Walmart Inc

NYSE:WMT

Earnings Call Transcript 2022-Q3

[Operator]

Greetings, welcome to Walmart's fiscal year '22, third-quarter earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference is being recorded. At this time, I will now turn the conference over to Dan Binder, Senior Vice President Investor Relations. Dan, you may now begin.

[Dan Binder, Senior Vice President Investor Relations]

Thank you, Rob. Good morning and welcome to Walmart 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 U.S., Judith Mckenna, President and CEO of Walmart International, and Kathryn 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.

[Doug Mcmillon, President and CEO]

Hello, everyone, and thanks for joining us. We continue to have momentum. Sales were strong throughout the third quarter, and we've seen a good start to the fourth quarter, thanks to all the thoughtful planning and hard work from our associates. In addition to visiting stores and Sam's Club in the U.S. this quarter, I also got to visit stores with the Canadian leadership team in the Toronto market. It was a reminder that our associates around the world have served others throughout this pandemic with courage and resilience. Our Canadian stores had some great items for Diwali, we sold through Halloween well, and the seasonal areas were ready for Christmas. In the U.S., we're ready for the holidays too. There's a level of excitement in the air.

You can feel it. I've been walking away from these stores with the recurring thought. We're ready. We have the people, the products, and the prices to deliver a great holiday season. Around the world, so many families depend on us for food, apparel, home items, TVs, and seasonal items like toys and Christmas trees. They trust us to have what they're looking for and at the right price. And while this year has its challenges, we're in position to serve them. All segments saw a strong top-line gains in the quarter, excluding divestitures, and I could not be prouder of our team. They continue to solve problems and move with speed. Walmart U.S. drove a sequential acceleration in comp sales, both on a 1 and 2-year basis, and continued to gain market share in grocery.

Sam's Club had another very strong quarter as did Walmart International with China, Mexico, and India leading the way. Customers and members are shopping with us across channels, and we're making it easier for them. Speed matters. That's why we offer fast, same-day delivery to millions of customers around the world. Walmart has served customers across economic cycles for more than 50 years. Each one is unique and they require us to adapt. In this latest cycle, the pandemic cause shifts and how customers and members shopped in what they purchased. The long period of sustained demand for goods has stretched supply change, resulting in out-of-stocks and inflation.

Fighting inflation is in our DNA. Sam Walton loves that fight and so do we. I want to thank our truck drivers, merchants, replenishment teams, our associates to move inventory through the supply chain, and our suppliers. They're working together creatively and quickly. We have lots of variables to manage to deliver everyday low prices to customers and simultaneously strong financial results for our shareholders, and we're using them. We continue to make progress on our strategy. The team is moving fast and being aggressive as we build the pieces of our flywheel. In the U.S. Walmart GoLocal for last-mile delivery is an example.

We're excited to have the Home Depot join Walmart and Sam's Club to share our white-label delivery as a service platform. This service is powered by our proprietary driver platform, Spark Driver. The technology behind it is now available in Mexico as we learn to build more digital products that can be leveraged globally. Spark continues to grow and is now active in 900 U.S. cities, providing access to more than 50 % of U.S. households and we're just getting started. We recently enabled a new feature within the Spark Driver app called Shopping and Delivery, which gives service providers the option to shop and deliver customers’ orders. So, if delivery slots are full at a location, this feature allows us to serve that demand.

The Spark platform has a lot of potential in the U.S. and beyond. Selling advertising isn't another important piece of the flywheel because it helps suppliers and marketplace providers sell more while creating a new profit opportunity for us. Globally, we continue to see rapid growth in advertising income led by the U.S. Flipkart in Mexico. We are also making good progress with Phone Pay (ph), and we're starting to ramp in Canada and Chile. Beyond advertising income, we're creating new ways to gather and analyze data to fuel smarter, faster decision-making to better serve customers, members, and suppliers. Earlier this quarter we launched Walmart Luminate in the U.S., which is a new suite of data products created for our merchants and suppliers to reveal actionable category in item inside.

Our sales team is getting started and we're encouraged by the number of suppliers that have already signed up and their feedback. Our work to become a regenerative Company continues. We had an offsite recently with over 50 of our leaders from several countries to imagine what more we can do and how we can pick up speed, environmental, social, and governance issues are important to us and we're committed to continuing our leadership. In September, we issued our first-ever green bond at $2 billion. It is one of the largest yet from a U.S. based Company. Proceeds are to be used to fund projects like renewable energy, high-performance buildings, and zero-waste. While we've been investing in environmental sustainability projects for years, for size, and design of this bond is aligned with the bulk commitments we've more recently made.

We hosted our sustainability milestone meeting in October. Many of our suppliers, NGO partners, and associates attended. We shared a new goal at the meeting to achieve a 15 % absolute reduction of our virgin plastic footprint by 2025. We think this goal and others announced at the meeting will move our business in a direction that is good for the planet and good for business by giving our customers the things they love without the things they don't. Now, let's move on to segment results. I'll begin with Walmart U.S. Comp sales of 9.2% or 15.6% on a two-year stack is remarkable growth. The gains we've seen in market share for grocery and strong back-to-school results indicate our inventory position has improved. Prices and assortment are compelling and customers continue to move away from early pandemic behaviors. We see tailwinds in our results.

A strong consumer, a degree of inflation, and government stimulus are all factors but I also like what I see in the core of the business. Transaction counts in our stores and clubs are growing. Inventory is up 11.5%. Our price gaps are where we want them and we're innovating in the supply chain and adding capacity. And we're building businesses like Walmart GoLocal, Walmart Connect, Walmart Luminate, Walmart Plus, Spark delivery, our Marketplace, and Walmart Fulfillment Services. Financial services are another area where we know we can make a difference in the lives of so many. We recently launched bill payment services in our stores, as well as the ability to load money to a bank account or prepaid card. Moving to Sam's Club U.S. comp sales were strong at 13.9%, excluding fuel.

Membership is the lifeblood of the club model. Growth in membership income of 11.3% is the fifth consecutive quarter of double-digit growth. Membership count reached a new record high during the quarter and overall renewal rates were strong across the board, including first-year renewals and those for Plus members. Both Individual and Business members are shopping with us across channels and using the digital tools we've developed. The new "don't forget " function with scan & go is a great example. It's a completely digital way for us to help members and drive basket size at the same time. Based on a member shopping history, we can target items that a member may be for getting in their trip all through the app, and we already see an increase in the number of items in the basket.

We are also expanding delivery options at Sam's we now offer same-day delivery for 440 clubs using our Spark Driver network. Turning to Walmart International, we had another quarter of strong growth with sales up 10.3% and profit up even higher at 17.5% excluding divestitures and currency. We ended the quarter in great shape on inventory and price gaps. Back-to-school and other fall celebrations helped drive traffic for us, as families began to get back to normal shopping patterns. The festive season is off to a strong start with big billion days in India. We continue to see strong growth in e-commerce. On a 2-year stack, sales increased 91 % led by Flipkart and China. We've talked about the importance of omnichannel globally, and we continue to see the build-out of these models across markets.

Our small Sam's Club depots that extend the reach of our large clubs in China helps deliver e-commerce growth of 96 % with incredibly fast delivery for everyday items. In Mexico, we continue to expand same-day delivery and express delivery orders quickly reach customers using crowd sourcing capabilities. And in both Mexico and Canada, the expansion of Omni capabilities has driven by technology that we've developed to share across markets further leveraging our scale. Our international markets are building flywheels that have common characteristics with each other and with U.S., which helps us innovate and leverage the technology we're building. Our store in Club formats is well-positioned. We're moving quickly to add and expand more digital businesses, including eCommerce and payments to create new business models.

We're innovating for our customers, like the recent expansion of Flipkart SuperCoins across platforms. We're also making important investments for the future while delivering profitable growth today. You see examples of these investments in our supply chain in India and Mexico, new clubs in China and store remodels in Canada. The team is delivering on its purpose of driving long-term sustainable growth for the Company. With that I'll close today by thanking our associates around the world for what they do each day to serve our customers and drive results. The holiday season's here, and we're ready. Our teams have been working hard to ensure we have the people, the products, and the prices that will help make this season special for everyone. I'll now hand it over to Brett.

[Brett Biggs]

Thanks, Doug. In the third quarter, momentum continue 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 a 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 great values. And we're ready to serve them however they want to shop. Our Omni models are 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 U.S. comp sales grew 9.2%, including nearly 6 % growth in transactions with in-store shopping leading the way. eCommerce sales growth was up 8 % in Q3 against strong sales gains last year, resulting in an 87 % 2-year stack. We continue to see strong market share gains in grocery this year, as well as unit share gains on a 2-year stack. Sam's Club had another outstanding quarter with comp sales growth, excluding fuel and tobacco of 15.5%, including more than 10 % growth in transactions and 32 % growth in eCommerce.

Membership counts at another record high and renewal rates remained strong. International results were impressive, including eCommerce penetration of around 19 % as omni services scale across key markets. For example, Canada has expanded online grocery pickup from stores nationwide. While in Mexico, customers expressed delivery orders can be shipped via gig drivers and 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, eCommerce 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 GoLocal'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 remain 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 a $139 billion. Walmart U.S. comp sales momentum remains strong of 15.6% on a 2-year stack to impart the strong U.S. 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 in Sam's Club continued, with comp growth of nearly 31 % on a 2-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 for fuel mix in the U.S. 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 U.S. As a result of these investments, we've seen a great response to our holiday hiring programs with 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 in 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 4 years. Now let's discuss the quarterly results for each segment. Walmart U.S. 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 awareness, 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 a 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 6 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 GoLocal business, while the Spark Driver platform continues to expand nationally. Walmart Connect advertising sales have increased nearly 240 % on a 2-year stack. And in Q3, we launched a new demand side platform and partnership with The Trade Desk to expand offsite media offerings. We also added around 21 million items to our eCommerce 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 U.S. 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 and monitoring price sketch 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 in 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 U.S. ports.

International had a great quarter with double-digit sales growth, strong momentum and eCommerce across key markets, and operating profit growth outpacing sales. eCommerce sales in constant currency grew 33 % on top of strong gains last year with growth and China, Flipkart and Mexico particularly strong. We've nearly doubled eCommerce sales in international over the past 2 years. And it's encouraging that our ecosystem is expanding and developing in areas such as digital advertising. China counts were quite strong in Q3 increasing 16.5% with continued strength from Sam's Club as well as more than 90 % growth in eCommerce sales. During the Mid-Autumn Festival, sales were terrific and we saw an acceleration and Omni performance with nearly all hypermarket 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 double fulfillment capacity versus last year with dozens of new fulfillment center locations, more than 1,000 last-mile delivery hubs, and expanding relationships of Toronto partners to handle large percentage of last-mile deliveries. Comp sales in Mexico increased 6 % and grew faster than the market according to UNCTAD, 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 1/4 of marketplace sales fulfilled through this network. In Canada comp sales were up 6 % and increased more than 13 % on a 2-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 2 hours and a couple of stores in Toronto. International operating income and 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 and member counts, strong renewal, and increase 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 U.S. 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 Omni-channel Company. Thank you for your interest this morning, and we'd be happy to take your questions.

[Operator]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instruction] And a confirm tone will indicate your line is in the question queue. [Operator Instruction] For participant using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we assemble the queue. Mr. Lasser, please proceed with your questions.

[Michael Lasser, Unidentified Analyst]

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 hard as it is today, particularly with respect to wage inflation. Looking out over the horizon over the next several quarters, how does the current environment impact Walmart's ability to sustain in this January -- this algorithm into next year, especially that Brett as I think you just mentioned that some of the investments you are going to plan to make this year have been delayed into next year.

[Brett Biggs]

Hey Michael, it's Brett. Yeah, I think as we -- the algorithm we talked about last year, a couple of things we mentioned. One was at the time also we didn't see a stimulus coming, didn't anticipate stimulus coming, which ended up coming. But I would look at that more as mid to long-term algorithm, which I think is the way we portrayed that when we discussed it. Certainly, right now we're seeing inflation in areas and some of that's demand-driven, some are supply-driven. Over time, things will likely work themselves out, but the context of how we think about the longer-term growth of Walmart has not changed.

[Michael Lasser, Unidentified Analyst]

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

[Brett Biggs]

Thanks, Michael. That's a good question. The thing that comes to mind is the change that has to happen and has happened to an extent and continues now related to working in a more digital fashion, we use a phrase here that's called for in a box, which is an agile way of working with customer product design, technology, engineering, all around the table. Designing omnichannel outcomes for customers and members. Historically, if you look back years ago, the Company would have operated in specialized silos, merchandising, operations, finance, logistics, etc. And the teams learned in recent years and is still learning how to move faster again with the end in mind design with that outcome.

And that enables us to put technology to work in a way that is truly omni channel, not siloed. Customers and members expect that we've got unique opportunities to deliver that. But the change inside the Company has to happen to enable it.

[Michael Lasser, Unidentified Analyst]

Thank you.

[Operator]

Our next question is from the line of Stephanie S. Wissink with Jefferies. Please proceed with your question.

[StephanieWissink]

Thank you. Good morning, everyone. I wanted to give you guys a chance to talk a little bit more about how you activated your supply network and also your hiring tactics for seasonal labor. Couple of the numbers that struck us in the release were the inventory level and the labor counts. If you could just talk a little bit about that 11 % inventory increase, if there's any price in there that we need to be conscious of and then 200,000 hires across -- I think you said stores and supply chain that maybe give us a sense of how that balance, where that labor resides relative to how your business has shifted more omnichannel. Thank you.

[Doug Mcmillon, President and CEO]

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

[John Furner, President and CEO of Walmart U.S.]

Yeah. I'd love to. Good morning. First, we wanted to make sure that we were positioned well for customers. It's an important time of year in general merchandise and the food businesses as our customers prepare to celebrate holidays all across the country. And we took a lot of steps early in the year to try to get ahead of what we thought could be some congestion and some other supply chain pressures that we've been facing throughout the year. Some of the things that helped us in the quarter, Brett mentioned a couple of things like chartering vessels, ensuring that we were forecasting appropriately and then managing the labor across each and every piece of the supply chain has been paramount to being able to deliver an increase in inventory as you noted of over 11 %. Certainly, there were pressures all along the way.

But I would just complement the teams that Walmart that operates a supply chain and not only general merchants, but our Food Network's, both networks have been running extremely well. There's a lot of volume going to the networks and the teams have been very innovative and approaches to solving these problems. The pricing very complex, and there have been a number of places where we've seen acceleration that be in throughput, inbound from our vendors and then outbound to our stores and fulfillment centers has been extremely strong.

[Kathryn Mclay]

From our supply chain is backup for international. Clearly H5 market is in a slide play, different position, but many of the actions that John described apply globally around the world. But I take some more like Mexico, that market is about 93 % domestically sourced. So those pressures are slightly different and depending on the category. We've spent the last couple of years expanding our supply chain, capabilities and that's really stood us in good stead. And then you've seen as ramping up a hiring in places like Canada and pre the holiday season as well. That's 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 U.S. is doing and I think this is where our scale and capabilities really come in to climb. From an inventory perspective we're up about 10 % year-on-year but that ex-divestiture. Actually -- so that's Inc. divestitures. Ex-divestitures, this is even higher than that. And for the first time I'd tell you that's a good thing because it actually positions as well as we're going into the peek of the holiday season.

[StephanieWissink]

Yeah. I would only just add onto say, since obviously it gets to leverage the Walmart supply chain that's to our advantage and we also worked deliberately this year to pull forward inventory, so we landed Halloween earlier, we landed Christmas earlier. So, everything's just shifted up a little bit, which has put us in a good trading position.

[Operator]

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

[Karen Short, Barclays]

Hi, thanks very much. I just wanted to just ask a short-term question. So, looking at your guidance for 4Q, wondering if you could give some puts and takes on gross margin and SG&A. I appreciate there are a lot of moving parts on the wage front, but the implied 4Q flow-through on EBIT is significantly higher in 4Q than it was in 3Q. That's my first question

[Brett Biggs]

Yeah. Karen, this is Brett. I think probably you answered your question a little bit that there's -- there are puts and takes as we look at the quarters or has been for the last 8 or 9 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 amalgamation of all of those things. It'll be a different mix in Q4 of what we'll sell.

[Operator]

Thank you. Our next question is from the line of Peter Benedict with Baird. Please proceed with your question.

[Peter Benedict, Baird]

Good morning. I -- kind of a question just around Walmart's positioning during periods Inflation and recognizing that this is O level Inflation, we haven't seen for a very long time. Can you just Doug, maybe take us through how the business historically, at least has responded, how customers have behaved. Are their trip changes? Is their trade down or your -- do you get access to new customers? Just curious, your kind of perspective in the event that this inflationary environment persists for longer?

[Doug Mcmillon, President and CEO]

Yeah, sure. Hi, Peter. I'm always just thinking about Judith because she is reminding us this week just how much inflation we've experienced inside Walmart around the world over time. We haven't seen this kind of inflation in the U.S. for quite some time. But we have operated in markets where we've seen this basically forever and even more extreme. So that experience is helpful. And we do start with wanting to keep prices low. The purpose of the Company is to save people money and help them live a better life and we get excited about trying to do that. And the companies are pegged well, if you think about it, with an inflationary environment, there are things that come along with that. And in a deflationary environment, we can lead down and we're a low-cost operator and we can take advantage of those situations.

So, in this case, our cost inflation is higher than our retail inflation, and that's what we would want. But we've got lots of flexibility as we monitor price gaps to decide what we do at general merchandise, what we do with apparel, for example, what we want to do with beef, with the inflation that's happening there. And it becomes a mix management exercise with us trying to manage serving the customer member well, managing the bottom line. Now we would we care a little less about how the gross margin and SG&A balance out as we would with what the net looks like. And so, we're managing in that fashion and that's what you can expect us to do going forward.

[Operator]

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

[Simeon Gutman, Morgan Stanley]

Hey, everyone. Good morning. So, I guess I'll ask a multi - partner since maybe we're only getting one. First on gross margin, the down 12 and the mention of the supply chain pressure. How do -- how should we think about it being maybe a peak point in pain in terms of supply chain costs. And how is leads into next year. And I thought I -- I think someone, I don't know if it was Kathryn or Judith mentioned the buying forward of inventory. Is this inventory just owned further upstream in the supply chain, or it's already in your DCs and stores that can be deployed?

[John Furner, President and CEO of Walmart U.S.]

Hey, Simeon, it's John. Let me take the first part of the question, and then we will handle the second part together. As far as gross margin, we start all these conversations with what's the right value for customers given our position in the marketplace. And we've been pleased with the results in terms of price gaps over the last 18 months, we are in a better position than we were before the pandemic and we intend to keep our price GAAPs that way. As Doug mentioned, our cost inflation is definitely higher than retails so we will hold on moving in retailers as late as possible. And what you saw during the quarter in the third quarter were specifically in gross margin were costs that came through in, terms of supply chain that would be everything from our domestic supply chains, labor, international supply chains as well.

And then we have benefits of lower markdowns and higher sellers that would include back-to-school. We had a very good back-to-school season, Halloween sell-through, both in food and general merchandise were very strong. And we see customers who were -- are celebrating. We're pleased our position as we go into Thanksgiving. I've been at stores around the country and our feature mix looks much better than a year ago. Definitely a holiday feel. Last year we were pretty reliant on things like snacks and beverages to fill space and we're having the inventory shortages. So, I feel really good about the positioning going into the holiday season. We're proud of the 11.5%, I mentioned that some moment ago, but many ladies and gentlemen, all over the country have worked very hard to make that written that number come to reality, including managing each piece, which is both offshore and domestically.

The big advantage that Walmart has in times like this is, about 2/3 of what we source and sourced from the United States here in the country. So, we've got a lot of flexibility in terms of being able to balance this out.

[Judith Mckenna, President and CEO of Walmart International]

I'll probably just add to Kathy to say, if you look at member sentiment as well as supply chain. So, we fill last year and again this year, the member sentiment of wanting to participate in seasonal events early. And so, we took advantage of that and brought in the inventory early. We brought up a 100 % in Halloween costumes. We put them in earlier, we set them and we fell through them. I think Christmas, we've already had healthy sales for the rest of the inventories in country and on its way to the Club, so I think that's what we think by a member sentiment not trying to pull forward from a supply chain perspective to make sure we can see it. We've got access to it.

[Kathryn Mclay]

It's after that. It's due day that we are prioritizing flow around the world and have been doing for some time. So those products, which we know that customers and members need most, making sure that they've got places on the vessel when it's the international supply chain to bring them in. So, in addition to people wanting to buy earlier, we've also been really thoughtful about how that product is coming in as well.

[John Furner, President and CEO of Walmart U.S.]

One of the most important things that happen -- happened quite a few months ago was we all held hands and decided to the aggressive. So, the seasonal businesses that we're driving now, we made a call on that maybe in some cases a year ago, and I think that helped us in terms of quantities, getting them through, getting in through earlier and I think it's going to play out that way. I think it's going to be really strong as it relates to whether it's peak or not, Simeon, there are variables like what happens with the virus, is the market going to continue opening up and people will consume services, travel, and all those

[John Furner, President and CEO of Walmart U.S.]

kinds of things, and what does that mean to goods. So, there is a demand side of this as well as a supply side of it. And I don't know that anybody could call exactly where the peak is going to be. But it doesn't really matter to us. We're going to manage through it regardless of what happens. And when we get an opportunity to take rollbacks, we're out there asking suppliers even now, do any of you want to get aggressive and swim upstream and take prices down while prices are going up to gain share. And we got so many suppliers to work with and choose from that you find people and some categories that can do things and as the months progress, we expect to find more of them.

[Operator]

The next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

[Kate Mcshane, Goldman Sachs]

Hi. Good morning. Thanks for taking our question. [Indiscernible] have mentioned in the prepared comments in the presentation about the impact of stimulus in Q3 and I was wondering if there was any way in which you can quantify how much stimulus had an impact in Q3 versus Q2 realizing, of course, that we're getting further away from initial stimulus and what you're thinking of contribution of stimulus go to look like in Q4.

[Brett Biggs]

Yeah Kate. This is Brett. It gets pretty challenging to try to quantify that impact with some of the other impacts that we're seeing as well. Obviously, there are some parts of the stimulus that wound down in Q3. Things like childcare credits that kept going through Q3. But demand is really strong, unit demand is strong. On our stores, they're crowded. So, we continue to see good demand and I think as you come assured your question stated almost, as we get further and further away from stimulus. I think it makes us feel better and better about the demand for what we're doing.

[John Furner, President and CEO of Walmart U.S.]

And Kate specifically in the U.S. Good morning, it's John by the way. Specifically in the U.S. we certainly see a consumer that has a strong

[Brett Biggs]

Balance Sheet. We see a spending levels higher, we see demand that's higher traffic being up 5.7% in the quarter is an encouraging sign. And then having categories like Apparel lead the business, which is discretionary or Apparel team has done a great job positioning, that's going into the back-half of the year with new technology, new products, having apparel lead that certainly encouraging. And then also, we're really proud of the results and food with 2-year share gains and units accelerating retail gains. I think it gives us an indication of how the consumer is feeling, and how they're going to be spending the rest of the year.

[Doug Mcmillon, President and CEO]

It seems like the most pronounced thing we saw would be in hiring. Like when the stimulus dollar started to go away, the hiring situation changed faster. We saw people come back in a matter of weeks. We were back to being staffed.

[Brett Biggs]

That's right. Doug is more pronounced than on the demand side. It certainly -- yes, it certainly was. Certainly, felt the impact of that early in the year when the Delta variant began. And then in the last quarter or so, we've added close to 200,000 people in the workforce. We are really excited to welcome the 200,000 new associates to the Company. About 25 % of those are in the supply chain and the other 75 % are in stores in other areas. But that's been done to meet demand, and again, we're excited about our positioning when it comes to people, product and our pricing.

[Operator]

Our next question from the line of Bob Drbul with Goldman Guggenheim Securities, please proceed with your question.

[Bob Drbul, Goldman Guggenheim Securities]

Hi. Two questions for me. Good morning. I guess the first one is, can you share a little perspective on the Walmart Plus membership program and what you've learned so far, and how you feel about it. And the second question is, can you talk about, I think the 21 million items you added in the Marketplace. I know that's been a big focus for you guys. So just love to hear sort of where you think you are at this point. Thanks.

[Brett Biggs]

Sure, Bob. Good morning. First, we're really excited about the Walmart Plus program. We launched just over a year ago with some really core values for the customer, which include unlimited delivery primarily from stores, but that doesn't include eCommerce on the program also offers fuel discounts and scan & go and then most recently, we offered early access to customers Plus members who are shopping on our holiday events. So, our Plus members now have about a 4-hour window to be able to access product ahead of the market and certainly seeing great results in that. Plus is a really important part of our growth strategy over the long term.

We know once a member -- a customer becomes a member, and typically those are members that are joining through our already pickup customers and we know there's spend increases on our first-place wallet share growth. So, looking forward to the progress that we'll be able to make over that in time. And the second part of your question, could you repeat?

[Bob Drbul, Goldman Guggenheim Securities]

Just some perspective on the eCommerce marketplace to 21 million new items. I know that's been a focus, so just where you guys think you are at this point?

[John Furner, President and CEO of Walmart U.S.]

Yes. We're currently about a 160 million items available, so $21 million growth in the quarter is a really nice gain. And we certainly see high demand from marketplace and one of the services that we're excited about is Walmart Fulfillment Services. We can scale that business. It's just about scrape grates we'll able to add capacity. So, there are a lot of great plans in the supply chain. We've talked about supply chain a number of times this year. And then we've got a lot of innovation and investments in the supply chain that we're very excited about to add capacity for the overall network. But this certainly will include and support our marketplace sellers and have a great seller value proposition as we look forward.

[Operator]

The next question is from the line of Ken Xu with Stephens, please proceed with your question.

[Ben, Stephens]

Hi. Thanks. Good morning. I want to ask two-part question related to, Brett, your commentary around ROIC and some of the teams brought a commentary around wage investment relative to inflation. You're at one of the strongest ROIC metrics that you've seen in some time. You're talking about -- it sounds like being pretty competitively positioned relative to hiring and being able to staff up back to full staffing as the stimulus fell off. You've also been investing in wages. I'm curious with all of these variables in place and an inflationary backdrop, how do you feel about your level of investment around wages into the organization? And do you think that we're in an environment where you can deliver against the productivity loop that we're also focused on at the start of this year?

[Doug Mcmillon, President and CEO]

Yeah. Hi, Ben. How are you doing? I'll go back to really what we talked about in February, which capital on a question earlier, I still feel really good about the long-term algorithms mid-to-long-term algorithms that we discussed in February about being able to grow operating income faster than sales as a Company going forward. And that would pretend to -- I think shareholders over time being pleased with the direction of ROI, we have some capital to invest and John 's talked a lot about that particular in the U.S. side on supply chain. And we're going to do that because we think it's going to help us long term on both the top-line and bottom-line. But I am pleased with where we are from an ROI standpoint. We were focused on it and I think over time it should continue to grow as a Company.

[Brett Biggs]

One of the things we mentioned in February was the importance of automation. And we'll be talking more about that in the future but you just go back and review what we said there. We've got opportunities in distribution centers, fulfillment centers around the world to deploy new technology that will help us with productivity. And that'll take some capital investment. But if you look at what it delivers on the other side for customers and members, as well as from a productivity point of view, we continue to be excited about that. And the last thing I would add have been just certainly the focus on topline Doug mentioned a few minutes ago, but we made decisions about over a year-ago to certainly be aggressive with inventory positioning and the team is really focused on line growth.

One of the fun things in retail is adding up the score every day and that starts with your revenue and with revenue growth, we are in a position where we can leverage our fixed costs and then as you've heard all, all throughout the call this morning, in the middle we can manage and we've got a team who are great at managing the middle. The middle would include things like costs, gross margins, wages, the other factors in the middle. But overall, we're happy the position to meet the ability of management. And last thing I'd say is we're, we're excited about the investments in wages and associates on this last round positively affected about 565,000 people. And it's a really large number, 565,000 people got a raise. And we're proud to be able to be in a position to do that.

[Operator]

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

[Chuck Grom, Gordon Haskett]

Thank you. Great quarter. Brett, I was wondering if you could just unpack some of the moving parts on the third quarter U.S. gross margin compression of 12 basis points. And I guess looking ahead, how you see that playing out in the fourth quarter.

[Brett Biggs]

Yeah. Thanks, Chuck. We didn't give guidance on a specific line on Q4, but I think it demonstrates again, though we've said for many years, just all the levers that we have to pull as a Company to be able to -- for P&L to work at the same time that we're serving customers the way that we want to and really Q3 it'd be no different from the standpoint of levers moving one way or the other certainly had supply-chain cost pressure just to make input cost pressures. But then when you get the demand that we're having at least a lower markdown, fuel was a pressure in Q3, which sometimes it's a positive, sometimes it's a negative. Feel really good about our advertising business.

John, on the growth that we're seeing in the U.S. but also globally. It's all these things that come together and as a management team cost side and margin side, it's up to us to manage those pieces in a way that gets to the results that we had in Q3 and the results that we've guided for in Q4. So, we've managed through a lot of different environments over the last 8 or 9 quarters in particular, and feel good about this team's ability to continue to do it.

[Operator]

Our next question comes from the line of Edward Yruma with KeyBank. Please proceed with your question.

[Edward Yruma, KeyBank]

Hey guys, thanks for taking the question. A quick 2 - parter for me. I guess first you guys have added a lot of capabilities and use of AI. Really interested in understanding how it's made change? How you managed the business? Have you been able to get faster? And then as a follow-up on Marketplace, nice growth in assortment. It does seem like a lot of Marketplace participants are selling items that are out-of-stock in the core Walmart business. I guess, how is your view on kind of Marketplace in terms of enhancing assortment versus offering consumers products that may be sold out at Walmart? Thank you.

[John Furner, President and CEO of Walmart U.S.]

Let me take -- good morning, Edward. This is John. Couple of things on your first question, type of capabilities. First, the team has really changed the way they work over the last couple of years. We mentioned a few minutes ago, a lower digital way of working, which we call in the business for [Indiscernible] and quite simply we look for customer problems, associated problems, friction in the environment. And then we assembled a team of people which would include someone representing the customer, business, product, technology design. And these groups worked through each of the problems and create digital products to take the friction out.

Along the way, the real benefit is the data that's generated from these products. And one example, as we're managing our backrooms of super-centers and they put markets on the country using computer vision and augmented reality to not only know what's in the back room but what can be moved to the floor. And we use AR -- Augmented Reality is away for associates to know how to direct work. And from that, we generate literally billions of pieces of data every week. And it's helping us with overall inventory management. And I think our in-stock positions reflect that work as an example. Second, on the Marketplace, we've taken more of an open approach on the Marketplace, and we're ensuring that each of our search and recall algorithms are working on behalf of the customer.

What's really important in retail is knowing your customer, understanding the customer's intent, and then taking the catalog, whether it's 1P or 3P in matching the items that they are looking for. And then it's up to the team here to execute it. We've got a really clear customer value index that we think about each and every day online and we measure ourselves to that. So, we're really centered on -- as I said, a couple of times this morning, really centered on revenue growth, focus on the customer, and then we'll work through the other pressures as Brett mentioned, like we have the last 8 or 9 quarters. We use an ML and AI to do a number of different things. We used it to help adjust to the pandemic and use the stores as fulfillment hub.

And we used it for predictive baskets, smart substitution, our in-stock assistant, AI empowered. And this modernization that we've been talking about with you guys in previous meetings -- is continuing, which unlocks more capability to use that data we moved to 153 petabytes of data to the cloud so far. And we've got room to grow there and we can put data and machines to work in ways in this Company that we've not yet done, but we are making progress.

[Operator]

Thank you. As a reminder, we address questions for as many as possible, we ask that you please limit yourself to one question. Our next question is from the line of Robby Ohmes with Bank of America.

[Robby Ohmes, Bank of America]

Good morning, guys. I'm going to break the rule on the 1 question just to let you know ahead of time. John, I was hoping -- can you hear -- can you frame the digital advertising opportunities for us a little bit, both maybe U.S. and International. You guys, I think you have mentioned it, quite a bit on this call. How big is it now? How big can it get as you're developing? And then just my add-on question to you since, I don't think you guys talked about the gas prices rising and maybe remind us maybe, John, you could remind us the gas price impact on the customer outlook for Walmart with it going up so much.

[John Furner, President and CEO of Walmart U.S.]

Yeah. Robby, I would expect you to break that rule as it relates to digital advertising. We are really excited about it. Obviously, we're coming off a smaller base than some others. We've shared that the 2-year stacks 240 % in the U.S. at some point we may share a number with you. We're obviously talking about that. The thing I'm excited about, is it's happening everywhere. I mean, Judith is driving an advertising income business around the world and the supply wheel that we showed you guys in February is coming to life across markets in a way that generates a different business model that will change the Company in the long term and it's happening and we're excited about the back, we get traction and a number of different areas.

Gas prices are concerned. They're concern not just in this country, but everywhere. They are up dramatically versus a year ago. And the customers had money and at some point, that's going to come to an end. Hopefully that's a gradual process and hopefully gas prices come down. We sell a lot of fuel in both Walmart U.S. and Sam’s; we're trying to help keep those prices down.

[Doug Mcmillon, President and CEO]

I'd just pick up a couple of things, Robby as excited about the momentum. I'd like the way the team has positioned the business and call it Walmart Connect. It connects buyers, sellers, and customers on the platform. And that's really important that everything we do is centered around the customer. And in the last quarter, we added a new Chief Revenue Officer Seth Dallaire. We are excited to have Seth onboard and looking forward to the impact he'll be able to make in the ad business. And as I've said on fuel, certainly we're watching the pricing in fuel. W

here we can offer a value, we will and we do; but we know that Americans spend a large percentage of their income on food and energy. And so, with pressure on energy prices then certainly it's up to us the team to do everything we can to keep prices low and to fight inflation and the team's doing a nice job of that.

[Judith Mckenna, President and CEO of Walmart International]

It's Judith. Maybe just on our tax rail International, one of the other things to add is the way that we're sharing technology but also capabilities around the world. So that flywheel built out using the capabilities that we're building in different markets to support markets earlier in that journey is really important. So, for example the Flipkart ad-tech platform which has developed and really quite mature, which we deploy that in Chile, for example, whereas Walmart Connect, that program is deploying in Mexico and Canada, so another great one of those areas, we're not only that's benefiting, all of the market pretty much around the world. It's also ultimately the inbound of share capability.

[Operator]

Thank you. Our next question is from the line of Paul Lejuez for Citigroup. Please proceed with your question.

[Paul Lejuez, Citigroup]

Thanks, guys. Could you talk about cost inflation on the grocery side of business versus general merchandise. What are you seeing on each and how do you think that compares to what competitors might be seeing and what you expect them to do in terms of passing it through to the consumer, and how does that influence your decision about pricing? Thanks.

[John Furner, President and CEO of Walmart U.S.]

Good morning, Paul. This is John. First, what we said earlier, our unit growth in grocery is growing faster than dollars and that's a position we'd like to stay in as long as we possibly can. We want to keep prices low for customers all across the business and we'll be the last to go up. So, we're happy with our price positioning. We see gaps that are wider now than they were before the pandemic began and we intend to maintain that position. As far as the mix goes, it's relatively even across the business, so there aren't areas with probably the exception of the beef category that really stand out from grocery to general merchandise. We've got solid growth in general merchandise as well, leading the businesses in Apparel.

Our Health and Wellness business has been strong. So, the Supercenter and the overall business has an ability to mix. That's quite helpful. And in the last quarter, part of the margin compression, we were down about 12 basis points was benefited by mix, it was benefited by higher sell-through and then was also benefited by lower markdowns as a result of those sell - throughs. And then we had supply chain costs that came through so the team at Walmart have a broad portfolio of categories and a broad portfolio of levers that they can use to keep prices low for customers.

[Operator]

Thank you. Our next question is from the line of Joe Feldman from Telsey Advisory Group, please proceed with your question.

[Joe Feldman, Telsey Advisory Group]

Yes. Hey, guys. Thanks for taking my question. Wanted to go back to something that you guys mentioned earlier in the call. I think Doug, when you were in your prepared remarks, you mentioned seeing that the pandemic causing shifts in shopping behavior, which we all talked about a lot. And then a little later, I think you guys talked about seeing some of those behavior shifting away from what we saw during the pandemic. And I was hoping you could share some thoughts on basically what you're seeing and what you expect to stay with us for the long term in terms of some of these behavior changes, in terms of shopping.

[Doug Mcmillon, President and CEO]

I think pickup and delivery around the world will grow and the step change that occurred will stay and then grow from there probably at a lower rate. That's what we're seeing here. But the store traffic's the biggest issue. When the pandemic enabled it, people came back to stores; and I think they like stores. They want to have that experience. They enjoy seeing merchandise, being around each other, and that's why Omni channel makes so much sense. So grateful for that. There are other things like Telehealth that will persist forever. The goods versus services trade-off that happened during the lock downs and during the heavier pandemic period were definitely a big deal.

We'll see how that plays out over time. People eating at home. I think they've enjoyed that and they're going to do more of that. And that gets us an opportunity across all of our formats around the world. Is there anything any of you would add to that? I think we covered it.

[Operator]

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

[Doug Mcmillon, President and CEO]

I'll just wrap up by saying that we appreciate your attention on Walmart and hopefully what you can see is that the business is changing. We can sell customers and members things in a variety of ways. We can make money doing it. The business model's changing, the digital transformation's underway, this is a different Company than it was, and we've got a lot of runways in front of us. We're looking now at our input metrics; we're not just enjoying the benefits of some of these tailwinds and feeling like we're certainly a Company that's arrived. We're paying attention to net promoter scores; we're working on the things underneath that will enable us to continue to grow regardless of what the environments like.

There will be a point in time some point in the future where you guys will be asking us about deflation, and you'll be asking us about how we're going to grow share and we're focused on growing share today and in that environment. We run the Company for the long term, manage it for the short-term and really proud of what the team is doing to make that happen in grateful to our associates. Have a great day.

[Operator]

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