Walmart Inc. (NYSE:WMT) UBS Global Consumer & Retail Conference Call March 8, 2018 10:30 AM ET
Executives
Brett Biggs - CFO
Analysts
Michael Lasser - UBS
Michael Lasser
Good morning everyone. I am Michael Lasser, the hardline, broadline and food retail analyst from UBS. We couldn’t be more excited to have Walmart with us today. They went to very long lengths to get here, and we want to thank them very much for their efforts, the largest retailer in the world. And we are super excited to have Brett Biggs with us, the Company’s CFO. We also have its lame duck, Head of IR, Steve Schmitt.
Brett Biggs
We haven’t let him go yet.
Michael Lasser
Yes. And its superstar IR person Kary Brunner. Steve is going to assume the CFO of Sam’s Club. But Brett’s been the CFO of Walmart since 2016. He’s been with Walmart since 2000. He’s done a phenomenal job. He’s brought about -- he’s been instrumental in bringing about change to a company that was thought to be difficult to change. And so, there’s a lot that the team should be really, really proud of. And so, this should be a good conversation.
Brett Biggs
Thanks a lot. I appreciate it. Glad to be here.
Question-and-Answer Session
Q - Michael Lasser
Thank you. Coming out of the quarter, I’m going to start with not so easy one, the focus was about e-com, and a little bit of a deceleration in the e-com growth. It was always clear that the channel was going to slow, particularly after you lapped Jet.com acquisition but some of the deceleration seemed to be unanticipated. What lessons did you learn from this holiday season that you can apply moving forward, especially as you’re looking to reaccelerate the growth?
Brett Biggs
Sure. I’m going to have to start with our forward-looking statement.
Michael Lasser
Please do…
Brett Biggs
I wouldn’t forget about and our attorneys would be happy. So, I may make forward-looking statements. As you think about our Company, make sure you’ve looked at everything that’s online about us. If you’re in the room, you can see the statement; if you’re online, you should be able to see it as well. So, I’d love starting with that. It’s the conversation…
Michael Lasser
It really does, it’s a good way to inspire.
Brett Biggs
Yes. So, let’s get back to, -- I might make [indiscernible] your question just a second, and just take a couple of minutes on where I think we’re as a company. It was a good year. FY18 was a good year for us overall. I like the momentum that gives us coming into the year, into this year. And when I think about some things about the year that were important to us, and they were exciting, surpassing $500 billion in revenue for the first time is -- it’s an arbitrary number, but it’s -- I think it’s a testimony to what we can do as a company and the growth and the strength of the company. The fact that we -- if you take out the adjustments for items, we leveraged expenses during the year, it’s been a while since we’ve done that. So, we’ve started to bend the curve around expenses. I’m excited about that. The comp in the U.S. are being over 2% for the year, and I’ll talk more about that. But when you look at -- think about the base of this, of our U.S. business, it’s over $6 billion in growth in comp. So, as we’ve talked about strong efficient growth, I think that is the definition of strong efficient growth.
The e-commerce business, which I’ll come back to your question in just a second, if you don’t mind, we have 44%, good for the year, with less in the fourth quarter, I’ll talk a little bit about that.
And then, operating cash flow, so $20 billion of operating cash flow, just over that for the year; that’s almost $60 billion in the last two years combined. So, the strength that that gives us as we’re transforming this company is incredibly important. And we are transforming the Company. It’s -- we’re changing how we work, we’re changing the speed at how we work, we’re changing how we take decisions, but always in the DNA of Walmart.
So, we have really unique assets. If you think about the store base we have around the world, e-commerce business that we have, online grocery, the different ways that we can approach the customer, we are in a really good position and have unique assets.
And when it comes -- we want every one of those -- every piece, every one of those assets to be -- to work optimally all the time, but it’s more important for us how they come together. And I think that the 2.6 comp in Walmart U.S. which includes e-commerce in the fourth quarter was the best signal of that. That the customer likes what we are doing and that we’re able to satisfy that whether its e-commerce, pick it up at the curb, pick it up in the store, come in our store, we’re there for you.
We are taking decisions more quickly. You have seen the things we continue to do from a portfolio standpoint, so sold our first-party, shut down our first-party e-commerce business in Brazil. We sold Suburbia earlier in the year, decided to take some actions on some of our Sam’s Club, so we are taking decisions.
And the tax reform was part of that. So, as we came toward the end of the year, everybody started learning more about tax reform. We felt like that was an opportunity to take the pace that we’re on, the strength that we have to continue to be aggressive with what we do in our business and we stepped back to the team and said we are in a great place and let’s keep taking actions that benefit us long-term. And there is short-term implications to that, we get that. We understand short-term expectations of investors but we felt like that was the right decision for the Company. But I am as optimistic as I have ever been, about where we are as a company. And e-commerce is a part of that. Now, I’ll get to your question…
Michael Lasser
Yes, please. It’s helpful.
Brett Biggs
As we came in, we talked about on our release that we -- we had planned down fourth quarter. We ended up hitting -- total sales, we ended up hitting right where we said we would in October, which is about $11.5 billion in total Walmart U.S. e-commerce. We are a little bit lower than we had planned. There were some promotional things that we had done a year before that we felt like wasn’t the right thing to do this year from an e-commerce perspective. But, again, when you look at the total, the total is good and strong.
So, we made that decision. We’re a little bit lower because of some operational challenges, mostly on the fulfillment side and nothing that was major. But as we are growing as an e-commerce company, it’s not always going to be linear. We’re learning. We are fairly new still as an e-commerce company. So, we are going to learn as we go through that and there is going to be some hiccups, and we had a little bit of that in the fourth quarter. But overall, we still feel good about the business as you look at next year, online grocery has been fantastic. We continue to get more aggressive on that. We have 1,100 stores today, we expect to have over 2,000 by the end of the year. That’s an important part of how we are serving customers online. So, I am excited about what we’re doing in e-commerce and therefore the guidance we gave.
Michael Lasser
So, two questions on that. Number one, talk a little bit about some of the promotional changes. And two, you talked about some of fulfillment challenges. So, what lessons did you learn from that that you can now apply moving forward?
Brett Biggs
Yes. On how we approach the business quarter-to-quarter, again, for us, I’ll go back to kind of an opening comment. For us, it’s the total. How do we want to serve that customer, how is that customer want to be served. At times, there may be times where that skews more toward stores, maybe time that skews more toward online. Great thing is when we do both of them and get the parts to work together. Again, on the fulfillment side, we are learning every day. We have nine large fulfillment centers. There’s a number of things we are doing differently. So, go back last year, 2-Day Shipping, Pickup Discount. There’s just a number of things that we are doing differently and there’s just lessons we’re going to learn as you go along the way.
Michael Lasser
Sure. I think heading into last year, heading into fiscal 2018, you had promised that e-com was going to grow north of 30%. Marc was a little skeptical. You had some tricks up your sleeves, like rolling out the Pickup Discount, rolling out the 2-Day. Do you feel like there’s initiatives that are on the horizon that could be as impactful. Obviously, rolling out online pickup -- or grocery pickup to 1,000 more stores can be helpful, but are there other? And if you want to share them, it’s fine.
Brett Biggs
Yes. I probably won’t get into detail [multiple speakers] but there’s always things going on. Marc and his team, we had a great e-commerce team before they came. Adding Marc and his team is just -- will take that to a different level. So, we are always working on things. Some of the things you will see this year -- you are already seeing some hints of it as a site redesign. So, what we did in home a couple of weeks ago, which we’ve gotten really good customer feedback, you are going to continue to see the site evolve over time. And as I was talking about earlier, just being still relatively new in e-commerce, Marc talks about the CVI, Customer Value Index, and it’s how do we do everything better in e-commerce. Having it on the site, you can find it, it’s priced right. We can get to you, we can get it to you in the right amount of time. We are getting better at that every day; we are getting better at that every quarter; we’re getting better at that every year. So, there’s some benefit you get from just getting better.
We have Store No. 8 where we continue to innovate. And Store No. 8 is where we are thinking three years, five years, 10 years, how is the customer going to shop, how are they going to use AR, how are they going to use VR. And within that, how do we want to approach that as a company. So, there are some things that we are going to want to own and do things ourselves. As a company, we probably did more of that in the past; whether it’s technology or things, we tend to develop everything. I don’t think that makes as much sense as it used to. There is places we are going to partner. You saw that with Google, you saw that with Lord & Taylor. And there is places we acquired. You saw that with Bonobos, with Moosejaw and things like that. So, there’s a lot of different ways that we can come at how to continue to grow in e-commerce. But things like Pickup Discount, 2-Day free shipping; we have talked about being more aggressive with online -- with grocery delivery which is always things in the works.
Michael Lasser
You haven’t talked much about Beyond [ph] this year. So I want to fully respect that. There are questions about investment resources that will be applied as moving forward. So without giving us a context of how much or is this the peak operating loss or whatever that is, just give us the sense of where you will be investing, particularly within your -- in your digital business? You mentioned nine fulfillment centers. Do you foresee the vision of having fulfillment centers across the country or the model would just be different than that?
Brett Biggs
I think it will evolve. Whether it’s how you sell or how you distribute will depend some on customers, depend some on competitors. And part of what we want to do is continue to maintain flexibility. I told someone earlier today, this annual planning cycle almost doesn’t work anymore. You’ve got to be really flexible and the customer is changing. That’s where you got to our start. How do they want to shop? There is a lot of different ways to attack that. We have more levers to pull than some of our competitors and I think that gives a benefit. We can get aggressive in area, may be less aggressive in one area, and that goes with price. We made investment in wages.
Walmart is always going to be a leader on price. We’re going to be competitive on price. It’s a huge part of what we do. And we’re going to be thoughtful about it though. We have a group, as you would imagine, that all they do is focus on price. And we’re going to be really thoughtful, we’re going to be strategic, we’re going to be targeted. But I think it’s benefited us over the last couple of years. So, just there’s a number of different ways that where we can come to the same answer. We know -- we want to win long-term, we want to win mid-term and we want to win short-term. There’s just a number of different ways to come at that, and we’re trying to maintain that flexibility.
Michael Lasser
And I think that’s an underappreciated point because one of the messages you offered on -- and thank you for having the call with your fourth quarter, was there’s a lot of different ways we can calibrate this business, which people don’t necessarily expect from a retailer that generates $0.5 trillion. And so, another example of that -- the message came out of the call was look, we’re going to emphasize Walmart.com a little bit more than we do Jet.
Brett Biggs
I would say it differently. No, I wouldn’t say it differently -- I think you said it correctly. I would say, we’re going to use it differently, Walmart.com. It’s important part of what we do. We’re learning more about the Walmart.com brand as well as we develop and we see how customers respond to that. We’ve got a great core customer set adding things like the partnership with Lord & Taylor, Bonobos, sort of things, it involves how people think about that Walmart.com brand and involves how suppliers and other brands think about Walmart.com brand. But the Jet brand is still very important. We knew coming in to acquiring Jet that it was it was very popular, millennials, higher income, more urban, that’s still the case. And if we -- I got asked a question other day about how do we -- kind of where do you see Jet ending up. And I don’t think there is necessarily -- there’s not a ending up. This is always a constant evolution; it’s a cycle, it’s a circle that we’re going to continue to be looking at the Jet brand, Bonobos, Moosejaw, Wal-Mart, what’s the best way to use those brands to increase our sales and make us more profitable over time. That’s what we want to do.
Michael Lasser
And are you finding that the Walmart.com brand can actually tap into some of millennials, it may not have tapped into but as you add these brands, as you reposition it, it’s just doing the more effective job at that?
Brett Biggs
Yes. It’s kind of interesting though. The Walmart brand, the Walmart customer, if you took the U.S. demographics, the Walmart customer lays over that really nicely. And Walmart is very popular with millennials, to begin with, and particularly as millennials have kids and want to save money, Walmart’s a great place to do that as you’re buying baby supplies and other things like that. So, there’s definitely -- there has been potential with the millennials. There’ll continue to be more opportunities.
Michael Lasser
Okay. Some of the questions we’re getting from the audience revolve around price and price investment. And I’m not going to necessarily ask you to give us your strategy on where you go for pricing here because I don’t think you’ll tell us. But, what do you see…
Brett Biggs
It’s nice that you realize that.
Michael Lasser
Yes. I’ve been trained well by your friends over here. But, do you see the competition using price as a tool to try and gain share, especially in light of the savings that everyone’s getting from having a lower tax rate.
Brett Biggs
Sure. We have great competitors, different competitors in different spaces, different geographies. And I think price, convenience matters a lot to customers, probably today even more than it did 10 years, but price is always going to matter. And the great thing for us is that that’s part of our DNA to begin with. We know how to do that. We’re thoughtful about it. We’re strategic about it. And I’ll turn the price question back to costs as well. You’ve heard me talk a lot about costs. And our cost structure today is higher than we like it to be long-term. We’ve made decisions around e-commerce and technology and wages and stores and things where we have taken decisions, or SG&A is around 21% today. We bent that curve a little bit last year. We said we want to lever again this year. But continuing to focus on that costs base gives us more fuel of how to invest in the future. I think from a margin rate perspective, gross margin rate perspective. Over time to some degree, some of that will be dictated by customers, some of that’ll be dictated by competition. As a company, we want to ensure we’re in the right place to be able to thrive in any kind of environment that we see. And a big part of that is getting that cost base where we want it to be. And we made some investments this year, we made some investments couple of years ago, but in the broader context, I like what we are doing from an expense standpoint.
Michael Lasser
It’s interesting you say that because one of the themes that we’ve heard as we talked about the pricing question over the course of last two days with the variety of retailers is are you going to pass along some of the rising wage and that wage cost, rising transportation cost and just the cost of doing business going up, in the form of higher prices. And the universal answer has been, look, we’re going to have to find productivity improvements to offset those indirect costs going up. So, it sounds like you agree with that.
Brett Biggs
Yes. I think that’s generally correct. And again, it’s all these pieces have to fit together in a way that for investors that it makes sense, what we are doing. So, it’s all -- it’s part of the equation for sure.
Michael Lasser
And then, this topic is very new but is very relevant. On the topic of protectionism, and tariffs, [ph] and there is thought that maybe some prices would go up as the increases find their way to finished goods. What’s your take on how the market is going to respond to that? I know it’s very early but do you have any initial thoughts or just how Walmart’s trying to contingently plan some of that?
Brett Biggs
I mean, it’s really early, it’s incredibly short on details at this point. And earlier last year, we were talking about border adjustment tax and tax reform, and we were certainly against that and glad that that wasn’t a part of where we ended up on tax reform. We’re monitoring it, just like you and everybody else are. And I think our size and our ability to pull different types of levers and we have different ways to come at the customer I think still benefits us -- versus competitors calling almost any scenario.
Michael Lasser
Yes. A year ago, besides border adjustment tax, we were talking a lot about the hard discounters and the impact they’re going to have on the pricing environment. It seemed at least that that -- some of the rhetoric that then has not materialized in the way that we thought it would, probably in part because of some of the actions that Walmart has taken. Is that a fair statement?
Brett Biggs
I don’t know how to make the link. We certainly were prepared for the entry of Lidl, they are a fantastic competitor. All these Aldi’s been a great competitor in the U.S. for a long time. So, we’ve known how to compete against the discounters and did in the UK. We learned some lessons in the UK. So I wouldn’t -- I don’t know how to make that direct link, but we’re going to be competitive and we’re always going to be tough.
Michael Lasser
I want to dig in a little bit to what you just mentioned about, Walmart has some opportunities to improve its cost structure. The perception is that Walmart is pretty lean. [Ph] Where do you see the big buckets of savings and potential savings, and how do you get at those moving forward?
Brett Biggs
I came to the Company 18 years ago. And I think I’d been at the Company about a week and we had this thing called the supplies roundup. And I was like what is the supplies roundup. And it’s like, well, you are going to look through your desk [ph] and everything for all the supplies you have laying around, we’re going to get it under one such a place so we can make sure that we have it, and we don’t either order more supplies. I was like where have I come to. This is a really different take on expenses.
Michael Lasser
Can I go back to where I was?
Brett Biggs
But a few months in, you start realizing if I had a business, that’s what I’d be doing. I mean, were maniacal about expenses and we haven’t lost that. I think we have lost some of the edge on that over the last year. You can feel it coming back. Earlier in the year, we talked about that we started a more formalized process around zero-based budgeting, and that’s just a tool to do we what want to do. But the conversations inside the company have changed. The way we are thinking about working has changed. I will give you some examples. We mentioned in October just reducing the amount of the length of a receipt tape, what that can be, and that example has just caught traction inside the company given where people like that’s amazing, what else is sitting out there? And I feel like people now are having fun more with, well, look at what I say. The stores are getting excited about it.
The change in the way we work, we still have more manual processes than we should. And so, some of the additional investment in technology is going to be how do we automate more of that. We have a big shared services group that reports through me. And we’ve in the past taken more of a standard type approach to shared services. And we want to take a broader view of shared services. What are the things that truly could be shared services, globally but at least inside the U.S.? You saw that some with the way we did back in processing about a year ago, that was a part of the broadening of shared services.
Goods is not for resale. When you have 4,500 stores in the U.S., we don’t do as good a job as we should about leveraging the purchasing power of certain types of services and things. There’s so many things. And with Walmart if you can do something that’s seems fairly small but you start multiplying it, there are big numbers sitting there. And so, I am optimistic. Some of them are quicker than others, some take change process and system that takes longer but I am excited about what we can do.
Michael Lasser
You told me an awesome story about Walmart collectively -- I think you had 20,000 hotel room nights in Atlanta. Is that…
Brett Biggs
Yes. So part of what we want to do there -- but we have good data. But sometimes getting to the minutia of the data is more challenging than maybe it should be. And as we went through the zero-based budgeting process and started to gather some of the facts about the company, it was actually more than 20,000 nights that we had in Atlanta. And so, it starts make you wonder, well, it’s a direct flight from Northwest Arkansas, why are we having 20,000? And the interesting things you find out are -- you have a person who is working on a store opening and they’re staying in Atlanta for long time, they will cause you to think, well, why do we have those many days, should we have an apartment in Atlanta, should we -- but it cause you to step back of the company and go, okay, a new travel is going up. Now, I know exactly why travel is going up. And I know by person where travel is going up, and it’s not a way to get someone in travel, just say, hey, could we do this differently. And there’s just all kinds of examples. And people have gotten excited about that access to the data. And we can make different decisions.
Michael Lasser
And it’s interesting too, because we’ve got a question, one of the areas of competition in the future is going to be, how well does each consumer company know its customers? And data will be critical to that journey. Where do you think Walmart fits in, in the need to have data, synthesize data about the customers and use data and how do you get better at it?
Brett Biggs
It’s extremely important. People -- we get asked questions a lot about loyalty programs, and we have a Sam’s Club membership that’s part of that model and we haven’t other than that really had a loyalty program per se in the U.S. But customization; that’s the key. And so, you’ve seen quite a bit of emphasis from us on Walmart Pay and our Walmart app, getting people to more frequently use our app and getting that sticky with customers is really important. Things like easy reorder online that we started last year. So, now when I come back to Walmart’s site, it knows everything, not only if I order online, what I bought in the store. And so, now, when I go online, I know what I bought in last six months, I just go click-click-click-click-click, totally different experience than it was a year ago. So, Mark and his team things like Store 8, the stores as well are really, really focused on customization of that experience. And we’ll get better, we’re early, and that’s what makes me excited about it because we are early.
Michael Lasser
And do you see that improving at an accelerating pace?
Brett Biggs
It has to. Yes. I mean, the customer wants it, so it has to improve at accelerated pace.
Michael Lasser
We’re getting a couple questions on supplier inventory world. Can you talk about your inventory reduction? Maybe cut too in certain categories. How vendors responded? And how should we think about inventory reductions looking out over the next three to five years?
Brett Biggs
Really, really pleased with the inventory performance, particularly in the U.S., but international made a nice -- made some nice progress this year as well. The amount of working capital improvement, payables and inventory over the last three years has been phenomenal. It’s made a difference in how we operate as a company. Greg Foran and I have this conversation a lot. He still goes in stores. He’s like, well, we’ve got room to go on inventory, I still saw too much in the back room. Part of that’s getting supply chain right and you’ve seen we’re working with suppliers differently on don’t be late, don’t be early, be on time, and that helps with our flow and our ordering capabilities. So, with data and with partnerships, the suppliers are getting better at moving inventory.
The merchants category by category are certainly looking at my in-stock, the right amount -- in-stocks continue to improve. We’re way better shaped than were three years ago and inventory coming down. It seems, when you first learn retail, it seems counterintuitive, seems like if you want to be more in stock, you would have more inventory and actually it’s quite the opposite. You want to have the inventory where your associates can find it. Technology has been a part of that. So, Greg would tell you, there’s still more room to go on inventory. I think there is, duplicating what we’ve done over the last three years would be a bit challenging but there’s definitely still room to go.
Michael Lasser
And how about that supplier relationship? Vendors and especially some of the Walmart’s biggest vendors are not having the time of it. Does this influence Walmart’s ability to maybe support some of the initiatives that it wants to do either through the price investments or having the right inventory at the right time. We also got a question on private brands versus large brands, it all works together?
Brett Biggs
Fits together. Yes. I go back to the comment I made in the introduction of when you’re driving the kind of growth we’re driving, that’s really important for suppliers, important for us. We tend to be their biggest customer, many times they’re our biggest suppliers in certain areas. So, there’s certainly a symbiotic relationship there. We -- the partnership with suppliers is incredibly important. But, the ability to get the innovation and the price that we need for our customers is also very important. And given the growth we’re driving, we want to ensure that we’re getting the best deal for us and the best deal for our customers. So, it’s always a work in progress.
Private label is -- there’s much more energy around private label than there was a few years ago. I was at our year beginning meeting with our store managers in Houston couple of weeks ago. And just we have a merchandise floor that’s basically set up and a convention center, and just every category you went around to, there was this innovation and energy around private label. We’re a house of brands. I believe we’ll always be a house of brands. And in the past, I think we used private label more as, whether it’s innovation I missing, is there a price point I am missing, let’s fill that hole. Whereas today I see more innovation on our side, certainly more synergy, more focus. So, Sam’s Club will be a great example with Member’s Mark where we had more than 10 brands in Sam’s five years, six years ago when I was at Sam’s towards one today with Member’s Mark. And it’s a huge brand. Great Value is huge brand, Equate is a huge brand and you’ve got a great quality.
One of the things we learned in the UK in competing with hard discounters in particular is, you cannot compete with opening price points, not the way to go at it. So, I think if you have a really good mid price point and quality, and really good quality think Equate, Great Value, you can really compete. I think customers in the U.S. are becoming more acquainted with private label, they are more accepting the private label. I’d be surprised that we’d get to the level as we see in Europe. But, they are more accepting that. And so, I think we are taking that more as a way to say let’s give our customers choice giving something different. So, it’s a great part of our offering.
Michael Lasser
So, give us some sense of the level of energy. You talked about the merchandising setup and this meeting now. How would that have looked maybe a year ago to give an order of magnitude of the effort and resource that Walmart is putting behind this?
Brett Biggs
It was interesting. I’ll go back three years ago. You would some private label and it was good, and we just had a lot smaller team then. Last year, we had a whole section set up, one section of private label. So, you really got a sense of how much private label we were doing and it was in makeup and it was in protein, apparel. It was all parked together, so it was all parked together. So, it was really powerful.
What I sensed this year as I saw going to an area of the floor and I know a lot of the merchants obviously and say, hey let me show you some stuff. And there is always a great branded television and those are fun to see. So, say let me show you this thing that we’re about to roll out, which I can’t talk about new product. But -- and they say, hey, you guys come taste this, this is great, you are going to like it. So, I guess, I just said it’s a food product.
Michael Lasser
We hope it’s a food product.
Brett Biggs
Yes. But the quality, hey, look at our packaging, this is what we’ve done, there was just a lot of energy from the merchants around there. Really proud of it.
Michael Lasser
And I think we can also get some sense of this from recent announcement about some of the brands you are launching in apparel and...
Brett Biggs
But it’s -- there is -- as I got foot on the floor, there is some things and -- there is some things in food, there is some things in apparel, there is some things in -- I mean, it’s just across the board and it’s exciting. But at the same time, it’s trying to -- you are working with your suppliers that had great products on the branded side as well. And a lot of times we are just filling in a gap or maybe they don’t want to be or it’s -- they just got to work together with suppliers.
Michael Lasser
So, there’s a few questions and I think central to the investment debate on Walmart. It’s how does the profitability of this business, especially on a great perspective look over time. So, recognizing that your constraint by what’s been already quitting the public forum, how should we think about the puts and takes and how could we get comfort that as a massive retailer facing some rising costs, if only the cost of doing business is going up, you can see stable profitability over time?
Brett Biggs
Yes. I mean, if you go back to October, we had said that coming into this year -- we gave guidance then that we had expected our operating margins to be fairly flat, which would imply operating income going up a little bit, you did the math. So, it goes back to decisions we made around tax reform to say we just -- the strength we have and where we are at and we need to keep doing this. And so, we gave guidance as good as we could and as transparent as we could that operating margin would come down a little bit.
Now, operating margin can go down and dollars go up, concerned about rate but really concerned about dollars. And if you think about the productivity loop, and we still believe in that whole heartedly is your rate could come down a little bit but if you generate more sales dollars, that allows you then to lower prices, better leverage your expenses. That productivity loop has not stopped inside of Walmart. The last two years I would say it’s accelerated.
So, even when we gave guidance in October, we gave guidance a year ago, we said there may be point in time where we decide to do something a little bit different. And that’s how I would classify this year, as we decided to do something a little bit different, and the dynamics of the environment changed a bit with tax reform.
Long-term, we understand and we spend a lot of time talking about ROI. It’s really important to us. And as you would expect, our executive team, as we meet, spends a lot of time talking about the trade-offs of this initiative versus this initiative, what’s the long-term benefit. There are some investments you are going to make that are just not going to have the payoff right away. They are not going to be in the same year, they may not be in the second year. But long-term, we feel like if we don’t do this, we will be in a position we don’t want to be in. And so, the amount of conversation we have about now versus two years from now, three years from now, five years from now is extensive but ROI is always at the forefront of those discussions.
Michael Lasser
One of the things you mentioned with -- at the time of the fourth quarter is that you expect the peak margins -- peak gross margin decline to have been in the fourth quarter and it’ll get on an annual basis?
Brett Biggs
Gross margin quarter to quarter, it’s tough for you guys to analyze. And there’s a lot of things that go into that gross margin. There is 20 lines that I have in my head that go into gross margin. And quarter to quarter, those can look different.
Michael Lasser
What will be the big puts and takes as we think over the course of this year?
Brett Biggs
I think price is always going to be a big part of what happens with gross margin. Transportation costs, they were up a little bit. Some of that is fuel costs are up a bit. But sales are good. And so, that has a bit of pressure. There is other things. Shrink hits gross margin; the mix of your categories hits gross margin. So, there’s a lot of different things. And you can sense by the guidance we gave on operating income and the way we talked about leverage that we expect gross margin to be down a little bit this year. But, if we keep getting the leverage and able to get the operating leverage that I think we can and should over a period of time, it gives us the opportunity to keep pressure where we want it, but still deliver a bottom-line that investors can be happy with.
Michael Lasser
And you mentioned that really the focus of the organization is on the current investment. And one of the vivid examples of that was the decision to pare back on the Sam’s Club store base. Can you talk about the decision? And we have seen better results in Sam’s, at least relative to what they have been posting over the last few years. So, what do you see as the biggest drivers of that recent improvement?
Brett Biggs
I told Steve to keep that up, when he gets over to Sam’s Club. It was 10% of our fleet. So it wasn’t a dramatic part of our fleet. There were good things that were starting to happen a couple of years ago. I think John Furner coming in and Gisel in operations and Ashley in merchandising are taking decisions, taking quicker decisions, acting with urgency. And the first thing you do is what you do in a membership is you start with a member. What member, how we’re trying to target them, are we focused on that? I think, they’ve really gotten focused around the member that they want to have. Club closures, store closures are really -- they are difficult. They are difficult from a associate standpoint. We don’t -- certainly don’t like that. And some of them more financially based where population has moved away from a club and you have a market where you have a certain number of clubs and you know you can hit the same volume with one less club. So, those kind of decisions were made, every club was looked at. And we talked about even two years ago as we looked at our portfolio globally even last two or three years, every store gets looked at and gets looked at all the time to make sure it’s fulfilling the strategy that we want to have. We’re not emotional about investments. We are emotional about associates, but not the investments per se. And I think you’ll see us close stores from time to time. We do internationally, we do in the U.S. and it’s going to be a continuing evolution of just we evolve as a company. We’ll open a few, we’ll close a few and keep evolving.
Michael Lasser
And what’s, aside from the store closures, we have seen better results from Sam’s, what has been the critical driver, so we can understand that’s sustainable moving forward?
Brett Biggs
Yes. I do believe it’s sustainable. Again it’s getting that focus on membership with things like paring down the two memberships, making membership easy-to-understand, now having free delivery for plus members, for e-com purchases, bringing the synergy together at the box, Scan & Go. I haven’t checked out in the Sam’s in a long time. I mean, I do, I pay.
Michael Lasser
Well, people are getting nervous...
Brett Biggs
With the Scan & Go app I do pay, but it’s just quick, it’s easy. And so, I think they’ve actually been on the front edge as a company of what we want to be as a company from a technology standpoint. And so, I think the improvements there I expect that to continue.
Michael Lasser
Why couldn’t you roll out Scan & Go in the super center -- your Walmart business?
Brett Biggs
Well we haven’t rolled it out but we do have it in some stores, so the store where I shop. And I’m looking -- how many stores we have Scan & Go in today, it’s more than a handful, but what’s that? Several dozen, okay. Several dozen stores. And it’s -- customers love it. Some of the new -- the two really new supercenters that we put in one in Orlando and one in Houston, the use of that is incredibly high. I’ve used it. Walmart environment is a little different because you weighted produce, you have other things that make the customer maybe a little more leery of Scan & Go. They want to make sure they’ve caught everything, they are afraid of oh, I didn’t scan that, you have 20 items that are four or five at Sam’s Club. But they’re really starting to get it. And we have handhelds are used or you can use your phone. I use my phone and it’s great. So, I would -- those kind of things are going to continue to be a big part of what we do.
Michael Lasser
And the question obviously comes up about Amazon and what it’s doing with technology, and the technology that you’re deploying to your stores will be a critical way that Walmart can compete in this ever so evolving world where Amazon’s having an impact.
Brett Biggs
Absolutely. If you look at newly remodeled stores, you’ll see much more use of Scan & Go but self checkout traffic early. You’ll see fewer manned lanes, or lanes with a cashier but some customers want that. They want that interaction, they may be intimidated by the technology, self checkout. So, we’ll continue to do both, but it’s certainly heading toward that way. And quite a bit of our inventory reduction I would lay at the feet of technology that’s helped us get there and just making it easier on associates.
Michael Lasser
The last minute or so that we have, I want to talk a little bit about the international business, which doesn’t get as much attention. But, should we expect any major shifts in the strategy? You have making some tweaks to the portfolio but how should we think about maybe some bigger moves?
Brett Biggs
Yes. The new CEO, I’ve known her for...
Michael Lasser
Yes, exactly.
Brett Biggs
A long time for Mazda, she’s been with the company more than 20 years, just a great executive, did a nice job in the U.S. The way we talk about international, and I don’t see how we talk about it changing really is very focused on our North American core, so Mexico, Canada, Central America, Walmex is one of the best retailers in the world, period. Probably doesn’t get the attention it deserves, because it’s part of such a large company. So, we like what we are doing in North America. China and India certainly have the opportunity to be very big growth markets for us, when you figure more than a third of the world’s population lives in those two countries. Those can continue to be big opportunities for us in the future. And then, the other countries play a role.
We have some countries that are doing incredibly well. And as long as they play a role in the portfolio and they are return-accretive and the talent accretive, they can play a part.
Michael Lasser
In Asia, you pursued a bit more of e-commerce central type strategy, especially with some partnerships with JD. Is that -- should we expect that that’s going to continue to be the approach, and anything you have learned there you can now deploy to U.S.?
Brett Biggs
Yes. I mean, how you approach China is how the China consumer wants to be approached. It’s a very young culture. I think, there are play -- there things about China retail that are more evolved than U.S., certainly on the e-commerce side. And so, we do learn how e-commerce shopping could evolve over time in the U.S. and particularly how ecosystems are developing. When you look at the ecosystems with Baidu or Alibaba or Tencent and us with JD, those matter. Those are becoming an important part, Amazon certainly in the U.S. and we are developing that ecosystem with -- and to some degree we think we have done some of the hard parts, because we have a lot of stores. And those stores can be so beneficial to us in the future, but when we think what we’re doing about with financial services, with our stores, with e-commerce, with online grocery, with our app, those ecosystems will be a big part of the future.
Michael Lasser
Well please join me in thanking Brett for what was a really fun and informative discussion.
Brett Biggs
Thank you.
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