Walmart : Management Commentary

Walmart Inc. (NYSE: WMT)

Second Quarter Fiscal Year 2020 Earnings

August 15, 2019

Dan Binder: VP, Investor Relations, Walmart Inc.

The management commentary below contains statements that Walmart believes are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and that are intended to enjoy the protection of the safe harbor for forward-looking information provided by that Act. Please review our accompanying presentation for a cautionary statement regarding forward looking statements made below.

As a reminder, our earnings materials include the press release, management commentary and accompanying slide presentation - which are intended to be used together. All of this information, along with our store counts, square footage and other materials are available on the investors' portion of our corporate website - stock.walmart.com.

For our U.S. comp sales reporting in fiscal 2020, we utilize a 53-week calendar. Our Q2 reporting period ran from Saturday, April 27, 2019 through Friday, July 26, 2019.

Doug McMillon: President & CEO, Walmart Inc.

Our hearts continue to be with our associates in El Paso and Southaven and we are focused on the safety of our associates and customers in all our stores and clubs. Those tragic and painful events will be with us forever, and our hearts go out to the families that were impacted.

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I continue to be amazed by the courage, resilience and caring of our people. As it's become clearer that the shooting in El Paso was motivated by hate, we are more resolved than ever to foster an inclusive environment where all people are valued and welcomed.

As we've shared previously, we will strive to use these experiences to identify additional actions we can take to strengthen our processes, improve our technology and create an even safer environment in our stores. We're also thinking through the broader issues related to gun violence and things we should do to help create safer communities. We would like for everyone to be reminded of the steps we've already taken:

• We stopped selling handguns in every state but Alaska in the mid- 90s.
• We stopped selling military-style rifles such as the AR-15 in 2015.
• We raised the age limit to purchase a firearm or ammunition to 21 in 2018.
• Walmart only sells a firearm after receiving a "green light" on a background check, while federal law only requires the absence of a
  "red light" after three business days. We don't sell a firearm until we receive a "green light" regardless of the time period.
• We videotape the point of sale for firearms, only allow certain associates to sell firearms, and secure firearms in a locking case with individual locks, among other measures.

We've attempted to take common sense steps that allow us to serve customers and create a safer environment. We estimate that we represent about 2 percent of the market for firearms today, which we believe places us outside at least the top three sellers in the industry. We estimate we have about a 20 percent share of ammunition.

In the national conversation around gun safety, we're encouraged that broad support is emerging to strengthen background checks and to remove weapons from those who have been determined to pose an imminent danger. We do not sell military-style rifles, and we believe the reauthorization of the Assault Weapons ban should be debated to determine its effectiveness in keeping weapons made for war out of the

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hands of mass murderers. We must also do more to understand the root causes that lead to this type of violent behavior.

Turning to our business results, we continue to have momentum, especially in the U.S. We thank our associates for their focus, speed and adaptability in this everchanging environment. We're favorably positioned as we leverage our expansive Supercenter network to deliver a robust omnichannel experience. More than ever, we're innovating across the business. We're experimenting with emerging technologies to improve store operations and reduce friction in our customers' lives. The initiatives we have underway provide extended access to our brand and position the company to earn a greater share of our customers' wallet over time.

For the quarter, disruptive weather in parts of the U.S. negatively affected comp sales early on, yet we saw significant improvement in comps as the quarter progressed and weather turned more favorable. On a consolidated basis, we had good topline growth in constant currency, and along with productivity gains and cost controls, we were able to leverage operating expenses by 23 basis points. Adjusted EPS was $1.27, a slight decline versus a $1.29 last year but stronger than we anticipated. You'll hear more from Brett regarding our updated guidance for the year but let me say that I'm pleased with what we've accomplished so far, and I'm excited about what's still to come as we look to the back half of the year.

Early in the quarter we hosted our annual Associate Celebration and Shareholders' Meeting here in Northwest Arkansas. You could feel the energy from the more than 6,000 associates who joined us from all over the world. It's one of my favorite times of the year. Not only do associates come together to learn and take back new ideas to their store, but I always appreciate how much I learn from spending time with these extraordinary people.

At Walmart, we're delivering solutions for customers that make shopping with us easier and allows them to add time back in their day. As we move towards a singular experience that's seamless, we need to better align many of the functions that directly or indirectly affect our customers.

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You'll recall that last year we hired the first ever Chief Customer Officer for Walmart - Janey Whiteside. We also recently created the new role of Chief Technology Officer and Chief Development Officer. We found a uniquely qualified leader for this position in Suresh Kumar. A natural progression to these and other changes we've made is to streamline other parts of the business in support of our omnichannel focus. The organizational changes we made in the U.S. during the quarter in areas like supply chain and finance are a critical step in our journey and will build upon our strong foundation. We've maintained some separation in merchandising for stores and eCommerce to keep the focus on our goals and enable speed.

Walmart continues to be recognized externally for innovation, execution and leadership in Environmental, Social and Governance work. Before I get to our segment results, I'd like to share a few recent examples of what we're doing to deliver shared value to our business and to society.

We're always looking for creative ways to promote sustainability initiatives with our supplier base, which is why we're collaborating with HSBC and their Sustainable Supply Chain Finance program. Suppliers that report progress with our Project Gigaton and Sustainability Index initiatives can get improved access and terms for HSBC financing options. Initiatives like these can provide the incentives to enable and transform the way businesses accelerate action on societal challenges.

Another initiative I'm excited about is called Walmart Rise. We're transforming our community engagement program aimed at developing new and creative ways to engage associates and customers in supporting their communities. The company will provide more than $20 million in additional funding this year to stores and distribution facilities nationwide to help spark change and make a difference.

You've heard us talk about Live Better U, a program which provides associates access to a college degree for just $1 per day. To help touch the lives of even more associates, we recently announced plans to enhance the program. Major expansions include the addition of 14 technology degrees and a pathway for high school students to gain access

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to college prep materials and the opportunity to receive college credit. It's an incredible opportunity, and we're honored to help provide the foundation on which so many can build a better future.

Let's turn to our operating segment results, starting with Walmart U.S.

The team delivered strong comp sales of 2.8 percent despite a tougher comparison and unseasonable weather to start the quarter. Comps accelerated sequentially on a two-year stacked basis to 7.3 percent, which is the strongest growth in more than 10 years. We're gaining market share in key categories, including food, consumables, health & wellness and toys. We leveraged operating expenses by 29 basis points and operating income grew 4 percent marking the fifth consecutive quarter of growth.

Our ability to deliver experiences that leverage our unique set of assets is paying off. As we scaled grocery pickup in the U.S., it unlocked new capabilities like grocery delivery. Customers love these services, and we're rapidly expanding them to new locations and testing new options such as unlimited grocery delivery for a fee. And now, we're taking convenience to a new level with InHome Delivery. Through this service, we'll help keep customers in-stock on the items they need every day. Starting in the fall of this year, a group of highly-trained Walmart associates will begin delivering groceries directly into the homes of customers - maybe in a garage, or in the refrigerator. It will be available to nearly one million shoppers in three U.S. cities.

In eCommerce, sales growth of 37 percent reflects strength in online grocery and Walmart.com. We're making progress to improve the fundamentals of our traditional eCommerce business, including the CVI score and NPS. We're lowering our variable costs per unit, improving gross margin and increasing the number of monthly active users. I'm also excited about the opportunity we have to expand our marketplace. We've quickly grown this piece of the business in recent years, and I know we can do even more as we look ahead.

You've heard us talk about our NextDay delivery offer that launched a few months ago. We set an original goal of serving about 75 percent of the

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