there are puts and takes as we look at the quarter as there has been for the last eight or nine quarters and there is really for every quarter. And as we look at all the potential things that we see in the supply chain, as we see in the labor market, as we see in pricing, the EPS guidance that we gave is kind of an amalgamation of all of those things.