Walmart delivered a strong Q3 sales performance, setting it up for the holiday trading period. We look at the factors driving its results and expectations going forward.
Walmart's Q3 key numbers
- Walmart's total revenue in Q3 increased by 8.7% to $152.8 bn, representing an additional $12.3 bn year-on-year
- Sales in its US stores increased by 8.5%, with Sam’s Club up 12.8%
- US ecommerce sales increased 16%, up 24% on a two-year stacked basis
- US comp store sales increased by 8.2%, with ticket up 6.0% and transactions up 2.1%
- Sam’s Club comp sales (ex-fuel) were up 10.0%
- International net sales increased 7.1%
- Consolidated gross profit rate declined 89 basis points
- Adjusted operating income increased by 4.6% to $6.1 bn
Our view: new operating model provides resilience
This was a solid performance from Walmart during an uncertain period. With inflation remaining high, consumers continue to adjust their shopping behaviours. This quarter signals that Walmart is benefitting from this. But the inventory hangover from earlier in the year remains a problem, although a much smaller one. The retailer is taking action to be in a great position for next year, however markdown activity along with the shifting product mix from general merchandise to grocery and consumables impacted gross margins. On the flip side, Walmart’s low-cost credentials are also being brought to the fore, with the business taking a prudent approach with expenses. Along with the solid growth in membership and alternative income streams, this is helping it to navigate the challenges on profitability. Not every retailer has this in its back pocket.
Where’s Walmart making progress?
- Driving sales growth through enhanced value proposition
- Continuing to reduce inventory levels and set the business up for 2023
- Advancing several of its new revenue streams
Walmart the value leader
Given its heritage as one of the most prominent EDLP retailers globally, it’s no surprise that the retailer is seeing increased traffic levels across its stores and ecommerce platforms. Walmart is positioned to gain greater trip frequency during tougher economic trading periods. US food sales grew in the mid-teens, with it seeing repeat business from customers who are shopping with it more frequently, including higher income households. Almost three quarters of its grocery market share gain in the quarter came from households exceeding $100,000 in annual income.
Actions being taken on value
But, inflation remains high (mid-teens percentage), increasing 80 basis points versus Q2. Walmart has seen customers trade down in proteins, baking goods, baby, and dog food. It is working with its suppliers to reduce product costs and minimise inflation impacts. In the US, this includes initiatives to remove inflation from the Thanksgiving meal, while in Mexico it has widened price gaps in its Bodega format by 100 basis points.
International sales increased 13.3% on a constant currency basis, with ecommerce sales surging 46% in the quarter. The earlier timing of Flipkart's ‘Big Billion Days’ event contributed to this, helping to increase international ecommerce penetration to 20%. Each of its major markets delivered positive comp sales, led by Walmex. Comp sales were up 11.7% at Walmex, 6.9% in China and 5.5% in Canada.
Globally, inventory was up 13% in the quarter, with inflation driving most of the increase. The retailer is also cycling last year when inventories were low, which should lead to a better in-stock position this holiday season. At Sam’s Club, inventory is up 36%, but it has been chasing inventory for over two years having delivered 11 consecutive quarters of double-digit comp growth. However, Walmart continues to deal with excess general merchandise inventory from the start of the year, with its buyers taking an item-by-item approach to match demand. The retailer estimates the remaining excess at around $1 bn.
Scaling new businesses
Walmart is aggressively growing several of its new revenue streams. Digital media, through Walmart Connect in the US, Mexico and Canada, and Flipkart Ads in India, will transform into a meaningful business. During the quarter, digital advertising increased 30% globally, led by 40% growth in Walmart Connect in the US and Flipkart Ads in India.
The retailer also continues to grow its ecommerce Marketplace business, including fulfilment, with a new launch in Canada. In the US, the Marketplace on Walmart.com offers around 370m items, an increase of 50% versus Q2. Sellers are making greater use of the retailer’s fulfilment services and leveraging its advertising capabilities to drive demand. There are strong synergies between these two new businesses.
Expectations for the golden quarter
The retailer expects net sales growth of 3.0%, with US comp sales (ex-fuel) increasing by the same amount. Food and consumables growth is expected to outpace general merchandise. This should help it deliver growth of 5.5% for the year. It expects year-over-year operating income within a range of a +1% to -1%. This guidance provides Walmart with flexibility to be more promotional, take further pricing actions to reduce excess inventory and manage margin pressure due to the changing product mix.
Sticky dry grocery pricing
It is maintaining a cautious view, assuming that consumer spending could slow, especially in general merchandise categories. The retailer also expects pricing in dry grocery and consumables to be stickier, given the increase in manufacturing wage rates. It will look to partner with its suppliers in this part of the store to develop more creative solutions to relieve pricing pressures for shoppers.
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