Wal Mart de Mexico SAB de CV

BMV:WALMEX

Earnings Call Analysis

Strong Revenue Growth and Strategic Expansions

In the second quarter of 2024, total revenue increased by 6.4%, with a notable 7.1% growth in Mexico and 3.2% in Central America. New store openings contributed 1.7% to the growth, exceeding prior guidance. Gross margin improved by 80 basis points, reaching 24.1%, while SG&A expenses rose by 14.7%. Operating income grew by 6.8%, and EBITDA margin expanded to 10.4%. The company continues to focus on automation, digitalization, and simplification to drive efficiency and customer satisfaction. Significant investments were made in new stores, digital initiatives, and customer engagement programs, including Walmart Connect and Walmart Luminate, which aim to enhance customer and supplier relations.

Revenue Growth and Market Performance

In the second quarter of 2024, the company reported a 6.4% increase in total revenue, driven by factors such as a 5.5% growth in same-store sales in Mexico and a 2.6% growth in Central America. New store openings contributed 1.7% to the total revenue growth, surpassing the previously provided guidance of 1.4% to 1.6%. Overall, the company's revenue growth outpaced the market, increasing by 200 basis points more than ANTAD's self-service same-store sales growth.

Gross Margin and SG&A

The gross margin expanded by 80 basis points to 24.1%, supported by improved commercial margins in both brick-and-mortar and eCommerce. Contributions from new business initiatives such as Walmart Connect, Bait, and Financial Services, along with supply chain benefits, played a significant role. SG&A expenses grew by 14.7%, influenced by increased labor costs, remodels, and utilities, only partially offset by operational efficiencies.

Operating Income and EBITDA

Operating income rose by 6.8% year-over-year, achieving a 7.9% operating income margin. EBITDA margin also saw a modest increase of 20 basis points, reaching 10.4%. For the first half of 2024, the company posted a robust set of results with an 8.1% growth in consolidated revenue and a 9% growth in EBITDA, highlighting the company's strong operational performance.

E-commerce and Digital Initiatives

E-commerce continued to be a significant growth driver, with GMV growing by 19%, bolstered by strong performance in on-demand and marketplace services. The company launched two new digital initiatives: Walmart Luminate, which will enable better understanding of customer needs and strengthen supplier relationships, and the Digital Connection Program, aimed at increasing customer loyalty through personalized shopping experiences.

Financial Position

The company maintains a strong financial position, with cash increasing by 7.7% compared to the second quarter of 2023. Inventories grew by 13.1%, exceeding sales growth due to seasonal preparations. Accounts payable also saw a significant increase of 16.1% year-over-year. The company generated MXN 89.1 billion in cash over the past 12 months, returning MXN 33.4 billion to shareholders and investing MXN 31.5 billion in high-return projects.

Central America Performance

In Central America, total revenue increased by 3.2%, driven by a 2.6% same-store sales growth. However, growth was softer in Costa Rica due to deflation. The region's gross margin improved by 10 basis points to 24.3%, but SG&A expenses increased by 60 basis points. Overall, Central America posted a 5.9% increase in total revenue and a 7.4% growth in EBITDA in the first half of the year.

Strategic Initiatives and ESG Commitment

The company continues to invest in strategic growth priorities, including new store openings, technology, and eCommerce. During the quarter, 25 new stores were opened, contributing to the company's aggressive expansion plan of opening over 1,000 stores in the next five years. The company's commitment to ESG principles is evident in its efforts to support local businesses and sustainability initiatives, earning top recognition in Mundo Ejecutivo's ranking of the most sustainable companies in Mexico.

Customer-Centric Focus

The company emphasized its focus on automation, digitalization, and simplification to enhance customer experiences. Initiatives like improved bakery quality in Premium clusters and seasonal events such as the French Fair and Hot Sale reflect efforts to cater to customer preferences. The company also highlighted the positive evolution of Walmart Pass, which saw a 33% increase in membership, driving higher purchase frequency and larger basket sizes.

Earnings Call Transcript 2024-Q2

[Salvador Villaseñor, executive]

Good afternoon. This is Salvador Villaseñor, in charge of Investor Relations at Walmex. Thank you for joining us today to review the results for the second quarter of 2024. Today with me is Ignacio Caride, President and Chief Executive Officer of Wal-Mart de México y Centroamérica; Raúl Quintana, our Chief Omnichannel Operating Officer; and Paulo Garcia, our Chief Financial Officer. The date of this webcast is July 24, 2024. 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 the 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.'s 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 is my pleasure to turn the call over to our CEO, Ignacio Caride.

[Ignacio Caride, executive]

Thanks, Salvador, and good afternoon, everyone. Thank you for joining us to hear about our second quarter 2024 results and progress of our long-term strategy. This will be my first time sharing with all of you our quarterly results. And as we always do, I want to start by thanking all of our associates for their efforts and commitment as these results would not be possible without their contribution.

It has been over two months since my appointment as CEO. And while our business strategy remains, we have identified three key factors that will make us move even faster in achieving our goals: automation, digitalization and simplification.

First, automation, which is not just a trend, it's a necessity. When we say that we are a technology-powered company, we reiterate our commitment to incorporating more and better tools to strengthen our leadership. Automation allow us to optimize processes, reduce errors and free up time to focus on what's most important: our customers, members, suppliers and associates.

Secondly, digitalization, which is our great ally. By digitalizing our processes, we connect more efficiently with our customers, better understanding their needs and expectations. This allow us to offer personalized and relevant experiences, strengthening our relationship with each of them.

And finally, simplification. Complexity is the enemy of efficiency. Simplifying our internal and external processes not only makes our operations smoother, but also the experience of our customers, partners, suppliers and associates. Our deep-rooted culture is crucial to continue to serve our customers the way they want to be served. We continue to offer low and affordable prices as we know customers prioritize value, access and affordability.

In the second quarter, we delivered a 6.4% total revenue growth, impacted by the Easter flip, with operating income 6.8% and an EBITDA growth of 7.7%. This quarter, we outpaced ANTAD's self-service same-store sales growth by 200 basis points, maintaining our momentum. Continuous investments in price gap and more recent price perception efforts, which increased 120 basis points in the quarter, along with a customer value proposition that is constantly evolving, are behind these results versus the industry. I will give more detail about our sales results in a minute.

During the second quarter of the year, our eCommerce GMV grew 19%, driven by on-demand and marketplace, allowing us to continue leading in omnichannel. Overall, we continue progressing across all of our verticals to continue strengthening our ecosystem.

This quarter, we launched two new initiatives announced on Walmex Day related to the knowledge of our customers: our Digital Connection Program and Walmart Luminate. Raúl will further explain later on. But let me just mention that the first one is key to continue increasing loyalty and stickiness by expanding our customer behavior knowledge and creating a stronger connection with them by offering tailored experiences, customized marketing efforts and helping them to have a better decision-making process.

The second one, Walmart Luminate, work as a collaborative tool for our suppliers, which will help us take all that knowledge from customers, make it available for suppliers and allowing them to make stronger decisions on their advertising strategies. As we said in our Walmex Day, when suppliers and merchants have access to the same robust omni-data, great things happen. So let's review our performance during the second quarter of 2024.

Please consider when I am talking about results in Central America, I am referring to figures on a constant currency basis. During the quarter, consolidated revenue grew 6.4%. Mexico and Central America delivered a 7.1% and 3.2% growth, respectively. Q2 results should be seen in context of Q1 due to the calendar effect and phasing of government subsidies in Mexico. Overall, H1, we posted very solid consolidated results with growth of 8.1%, with Mexico posting 9.1% and CAM 5.9%, and profit increasing faster than sales. Paulo will go through the financials later on his presentation.

Now let's review sales performance in Mexico. During the quarter, same-store sales grew 5.5%, out of which 3.7% came from increase in ticket and 1.8% from traffic. Our multi-format operation allow us to serve customers across different demographics and shopping occasions.

For the first time since the format conversion, we have Walmart Express as the leading same-store sales growth format. The efforts and investment that we shared with you since last year regarding fresh quality, look and feel and assortment are paying off. We continue to see health growth rates among all of our formats, and we are glad to see all our formats outpacing ANTAD's self-service same-store sales.

In terms of regions, growth was broad-based across all of them, with North delivering slightly lower yet solid growth when compared to other three regions. Regarding merchandise divisions, growth was driven by general merchandise and food and consumables, the format aided by Hot Sale. As in recent quarters, all of our merchandise division posted positive growth year-over-year. Raúl will expand on the operational highlights later in his presentation.

Now let's look at our performance compared market. As I mentioned earlier, this quarter, we grew ahead of self-service and clubs market measured by ANTAD by 200 basis points, maintaining momentum. We are very glad to see a strong positive trend since customers continue appreciating our value position and rewarding us with their loyalty.

Efforts in price perception, like communication through media, strengthening our brand and focus in key value items, along with our price gap and other levers, are key variables to ensure our customers recognize the previous efforts and investment made to expanded price gap. We will continue to listen to our customers to come up with new and better ways to serve them as there are still things we can improve to continue growing faster than our competitors.

Now I will pass the word to Raúl, for him to go through the operational highlights, and afterwards, I will return to comment on Central America, store opening and ESG.

[Raul Quintana, executive]

Thank you, Ignacio, and hello, everyone. I'm glad to be sharing with you our key operational highlights for the first time. Let me go through some of them.

We continue focused on our core business, to Win in Discount, and offer value to the customers that visit us every day through our different channels to help them save money and live better. Price perception remains a priority for us. This quarter, through all the levers Ignacio shared before, we were able to increase it by 120 basis points, with growth across most of our formats.

We stayed focused on the cornerstone of our business: our stores and clubs. These have always been our main priority. And we'll keep putting our energy and resources into them to ensure that we continue to create value and offer products at a price our customers can afford and to maintain their trust and loyalty.

During the second quarter, our same-store sales growth was led by Walmart Express. We have been communicating in previous quarters our efforts in terms of improving look and feel, assortment and fresh through our clustering strategy in some of our stores of both Walmart Supercenters and Express formats.

Let me give you two examples of this. We have been transforming our bakeries in our Premium clusters in Walmart Express and new Supercenters to improve quality, freshness and taste. As we know, that's something our customers seek. This is something that is still rolling out, but we're already seeing promising results.

The second example is our different country fairs that we know that Walmart Express target customers' value. This quarter, we hosted the French Fair for two months, with original products from France such as cheeses, wine, champagne, among others, with encouraging results and good acceptance. Other seasonal events during the quarter were Mother's Day, Plan Verano and Ola de Calor, all of them with relevant sales results.

In Bodega, for example, Ola de Calor had over 20% growth versus last year, with water and isotonic categories increasing above 50%. Our brands continue to be a key element of our strategy. This quarter, penetration increased close to 40 basis points versus the same quarter last year, mainly driven by Perishable and Home categories. The percentage of customers that buy at least one item from our brands, which is close to half of them, also increased over 20 basis points versus last year in self-service.

This quarter, we hosted our Hot Sale event. We had close to 63 million customers during the event, with an increase in omnichannel NPS of more than 240 basis points, which reflects our efforts to better serve our customers and members. Sam's Club was our top performer format during our Hot Sale event, with a double-digit growth in total sales, reflecting the trust and loyalty of our members and the value and benefits of their membership.

Now let's look at eCommerce performance as we continue to Lead in Omnichannel, making sure we have the best service, prices and products for our customers and members, no matter how they want to shop with us. During the second quarter, eCommerce GMV grew 19%, representing 7.8% of total GMV in Mexico. As in previous quarters, on-demand and marketplace were the main growth drivers.

In our brick-and-mortar business, Walmart Express is showing growth sales momentum on on-demand by achieving double-digit quarterly growth, following a difficult banner conversion period. Also, in May, aiming to continue improving service levels for our Sam's members, we launched a pilot test in three clubs of Pronto, our 90-minute delivery service, which, based on the initial results, we plan to roll it out during the third quarter.

Walmart Pass evolution has been positive. This quarter, members increased 33% versus the same quarter last year. Recent analysis shows that Walmart Pass members buys 25% more after acquiring our membership, driven by increased frequency and higher number of items bought.

Regarding Extended Assortment, our marketplace grew 26% versus Q2 of 2023, with both the number of marketplace SKUs and sellers increasing around 60%. Like in previous years, Hot Sale was a fully omnichannel event, where our customers and members were able to access our great deals through all of our channels. eCommerce penetration during the event was 14%, with a 52% increase in eCommerce visits versus last year's event. We continue working on enhancing our eCommerce capabilities.

We have shared with you the implementation of our Glass platform across our different formats. It was already implemented in our two Walmart formats, Supercenter and Express, and we just finished deploying it in Bodega. Glass is our front-end platform, leveraging U.S. technology that allows us to set the basis and unify the technology behind all of our formats that will help us grow the business significantly.

In addition, we are also fine-tuning our platforms back-end with the implementation of the Walmart Commerce platform, which will allow us to scale significantly the size of our marketplace with local and cross-border sellers and improve user experience through our search capabilities, among others. I am very excited about the future holds for our eCommerce, given all the effort we're putting in it.

Moving to our new business and our strategic priority to become the ecosystem of choice. Bait reached 13.7 million active users, more than doubling the 6.3 million active users from the same quarter last year, adding 400,000 users in the quarter. This quarter, we launched different new top-up price points, like MXN 60, MXN 120 and MXN 230 offers, which helped us to increase revenue.

On to Financial Solutions. This quarter, we disbursed more than 150,000 credits, 30% more than the same quarter last year. Walmart Connect delivered a 23% revenue growth versus last year, implementing 24% more campaigns versus quarter 2 of last year. On our Health business, this quarter, we sold 600,000 Health memberships as customers increase their understanding of the value we offer.

Finally, as Ignacio mentioned before, this quarter, we launched Walmart Luminate and our Digital Connection Program. Our Digital Connection Program called Walmart Beneficios and Bodega Aurrera Beneficios provides our customers with a personalized shopping experience, facilitates the integration with our verticals and offers significant savings with noncommercial allies as well as with Bait. It creates a unique experience for our customers according to their shopping habits.

To enroll, the customer needs to register a cell phone number and provide the same number each time he or she makes a physical or digital purchase. For us, this program will be crucial for getting to know even better our customers and better understand the impact that each vertical has across the whole ecosystem.

On the other hand, Luminate seeks to better understand client expectations, helping us and our suppliers create more effective commercial strategies together. This tool will provide data analytics regarding category penetration, purchasing frequency, buying missions, decision making, cross promotions, among other things, through historical data over the past two years.

It will only register purchasing trends and not personal data. Luminate was previously launched in Walmart U.S. in 2021, where many of our Walmart biggest suppliers in that country are seeing benefits from using Luminate's business intelligence tools.

Here, it will be initially available only in Mexico, and we will provide access to all suppliers, regardless of its size, through a corresponding subscription. We are very happy with the outlook of these two initiatives that will help us better understand our customers and be able to offer them improved solutions according to their needs while helping them save money and live better.

Now I will leave you again with Ignacio so he can comment about Central America, store openings and ESG before going through our financial results. It was a pleasure to share our quarterly highlights with you for the first time, and I will be glad to answer any questions in our live Q&A tomorrow morning.

[Ignacio Caride, executive]

Thank you, Raúl. Now moving to Central America. Again, please consider that we are referring to figures on a constant currency basis. In Q2, Central America reported a 2.6% same-store growth compared to the same period in 2023, mainly driven by volume growth. We saw softer growth in Costa Rica, partly impacted by deflation.

We are implementing actions to capture high volume growth in the second half of the year. During Q2, we opened our 900th store, opening 6 new stores in the quarter. Our price gap also continue improving, reinforcing our value proposition and commitment to help our customers save money and live better.

Also, we expanded eCommerce operations to 20 additional stores and increasing 50 basis points our eCommerce sales penetration. During the quarter, eCommerce reported an 80% growth compared to the same period of last year, driven by a triple-digit order volume growth.

We continue developing our ecosystem in the region. During Q2, Walmart Connect doubled its income and number of advertisers versus last year. These actions contributed to a 3.2% total sales growth, excluding FX effects.

Paulo will go into CAM financial details later on. Lastly, as we have reviewed our operations in Central America, we believe that these businesses are all financially strong, are well placed to serve their customers and communities and continue to have a significant growth potential, which is best realized under continued Walmex ownership.

Now let's talk about new store growth. During the quarter, we opened 25 new stores: 19 in Mexico, 5 in Costa Rica and 1 in Guatemala. New stores contribution to consolidated sales growth was 1.7% for the quarter, ahead of the guidance given in the Walmex Day, which was between 1.4% to 1.6%.

Most of the openings were from Bodega's smaller format and a new Supercenter in Jalisco, with the new Premium bakery Raúl mentioned before. We will accelerate openings in the coming quarters, aligned with the goal we shared in the Walmex Day of opening more than 1,000 stores in the next 5 years.

To finalize, we continue deeply committed to our ESG principles, making continuous efforts to ensure that our operations and initiatives align with these values. I'd like to share some of our quarterly highlights in these areas.

Building on our aim to support local businesses, we recently celebrated the second edition of the Growth Summit Mexico. These initiatives exemplified our commitment to fostering an inclusive environment that offers opportunities to Mexican companies of all sizes. We are proud to have expanded our supplier network with the participation of 350 companies this year.

On sustainability, our efforts across our organization are recognized and demonstrated by our top position in Mundo Ejecutivo's ranking of the top 50 most sustainable companies in Mexico. We also remain committed to supporting our communities in times of need. In response to the devastation caused by Tropical Storm Alberto, we have donated over 7 tons of in-kind aid to the states of Nuevo Leon and Tamaulipas. We look forward to continue our ESG efforts and sharing our progress with you.

Thanks again for joining us today. I am glad to be able to share these results with you for the first time, and I'll be happy to see you all tomorrow in our live Q&A. Now I leave you with Paulo, who will cover the financial results for the quarter.

[Paulo Garcia, executive]

Thanks, Ignacio, and good afternoon, everyone. Thanks for joining us today to review the results for the second quarter 2024. As usual, I will start by covering Mexico results, and then I will cover Central America. So let's look at Mexico's results.

As you heard from Ignacio, total revenue grew 7.1%, driven by 5.5% same-store sales growth. As in previous quarters and in line with the temporary P&L reshape we have mentioned before, gross margin expanded by 100 basis points, partially offsetting SG&A increase of 130 basis points as a percentage of sales.

We'll go through the gross margin and SG&A breakdown in just a moment. Again, we were able to improve gross margin, not at the expenses of our price perception and competitiveness in the market. Operating income grew 6.2%, and EBITDA margin expanded by 10 basis points to 10.6%, best-in-class levels.

Also, as mentioned previously, we can't look to quarter 2 results in isolation due to the calendar effects and phasing from government subsidies. Therefore, in H1, we posted strong results, 9.1% total sales growth and EBITDA growing faster than sales at 9.9%.

Let me now expand on gross margin. During the quarter, we had a benefit of 100 basis points, driven mainly by improved commercial margin, contribution from new business and eCommerce and supply chain benefits. Improvements in our brick and eCommerce commercial margins contributed with 40 and 20 basis points, respectively, mainly driven by improved general merchandise, assortment management and lower last-mile costs, in addition to the 10 basis points from supply chain benefits.

Our new businesses such as Walmart Connect, Bait and Financial Services, which continue positively contributing to our P&L, provided 20 basis points improvement on gross margin. All these contributed to our gross margin expansion, reaching 24.1%.

Now let's review SG&A. We increased 55 basis points running expenses as labor costs, remodels and utilities increases were not sufficiently offset by operational efficiencies. In parallel, we continue investing behind strategic growth priorities, notably new stores, new business, tech and eComm as well as enhancing our associate value proposition. All the above-mentioned gross investments impacted expenses by 75 basis points.

Now let's review Central America results. Please consider that on this slide, I will refer to figures on a constant currency basis. Total revenues increased 3.2% versus last year, driven by a 2.6% same-store growth driven by volume. Overall growth was impacted by Easter flip and softer Costa Rica performance, the latter still impacted by deflation.

Gross margin, improving 10 bps against last year, closing at 24.3% of revenues. We continue to reinforce value proposition through price investments, fully offset by lower supply chain costs and Walmart Connect. SG&A represented 18.3% of revenues, increasing 60 basis points compared to quarter 2 2023, mainly impacted by growth investments, such as marking remodels, new verticals acceleration and lower sales.

The aforementioned results and other income benefits resulted in operating income growth of 10.6% and an EBITDA margin of 9.1% expanding 40 basis points versus the same period of last year. Overall, Central America reported a solid H1 with total revenue increasing 5.9%, achieving a 7.4% EBITDA growth with a 9.5% margin.

At a consolidated level, total revenue increased 6.4%, with new stores contributing 1.7% to total growth, ahead of our guidance provided at our Walmex Day. Gross margin expanded by 80 basis points to 24.1%, and SG&A grew 14.7%. Operating income grew 6.8% year-over-year, with a 7.9% operating income margin.

Finally, EBITDA margin expanded 20 basis points to 10.4% while consolidated net income grew 9.3%, resulting in a 5.5% net margin. In the first half of 2024, we posted a strong set of results, with consolidated growth ahead of the market increasing 8.1% whilst reporting a 9% EBITDA growth with a 10.6% margin.

And now moving to the balance sheet. Cash increased 7.7% versus second quarter 2023. We will see the sources and uses of cash in the next slide. Inventories grew 13.1% above sales growth due to preparation for seasonal summer campaigns, back-to-school and lower sales on certain categories during Hot Sale. And finally, accounts payable grew above sales, reporting a 16.1% year-over-year growth.

In the last 12 months, we generated MXN 89.1 billion in cash. We returned MXN 33.4 billion to our shareholders as dividends. And operating our share buyback program, we repurchased shares worth close to MXN 1 billion.

We invested MXN 31.5 billion in high-return projects to continue deploying our strategy and accelerating growth whilst paying MXN 17.9 billion in taxes. Our working capital for the period required MXN 1.5 billion due to the increase in inventories mentioned before. All in all, our cash position finished the quarter at MXN 48.5 billion.

To finalize, I would like to emphasize the three key messages of the quarter: number one, we kept our growth momentum and expanded our growth gap versus the market with a 200 basis points growth above ANTAD's self-service same-store sales whilst delivering best-in-class returns; number two, strong performance of new stores ahead of the guidance given, as we are about to accelerate openings, we make sure investments are done with discipline; and number three, we continue strengthening our ecosystem that will improve customer knowledge with the launches of Digital Connect Program and Walmart Luminate.

All in all, I'm happy to say that we ended the first half of the year with good momentum and a strong set of results. We will continue investing behind our strategy and listening to our customers to keep winning their preference and creating value to all our stakeholders. As always, thanks for your interest in our company. We will make ourselves available to answer the questions you may have tomorrow at 7:15 a.m. on our live Q&A. You can reach our IR team if you have any doubt concerning how to connect to the call.