Walmart Inc. (NYSE:WMT) dbAccess Global Consumer Conference Call June 11, 2019 5:15 AM ET
Richard Mayfield - EVP and CFO, Walmart International
Conference Call Participants
Paul Trussell - Deutsche Bank
Good morning. My name is Paul Trussell, I'm the U.S. Retail Analyst. And thank you all for being here at the DB Global Consumer Conference. I'm very excited to have with us today Richard Mayfield. Thanks for being here, Richard.
Richard Mayfield is the Executive Vice President and Chief Financial Officer for Walmart International. In this complex division of Walmart's operations, Richard leads the international finance team, and has responsibilities for indirect spend management, real estate, business development and strategy.
Before we get into our fireside chat, I just want to mention that there may be forward-looking statements, and please refer to walmart.com for their Safe Harbor statement. And with that, Richard, you run a pretty big business within a pretty big business. Maybe just give some opening remarks on really what the focus and priorities are right now of Walmart International.
Sure. And thanks for the introduction, Paul. I think most of you probably know we've had consistent performance over the last four years. We've seen consistent improving comp sales across the business, we've grown profits faster than sales. I think Q1, you'd have seen the recent results, we had 7 of 10 markets with positive comp sales.
The numbers were a little bit impacted by timing of Easter, our quarter is January to March, Walmart Inc. is February to April. So, UK in particular would have been in positive territory. Just from a strategic point of view, we're executing our strategy, while at the same time making some thoughtful decisions around portfolio.
So I think over the last 12 months, you've seen us make a big investment in India. We've completed a partnership deal with Advent in Brazil, which takes our ownership down to 20%. In the last three or four months, we've completed deals to exit our two remaining banks in Canada and Chile, which would both be ROI accretive this year. We're in a little surprised by a couple of decisions on the portfolio actions in both the UK and on the Cornershop deal in Mexico, and we -- I'm sure we might reference those later.
Just on the strategy, we're building strong local businesses powered by Walmart. I'll just explain that briefly and then we'll hand over to some of the questions. Strong local businesses means that we develop each business specific to the conditions in that market. So building a business is relevant to local customers, and position for long-term growth and success. And that may mean different businesses and certainly different partnerships and ownership structures and business models in different markets.
And then the powered by Walmart is very much about leveraging the capabilities, the scale and the people we have across, as you said, what is a large business. And probably I've mentioned a couple of things there. One would be our global sourcing organization, really leveraging our scale in areas like general merchandise, packaged foods, and you mentioned ISM or [G&A] [ph], maybe the term that people know, and then the other area would be technology.
I think I'll just finish by saying that, we’re seeing some uncertain political and economic environments around the world, but we feel that the combination of our store portfolios close to customers, with our developing omni-channel online businesses makes us pretty well positioned for the future.
Q - Paul Trussell
So a lot to discuss, but let's start on the top line. You've mentioned some of the success you've had in particular markets. Maybe give us a little bit more details on the outlook for the business over the balance of the year. And obviously your current guidance kind of has with and without Flipkart.
Yes, I mean, obviously, we gave guidance at the start of the year, and we won't update that guidance until the end of the Q2. And when we announced earnings then, I mean, obviously, in Q1’s results you'll see the continued success we're seeing in Mexico is probably a standout. We had a 4.7 comp there, a two year stack of over 14%. And that's been a pretty consistent theme. Why are we seeing that it's we’re the market leader there, we have a multi-format business that we think is well positioned for premium customers with the Sam's Club business. And about 40% of our business is a discount business called Bodega that's important in Mexico, because about 45% of that market is still informal and formalizing, so we think we've got plenty of growth opportunity there.
Just in terms of how the growth pans out. While I won't update the guidance. Fair to say from a comp sales perspective we’ll see a similar number to the one we saw last year. We're opening about 300 new stores the vast majority of those will be in China and Mexico and Central America. And then, there are two kind of new pieces, if you like there's obviously the addition of Flipkart and the deconsolidation of Brazil. Those two numbers broadly offset one another. There's a slight accretion Flipkart numbers are a bit bigger. But broadly speaking, they cancel each other out.
So let's stay on the topic of Flipkart. Pretty meaningful investment that you made in that business, still a little bit less than a year. But what's been the learnings and takeaways so far? And how should we think about the path going forward on both the top line and impact to the bottom line?
Yes, we're very excited about India. And we're very excited about Flipkart. To give a couple of stats, it’s a population of 1.3 billion, average age of 28, which is pretty unusual. There is about 400 million smartphone users in India and that’s projected to grow to 860 million over the next five years. So there's a big growth opportunity there. We’re very excited about the team in both Flipkart and PhonePe the payments business. They're very strong tech data people. But there's just a culture of customer centricity. And they're very disruptive in the way they think about reinventing categories to address customers’ needs.
We're building an omni-channel ecosystem to win in India. And that word ecosystem is part of the reason why we're excited. So really think about it in three pieces. There's an e-commerce business within Flipkart, Myntra and Jabong the brands, we have market leading positions in some key categories. So mobile phones, apparel and large electricals and appliances.
We have in Ekart, a logistics business, we think is the lowest cost logistics network across India, addressing all the pin codes in the country. And then we have PhonePe, which is a FinTech digital payments business, which has been growing very rapidly and we're very excited about.
I think the one other thing I’d probably mention outside, just the e-commerce business, one would be digital payments. It's an ecosystem component that’s as you know being critical for the growth in China and we think is going to be the same in India. The other one would be marketplaces, the Flipkart marketplace, has about 150 million SKUs, 160,000 vendors and they’ve build that with very strong seller propositions and using machine learning tools to curate the site. And we think that's something we're learning a lot from and very excited about.
So there's a lot of commentary about the regulatory environment in India, as well as competition, maybe just touch on what you have experienced over your time and how it's played out relative to expectations going in.
Yes, I mean, it's important to remember we've been in India for 10 years. So, we’re used to the political and economic environment. And it sometimes can surprise you, there was a change in the very early part of this year with Press Note 2. We are compliant with Press Note 2, it involved four or five weeks of running around and making changing, some operational processes and some technology, but had very little impact, either on customer experience or on the financials.
I think you can expect the unexpected going forward, but as I say, we're used to that environment. I think one thing I'd probably say is that of all the potential outcomes in the elections, a Modi government with a bigger majority is probably the best outcome for business that time will tell.
And then, I think in terms of opposition there, you mentioned competition, it's an unusual market, the retail market is still about 85% is small businesses, mom and pop shops called Kiranas. The e-commerce network is largely ourselves, Amazon, and then some smaller players. So we feel well positioned, I'm sure there would be a few more surprises. But we know the environment reasonably well and we are confident about the future.
So turning to Europe, Asda has been performing well. There's also been some big news on that front from a regulatory standpoint. Maybe just talk to us a little bit about both business, but also the go forward strategy.
Yes, I mean, we've -- the business has been performing reasonably well. Again, if I adjust the Easter impact would have had eight quarters of positive comp sales, our price positions improved. We've been doing particularly well in private brand and online. But it remains a pretty challenging market, the consumer fundamentals are good, wages are rising about 3%, prices about 2%. But given the Brexit uncertainty, the market is under some pressure and growing more slowly. In fact, recent GDP figures look like they may have turned negative.
So it's challenging environment, our job right now is to focus on continuing to drive improvements in Asda and actually interestingly over the course of the M&A process we've been running, we reached the number two spot. So, the business is performing well, credit to Roger and the team for avoiding the distractions and running the business. That's the job going forward.
We’ve mentioned the possibility of an IPO, I wouldn't see that as an end in itself. But if we believe that the combination of an independent Board, local investment, a pathway to an IPO is the right incentive for growth of the business, then we will clearly consider that when it comes down.
Just referring to CMA, we spent a lot of time with the CMA before we announced the deal. So we knew we were using a consistent methodology to assess issues like local competition. We were frankly surprised by the decision. And obviously it limits some of the strategic options, I think, for large players going forward. But our job is to focus on running the best as we can.
Also the Asda market, they obviously has a very dynamic and powerful private label business. Maybe just touch on what you're seeing on that front, and how that maybe shows itself in other markets as well.
Yes, I mean, I think one of the things that's important to understand about the UK business is I mentioned three areas of leverage empowered by Walmart, and one of them is expertise. And over the time period that we've owned Asda, three things I mentioned that we've brought out of the UK, one online grocery that’s a big theme in the U.S. really, we learned that business in the UK academies. So the stores of training where we train associates, that was a thing that we grew in Asda now 200 of those in the U.S. and then private brand would be the other obvious example.
The market is very highly penetrated for private brand. And, as I say, we’re continuing to outperform the market there. We're excited about the future that that holds in our business from a growth and differentiation perspective. And no secret that that's also been an area that's performing well in the U.S. And have seen a lot of investment the Culinary & Innovation Center that we opened three or four years ago in Bentonville. And some of the improved performance in areas like apparel and general merchandise has been on the back of strong private brand development. So I think we feel good about that.
You mentioned online grocery, let's talk a little bit more across the various markets on how the e-commerce or omni-channel business is developing? Talk a little bit more about last mile capabilities.
The first things to say is every market is different, although there are some consistent themes. If you look at penetrations around the world, China is up at about 23%, the UK is about 17%, U.S. sort of mid-teens, Canada, 8% to 10% and then Mexico, India, mid-single-digits. So, penetrations are very different. I think pickup and delivery models, what I will say is less dense populations tend to be to tend more towards pick up that would be true in this country, it would be true in the U.S.
In terms of what we're doing in the international business, and this starts to go into the on demand and last mile delivery question that you asked. We’re focused very specifically on online grocery and then thinking second about extended assortments and marketplaces. And the reason for that is because we think stores, forward deployed fulfillment centers are the fastest and the lowest cost route to customers for that head of the assortment.
We also believe that in -- particularly in densely populated cities, kind of crowd source last mile delivery is the way forward. So if you take China, we have a partnership with JD and Dada, that’s in just over 300 of our stores, three kilometer delivery radius delivered in 40 minutes, I think we had one delivery within seven minutes.
So I'm not quite sure that would probably can account for the next store building. But -- so that would be one example. I mentioned Cornershop earlier that's a service we use, again think Instacart, crowdsourced delivery in Mexico and Chile growing extremely rapidly.
So we think that is likely to be the model, and you know there is a number of partners and a self built crowdsourced delivery approach that we're using in the U.S. So you see that that delivery model really building across most of our markets, and I expect that to continue.
As we think about gross margin within the international division, what are some of the puts and takes that we should keep in mind over the balance of the year or even more long-term?
Yes, I mean, I think on the plus side you mentioned private brands, in pretty much all of our markets, excluding the UK, where we're growing 2x, the total, but the total is lower. We're growing double-digits in private brands. So that has a positive mix effect on gross margins. We've also got a big program around cost analytics that's using data science to make better decisions about space allocations and to negotiate more effectively with our suppliers. So there's some positives on that side.
I think, working against that there are some mix effects in general food grocery consumables are growing faster than GM and apparel, so there is a bit of a mix effect in there. And obviously, there's price investments to continue to extend our price leadership in most of our markets. And really, it's just about striking the balance between those two things.
In terms of striking the balance, you obviously in your opening comments spoke a little bit more about the portfolio management strategy.
Help us think a little bit more around capital allocation.
Yes. Look, I think the first thing to say is the capital allocation across the segments in the business that's U.S. retail, Sam's Club U.S. and international might remain broadly consistent. I think from an international perspective, I mentioned we’ll open about 300 stores this year. To put it in a bit of context, if you go back five years, we were opening about 14 million square feet a year, today that’s about 9 million square feet. And roughly speaking as a share of total CapEx spend, new store spending is roughly halved in terms of its share of the total.
The bigger pieces of CapEx tend to be on existing store remodels, on technology, supply chain, and e-commerce spending. But in terms of where the money is going on new stores I mentioned earlier, roughly 75% of that money is going into Mexico, Central America and China.
So markets which are still high growth and where we see store based growth opportunities. And then remodel spending, a lot of that is about reinventing large stores and supercenters. I’ll give you -- so Canada would be a good example of that as is the U.S., I think U.S. remodeled 100 stores in Q1.
And a lot of that as I think about large stores of 160,000 square feet and a couple of examples from Canada we’ve recently put a couple of third party offices one of the Planet Fitness which is a gymnasium $10 a month membership fee. So it very much fits with the -- with our brand and then a full service clinic so very much help focus it’s clearly driving a lot of new customer traffic, as well as some GM based propositions that we’re putting in.
So just to reiterate, I mean, broadly speaking CapEx allocations across the segments remains the same. But you are seeing where that spend is going move more towards existing store of e-commerce and technology and away from new stores. And where the new stores are opening it’s in high growth markets.
We’ll open up the floor for questions in a minute. Maybe just before we do that Richard maybe just take a step back and talk a little bit about the health of your consumer, how you feel in terms of consumer trends and sentiments, speak about the different markets maybe even including how you feel about your China customer. I’d also be curious just to hear about what’s happening in Massmart in South Africa, as well as obviously the UK and Mexico.
Yes, I think, general trends I think one thing that we see around the world is a customer that’s focused on both value and convenience. So you hear us talking a lot about saving money and time. I think we feel our brand is well positioned for both of those first one kind of fairly we’re a low priced retailer and known for that and continue to invest in prices to win with customers in that sense.
And then on the convenient side of things, as I mentioned previously, we do think that the combination of stores and e-commerce particularly on that on-demand part of the assortment ahead is a competitive advantage and one that we’re leveraging around the world.
I think, if I look at some of the specifics you mentioned China, so I’ll spend a little bit time on China and then refer briefly to Massmart and South Africa in particular. In China, you saw Q1 our comp was 0.4% the two year I think it was 4.4%. One things we mentioned we’re in a three year process of exiting from bulk sales, which essentially a low margin business to business sales out of the stores that has its biggest negative impact this year so that that’s slightly depressing the comp.
Look we’re building again to be the largest omni-channel retailer in that market we’re really excited about the Sam’s Club performance continues to be exceptionally strong and we’re looking to expand. So I mentioned China new stores Sam’s Club is a strong element of that. Online is growing pretty rapidly and the Dada O2O piece that I mentioned earlier is the fastest growing element. And then in the Walmart business we’re focused very much on smaller formats so smaller pro to hyper markets and super markets which we started opening in the country.
Just moving to Massmart, yes it’s a pretty challenging economic environment I think Q1 GDP was a minus 3. And obviously when you’re in a largely discretionary spend we got strong positions in general merchandise. So that business has been under a little bit of pressure in the first half of the year.
And again, I think, with an election out of the way I think we should start to see some improvement in economic conditions. We have a fairly strong food component to that business, but I'm sure this year is going to be a challenging one with those kind of economic conditions.
Audience, please raise your hand.
Thank you. I think Walmart took a stake in Massmart in 2011 and that has consistently disappointed. And now you have the CEO and the CFO resign, can you give us -- are you just going to have the economies kind of come around so we can build on that, what are the plans there?
Yes, I mean, obviously, as you say we’re about to see a change over in CEO and CFO. Mitch is a pretty experienced international retailer and we’ve hired Mohammed, a new CFO out of Illovo, which is a publicly quoted sugar business owned by ABF. We feel pretty good about that management team. I think the first job is to trade the business well, but clearly, we'll be reviewing the portfolio of businesses the operating model, I think, there is a lot of opportunity for efficiency and cost savings I mentioned, GNFR is one example. I think there are some big opportunities to create value in that business and clearly with a new management team in place we’ll be looking to do that.
Hi, thanks. Two questions. One, are you seeing any pushback in areas like China to Walmart as U.S. company in terms of the trade war tariff issue? And then a completely unrelated question, hearing from a lot of companies here and other places that freight costs have become less of a headwind than they were last year when it was a big issue. Can you comment on what you’re seeing in terms of those costs? Thanks.
Yes, so taking China, I don't think we've seen anything specific. I mean, there's obviously some concerns about whether, Chinese government's attitude could change towards the U.S. companies. We haven't seen the thing today. I mean, I think one thing I would say, in our businesses around the world, this is true for the U.S. and our other businesses, the U.S. business sources two thirds of its products in the U.S. the remaining third is kind of from a diversified set of countries around the world. So, I think we feel those trade risks were reasonably well diversified and as well places anybody to manage whatever we see coming down the track.
To your second question around freight costs. Yes, I mean, we mentioned in Q1 results they had become much less of a headwind. And there were a number of factors in there. But I think some of it is just the rebalancing of supply and demand in that marketplace. So I think which should suddenly take a good pressure off cost inflation that we had been seeing last year.
I have a few more. Richard, just earlier you spoke about the digital payments business in India, maybe just speak a little bit more about the evolution of PhonePe over the last few months, obviously still a very young entity overall just two and a half years old. But there's certainly a lot of discussion in the marketplace around the longer term opportunity and potential valuation, maybe just give us some color on that? And to what extent you can potentially leverage some of their technology in other markets?
Yes, okay. So, PhonePe is aiming to build India's largest transaction platform built on payments. And then to use that platform to leverage some pretty big profit pools in markets like financial services. They're building an open platform for customers, merchants and financial institutions.
Give you a couple of examples of what I mean by open. One thing they're not going to do is build an e-commerce business within the payments mechanism, which differentiates them from most of the other payments platforms and obviously attracts more merchants who don't feel they're going to get this aggregated.
And then as they bring merchants onto the platform, their QR code works with all of the payment apps in the market where the competitors are closed loop. Now why are they making that bet, because they believe it will attract more consumers, more merchants and more financial institutions. How they built the proposition the customer journey they talk about send, spend, managing grow.
So to send is person-to-person transfers and the technology they use is direct bank account-to-bank account linkages not a digital wallet, which means you can link any bank account to any bank account.
The spend pieces is bill pay, and then shopping. And the managing grow is financial services, most of the journey has been the first two they’ve just started launching mutual fund products on the site as of March.
Just to give you a couple of examples. So on the -- they've already built a pretty big customer base. It's growing very rapidly, high transaction frequency and large numbers of customers. They're also automating as they go. So the -- if you take the bill pay proposition, the cost per transaction has basically come down by over 90% in the last 18 months to almost zero. And that's really about using machine learning to target the customer marketing that they've used to hire customers.
And then, if I take the merchant proposition, they initially -- so if I go back to July of last year, about 60,000 merchants on the platform, most of those were bill pay. So think telecom businesses, utilities companies. As of the summer of last year, they’ve put down the sales force to start recruiting offline merchants coronas retail stores. There is now 4 million merchants already so you can see the pace of development and that obviously, those new used cases are driving frequency outputs.
I think one of the reasons where -- a couple reasons particularly excited about it. One is, I've learned more about the fin tech digital payments world in the last 12 months than I’ve possibly could have imagined. And obviously we’ve built a wallet in Mexico called Cashy [ph]. So, we're already starting to leverage learnings one from the other and thinking about whether we can redeploy technology.
I think the other reason is, if you look at the China market, if you look at WeChat Pay has 1.1 billion users, look at Ann [ph] Financial and Alibaba's Financial Services business that market in China flip from a cash economy to a digital payments economy and you practically don't see credit cards being used there anymore.
I think the same thing is happening in India for similar reasons, I mentioned the smartphone penetration. The Indian government is making sure that every Indian has a bank account, the cell phone and the biometric ID. So they want to link those things together. So I think the regulatory environment is pushing with us, I think, in this particular instance. And so we’re just very excited about the future of that business both for itself and in terms of what we can learn and leverage in places like the U.S. and Mexico.
At the core of Walmart as being a low price leader, talk to us about which markets do you feel best positioned in terms of price? And where are some of the areas or geographies where you are still making maybe more meaningful investments in price because of the competitive dynamics?
I led with Mexico, I think probably of our larger businesses that that's the one that's best positioned. Partly because of market leadership, partly because the markets still growing and formalizing, and we got the right vehicle to address that. And our focus there now is on building out omni- channel online grocery and ecosystem components.
I think, it's fair to say that we’re continuing to invest thoughtfully in price around the world. We've -- as I said, we've seen strong food and grocery performance consistently over the last couple of years in it, with growth in excess of our total comp sales, and a lot of that is because of price position, as well as quality improvements and private brand.
So I -- while I think we have -- the stronger businesses tend to be, because of format, scale, physical locations. We talk a lot about the within 90% of the U.S. population within a 10-minute drive time, that figure for Mexico is 85%. So, I think positioning for us both now and in the future tends to be based on store locations combined with price competitiveness and online and I think we're building that around the world, but some places clearly we’re stronger than others.
Any last questions from the audience? Well, with that, Richard, I'm going to turn it back to you for any kind of closing remarks.
Yes, I mean, the only thing, I'm finished with this is we've covered performance and strategy. I think, as I said, I think we feel well positioned to address both the value trend and the convenience trend. We're increasingly convinced that the combination of stores and online is the winning model for the future, particularly for that head of the assortment. But we're still evolving our thinking around marketplace and ecosystem.
And I think in that space, you've heard a lot of the comments we've made about the U.S. and I think, what we're doing in India are actually we're ahead of the game in many cases around both marketplace and payment. So the ability to learn from there is really strong. We're in an uncertain world. I think we see challenging political and economic circumstances. But for those reasons, I think we're pretty well placed relative to our competition.
Thank you, Richard.
Thank you, audience. And this concludes our webcast.