Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Transcript 2022-Q1

[Pilar de la Garza, executive]

Good afternoon. This is Pilar de la Garza, Head of Investor Relations for Walmex. Thank you for joining us today to review the results for the first quarter 2022.

Today with me is Guilherme Loureiro, President and Chief Executive Officer of Wal-Mart de México Central America; and Paulo Garcia, our Chief Financial Officer. The date of this webcast is April 26, 2022. Today's webcast is being recorded and will be available at www.walmex.mx.

Before we start, let me remind you that the content of this webcast is property of Wal-Mart de México S.A.B. de C.V. and is intended for the use of the company's shareholders and investment community. It should not be reproduced in any way. This webcast may contain certain references concerning Wal-Mart de México S.A.B. de C.V. future performance that should be considered as good faith estimates made by the company. These references only reflect management's expectations and are based upon currently available data. Actual results are always subject to future events, risks and uncertainties, which could materially impact the company's actual performance.

Now it's my pleasure to turn the call over to our CEO, Gui Loureiro.

[Guilherme Loureiro, executive]

Good afternoon, and thank you for joining us today to review our results for the first quarter 2022. We are encouraged by the progress we made across the business on implementation of our long-term strategy. Customer experience scores continue to improve as we help farmers save time and money by lowering price amid the high inflation environment we are experiencing and as we deliver a seamless and enjoyable omnichannel shopping experience. We are serving customers, regardless of how they want to shop, sometimes at our stores and sometimes through our e-commerce platforms. We keep innovating and executing to get better at both.

We are focused on 2 strategic priorities: to win in discount, to lead the omnichannel, and to become the ecosystem of choice. And throughout the quarter, we made progress on these 3 fronts.

I will start by covering sales performance, and then Paulo will cover the financial highlights of the quarter. Please keep in mind that when I talk about Central America, I'm referring to figures in a constant currency basis.

During the quarter, we delivered double-digit total revenue growth. Consolidated revenue grew 10%, 10.2% in Mexico and 10.8% in Central America. Our long-term strategy is a growth one. Revenue growth has accelerated sequentially quarter after quarter in the last 4 quarters.

On first quarter 2022, we reached a 23.8% 3-year stacked consolidated revenue growth, demonstrating the consistency of our results.

Now let's look at sales performance in Mexico. Bodega's our main vehicle to serve the most price-sensitive customers and to win in discount. Throughout the quarter, we worked on simplifying execution and communication for our merchandising guidelines. Additionally, we continue to provide great value for customers through lower price and by reinforcing our private-brand offerings, which experienced a sales penetration increase of 60 basis points versus first quarter last year.

Seasonal events such as Valentine's Day and Super Bowl were well-received by our customers, and we drove double-digit sales growth. It is amazing to see Bodega's reach during this type of events. As an example, on the Super Bowl weekend, we sold 4 million beers and almost 700,000 snacks. Sam's Club delivered the second highest comp growth among our formats. We're driving strong volumes by focusing on great, high-quality items at disruptive prices, including Member's Mark, which experienced a sales penetration increase of 230 basis points versus first quarter last year.

We're offering Plus members an even more convenient omnichannel shopping experience since we started offering free delivery on orders MXN 1,499 and up. Members are really appreciating the value we are offering through the membership. During the quarter, Plus members represent almost 40% of membership sign-ups and renewals. This is very good for Sam's, given that Plus members ticket is 2x higher than Advantage members ticket, and their shopping frequency is 1.4x higher.

Walmart Supercenter also delivered strong growth. During March, we launched a new product called Omnichannel Merchants to support our on-demand operation. They are approaching customers at stores to convince them to try our services and invite them to join Walmart Pass. The omnichannel NPS of the format increased by almost 900 basis points versus first quarter last year. We are serving customers how, when and where they want to be served, and they are appreciating our efforts.

We are making progress with Walmart Express. So far, we have converted 86 stores. And in the coming months, we will convert the remaining 13 Superama stores. We see that stores that were converted in Walmart Express during the first half of last year are showing positive trend and even surpassing the level of sales they had before the conversion, which is encouraging.

We finalized a catalog reengineering analysis and adjusted our offering, so customers can find the merchandise they are looking for at great prices. Top categories that went through the reengineering are growing over 1,300 basis points more when compared to the growth rate before the process. One of the features customers appreciate most about the new format is the seamless and fast shopping experience. Pickup share of total online orders increased by 850 basis points versus last year, and over 35% of store transactions are going through the self-service checkouts.

In terms of regions, the South and North regions posted the highest same-store sales growth, while the Metro area delivered lower yet solid growth. In terms of merchandise divisions, our core division, food and consumables, delivered double-digit growth.

During March, we launched an initiative called Los básicos de tu canasta to continue to support our most price-sensitive customers by providing access to quality items at exceptional price amid the high inflation period we are going through. We are offering a basket of more than 50 food and personal care products, leveraging opening price points and private brands with disruptive prices.

General merchandise performance was driven by growth in categories such as home and small appliances, while performance in electronics was softer, impacted mainly by TVs and computers. We are seeing a lower demand, given last year and in 2020, computer demand was unusually high due to remote school and work. And we also experienced delays in inventory shortage due to the global supply chain disruptions. We are working to improve our customer shopping experience and to deliver what they ask for.

Apparel sales were impacted by the Easter week flip, primarily on our self-service formats. At Sam's Club, where we focus on basic apparel, all subdivisions, men, women and kids' apparel, delivered solid growth.

A customer-centric mindset is a key enabler of our strategy. We implemented a new tool for off-line surveys in over 1,200 stores to gather more customer feedback and have an even more accurate NPS measurement. This new tool will help us to serve our customers the way they want to be served.

Another one of our strategic priorities is to lead in omnichannel. During the quarter, we continued to make progress with on-demand and to accelerate the extended assortment. Regarding on-demand, we expanded capacity by enabling the service in 70 more Bodegas, and we started offering the on-demand services for the first time in Mi Bodega. We are getting to know our Mi Bodega omnichannel customers better and fine-tuning the operating model to serve them the way they want to be served.

We also worked on improving the shopping experience. We increased the staffing at stores. We reinforced the customer journey by focus on perishables, and we made several updates to our digital platforms to ensure a better inventory management and thus, improved availability. We are now offering on-demand at almost 300 Bodegas. We are providing a low-cost omnichannel solution for our customers, and they are appreciating it. During the quarter, Despensa a tu Casa grew almost 300% versus last year. By combining operating and digital enhancements, omnichannel NPS in Bodega increased 760 basis points versus first quarter last year. We started leveraging the 250 Walmart Supercenter and Walmart Express stores, enabled with the crowd sourcing model, to offer a fast 60-minute delivery. With this service, we are helping our customers to save money and time, which is very well appreciated, especially in busy urban areas.

We continue to make progress with Walmart Pass. During the quarter, Walmart Pass members orders accounted for 30% of Walmart and Walmart Express on-demand sales, and members purchasing frequency almost doubled versus nonmembers. During first quarter '22, on-demand's NPS increased plus 980 basis points versus first quarter '21, driven by record on time, in full and perfect order levels. Among the actions that helped us achieve these results were a customer journey analysis, work on capabilities to improve planning and staffing and new productivity initiatives for pickers.

We're also moving fast on extended assortment. We continue to add more items and new categories to our offering to reach more customers. The number of sellers on our marketplace increased by almost 30% versus quarter 4 '21. And we added new virtual stores such as Samsung, Baby Creysi, Black & Decker and Super Gamer. Currently, we have more than 135 virtual stores of brands our customers look for and love.

Technology is a key enabler for extended assortment operations. During the quarter, we automated and standardized the marketplace's payment process, which is allowing us to have a higher accuracy and efficiency. Additionally, we released a new classification model that will simplify product search and improve user experience. Initial results are encouraging. Conversion increased around 8% since the implementation.

All in, our e-commerce business continues to experience strong growth. For the first quarter 2022, e-commerce net sales grew 19%; and GMV, 24%. On a 2-year stack basis, GMV grew for the first quarter was 216%. E-commerce represented 4.6% of Mexico sales and contributed 0.8% to total sales growth.

Another one of our strategic priorities is to become the ecosystem of choice. Our strong core business is the base for omnichannel, and omnichannel is the base of our ecosystem. I will start with our progress on Cashi, our digital wallet. We continue to add features to deliver even more value through the product. We revamped the app to offer a fresher look and a better user experience. We enabled Cashi as an online payment method in our e-commerce websites, so customers that don't have a credit or debit card can use the digital wallet to make their online purchase. This new feature will help us to accelerate omnichannel sales even more.

We also made progress with the online credit marketplace we are building through Cashi. We're offering credit, through a third party, now in more than 100 stores. Customers are really appreciating this new service. Scoring is made in 5 minutes. And in less than 15 minutes, funds are disbursed via Cashi so customers can purchase items they need and want with a simple and low-cost credit product. This will help support further growth in general merchandise.

Now let's talk about BAIT, our MVNO. I am encouraged by the speed in which BAIT is growing. Besides leveraging our more than 2,700 stores and the 5 million customers that shop with us every day, we are also acquiring BAIT users through other channels, such as subway stations or specialized electronics and mobile phone stores. During the quarter, over 940,000 users joined BAIT, which represent a 40% growth when compared to quarter 4 last year. 3.3 million users are enjoying a mobile phone service that is 3x cheaper than what competitors offer.

Additionally, customers are getting free megabytes every time they shop at our stores, a good example of how the new verticals we are creating solve the customer pain points and reinforce our core business.

We are also making great progress with Walmart Connect, our advertising business. We are helping advertisers connect meaningfully with customers by leveraging data, which allowed us to increase the number of campaigns by 36% during the quarter.

We are delivering good results for our clients, and they are trusting us with higher investments. We saw an increase on the average investment per campaign of almost 60%.

Now let's look at our sales performance versus the market. After 8 years growing faster than the self-service and clubs market measured by ANTAD, in first quarter '22, they grew faster than us. Of course, we are not satisfied, and we are further enhancing our commercial offering to recover our growth leadership. High inflation impacts our customers, especially the most price-sensitive ones. So we are now working very closely with our suppliers to continue reinforcing our price position.

There are several actions we are taking to keep our low-price value proposition such as Los básicos de tu canasta initiative, which resulted in 160 basis points increase in our price gap during the quarter versus first quarter last year. Our goal is to reduce the impact inflation has on our customer budgets. This may affect growth versus the market in the very short term. But over time, it will strengthen the trust customers have for us, which will translate into better results for the company. We are already seeing this effect in Bodega and Sam's Club, and we expect the same to happen in Walmart and Walmart Express.

Now let's talk about Central America. Same-store sales growth was broad-based across all countries. El Salvador delivered the highest growth, followed by Nicaragua and Honduras. Costa Rica and Guatemala also posted solid growth. We continue with the implementation of our biformato strategy, which aims to further reinforce our Bodega and discount formats. We're focusing on basic items, on aggressive opening price points and on increasing our price gap versus competitors.

Private brands play a key role on our catalog as they allow us to offer great quality for our customers at the lowest price while creating loyalty. During the quarter, private brand sales grew 2x faster than the rest of the business, and sales penetration increased by 140 basis points. Global headwinds such as inflation and supply chain disruptions are no exceptions for the region, presenting risks on availability and on our customers' purchasing power. We have been able to manage through it by improving our price gap and guaranteeing proper in stock at our stores, so customers can find what they need and enjoy their shopping experience.

Let's move to new store growth. During the quarter, we opened 11 new stores, 9 in Mexico and 2 in Central America. New stores contribution to consolidated total sales growth was 1.2% during the quarter. During the last 12 months, we opened 118 new stores and added almost 120,000 square meters to our sales floor, which implies a 2% growth on our installed capacity. We continue to see plenty of opportunity to take our low-price value proposition to more families in Mexico and Central America and help them live better.

Our strategy translates into shared value creation for all stakeholders, and we are on our path to become a regenerative company. I would like to share with you the main highlights in this aspect.

For the fifth consecutive year, we are part of the Bloomberg Gender Equality Index 2022. Currently, 53% of our associates are women. Thanks to our commitment to the economic, environmental and social development of the country, we ranked #1 in the self-service and department stores sector in Merco's Responsibilidad ESG ranking. We were also considered the best retailer and the best omnichannel retailer in Mexico by America Retail's Retail Hall of Fame Mexico 2021.

In closing, I'd like to thank our associates for their great efforts and contribution. They are managing the short term through these still challenging times while building for the long term. We are transforming our business to serve customers how they want to be served and positioning our company to continue to win in the future.

Now I will turn it over to Paulo, who will cover the financial results of the quarter.

[Paulo Garcia, executive]

Thanks, Gui, and good afternoon, everyone. Thank you for joining us today to review our results for the first quarter 2022. Let's look at Mexico's results first.

As we heard from Gui, total revenue grew double digit, driven by a 9% same-store sales growth. E-commerce contributed 0.8% to total growth. Gross margin expanded by 20 basis points, whilst increasing our price gap by 160 basis points. Price investments were offset by margin-driving categories, such as health and beauty and apparel and by Walmart Connect.

SG&A grew 14.7%, driven by investments in strategic areas of our business, such as talent, e-commerce and technology. We will review the SG&A breakdown in just a moment. Considering these results, operating income grew 6%, and EBITDA margin contracted by 40 bps to 11.3%, yet maintaining best-in-class levels.

Let's look at the SG&A breakdown. Our strategy is a growth strategy, and we are going through an investment phase to further accelerate growth. By managing expenses with discipline, improving our units per labor hour indicator and fostering an everyday low-cost mindset, we are able to leverage base operating expenses by 13 basis points. In parallel, we invested behind strategic priorities and enablers such as talent, e-commerce and technology.

During the quarter, the main area of investment was talent. We want Walmart to continue to be that place where our associates can be themselves, where they can learn, grow and have fun. To achieve this, we will continue to implement the Associate's Value Proposition, which, among other elements, considers investing in salaries.

We are making relevant investments to offer competitive compensation plans for our associates. This has translated into higher engagement and a 30 percentage points reduction in turnover rates from 2019 to date.

On the last 12 months, we have adjusted salary bands for almost half of our field associates, and we had a carryover effect from the investments we made last year on critical positions nationwide, in border state stores, in tourist areas and key cities. We are moving from a brick-and-mortar business to omni-driven ecosystem. And the P&L for our business is evolving.

Each one of the new businesses we are creating has a different P&L. And each one of them is at a different stage of maturity. We will be disciplined through this transition in order to maintain our best-in-class returns.

Now let's review Central America results. Please consider that when I talk about Central America, I will refer to figures on a constant currency basis. Total revenues increased 10.8%, driven by a 9.7% same-store sales growth. It is encouraging to see all countries delivering positive sales growth again.

The Bodega and discount formats are growing strong and continue to be an area of focus for us. We are making adjustments to this commercial offering and investing to widen our price gap, which led to a 20 basis point gross profit contraction. We are also focused on simplifying our business and driving productivity. As a result, expenses grew 9.4%, below total revenue growth, leading to 20 bps expense leverage. We are focusing on cost efficiency in areas such as energy and water consumption; on digitalization, by introducing new tools and redesigning reports; on merchandise flow, with focus on backrooms; and on labor productivity, by simplifying processes, training and by improving our staffing forecasts.

With the above-mentioned results, operating income grew 12.9% and EBITDA margin was 9.9%. All in, consolidated revenue increased 10%. New stores contributed 1.2% to total growth. Gross profit margin expanded by 10 bps to 23.4%, and SG&A grew 13.2%.

Operating income grew at a healthy 6.7%, and EBITDA margin stood at 11%. Consolidated net income grew 10.3%, 30 bps ahead of total revenues growth.

Now moving to the balance sheet. Cash position increased 17.4%, reaching MXN 35 billion. Inventories grew 20.3%, driven by the Easter week flip. And given that we decided to have a larger assortment for spring vacations, as this year, the pandemic restrictions were lower. Additionally, certain categories like staples, sports, TVs, audio and video normalized their inventory levels, which were particularly low in 2021 due to the pandemic.

In the last 12 months, we were able to generate MXN 75.3 billion in cash, and our working capital required MXN 5.6 billion due to the increase in inventories I just mentioned. This allowed us to return MXN 28.2 billion in dividends and invest MXN 20.5 billion in high-return projects aligned with our growth strategy. We paid MXN 14.5 billion in taxes and ended the quarter with a cash position of MXN 35 billion, which represents a 17.4% increase versus 2021.

In closing, I would like to emphasize the key messages of the quarter. Number one, we delivered solid results with double-digit growth in both regions and healthy operating income growth of 6.7%.

Number two, we are making progress on our implementation of our long-term strategy. We are accelerating Bodega's growth to win in discount. GMV is growing strong to lead in omnichannel, and we are moving fast with the construction of our verticals to become the ecosystem of choice.

Number three, we will continue to invest behind growth, quickly recovering our growth gap versus the market, whilst managing expenses with discipline and driving productivity.

Thanks again for your interest in our company. As always, we will make ourselves available to answer the questions you may have.