00:00Let's get more on Walmart earnings with Greg Mellick, Evercore ISI Senior Managing Director.
00:04He has an outperform rating and $140 price target on the stock.
00:08Greg, great to see you.
00:09How much of this is just messiness in the quarter from things changing and pricing changing for their health care
00:14offering
00:15versus something that told us about weakness of the consumer, especially the lower end consumer?
00:22Yeah, great questions.
00:24So the quarter was definitely a disappointment with the comp coming in at 2.6.
00:28We were thinking it would be around 3 to 3.5, and there was an extra 30 bps of deceleration
00:34from the Fair Pricing Act implementation.
00:39But that's going to stick around.
00:41So I think the reaction today is basically Walmart saying, you know what, we're going to go back to doing
00:47what we do best,
00:48which is if we have TRF rebate money, we're going to use that to offset a rising energy cost,
00:54but also really invest in price and to help reaccelerate that traffic, which is still nice at up 1.5
01:01% in the quarter.
01:02But last quarter, traffic had been up 3.
01:04So I think, you know, to help consumers out here, I think Walmart is doing what they do best, which
01:09is leaning into price.
01:10And they gain market share, and perhaps part of it is because of price,
01:14but we are seeing their competitors like Kroger and Target also looking at reducing prices.
01:19Greg, at what point does their ability to capture market share start to lessen
01:24because competitors are adopting the same strategy of value?
01:28Well, it's a competitive market, and I think that's one of the things that we're seeing.
01:32We're calling it the food fight into the back half this year, but, you know, consumers have cumulative inflation over
01:40the last three or four years does weigh on consumers.
01:44And so one of the ways to keep them in the game is to do extra rollbacks.
01:50Walmart's up to 11,000 rollbacks.
01:52Target yesterday talked about reducing prices on 10,000 items.
01:55So you're right, if it comes into a food fight of basically who has the scale and who has the
02:03ability to invest to help reduce prices for consumers,
02:08I think Walmart is in that good competitive position.
02:10For them, I'd say the important thing was confirmation that a lot of the new businesses are growing north of
02:1820 percent,
02:19in some cases even up to 40 percent if you look at advertising.
02:21And those are the things that will give them profit growth and outsized profit growth to basically do this,
02:28and we'll keep in the P&L intact.
02:29And that's what a lot of competitors don't necessarily have.
02:33So that's why I think Walmart will come out of this in a good position.
02:36But it does take some time to get that traffic back when you start this reinvestment.
02:41In this food fight, how does Amazon complicate things in their push into groceries?
02:47Well, Amazon has certainly been pushing consumables.
02:50They've talked about $150 billion of grocery consumable sales.
02:54It's not so much food as it is consumables.
02:57Look, I think you have a situation now where Amazon and Walmart combine to about 20 percent of U.S.
03:03retail sales,
03:04and we think both of them have plenty of room to grow that to 25 or 30 percent over the
03:11next five years.
03:11And they're both doing it with membership models, and I think that's where Walmart still has a – it can
03:18compete effectively with Amazon.
03:20But they're going to make sure that whatever share Amazon takes out of grocery and retail isn't coming out of
03:27them.
03:28And likewise, I think Amazon is going to make sure whatever Walmart's able to do with growing plus membership
03:33and getting into more middle and upper income households going to them also for good value and convenience,
03:39they're going to make sure they don't lose out on that either.
03:43Greg, it feels like you're describing an environment for Walmart that is still very strong but more competitive.
03:48And I wonder, given all of that, do you think that the reaction today looks overblown to you to see
03:54Walmart have its worst day since 2022?
03:57Is this just kind of an optics problem at the moment considering the numbers that they put up?
04:01But underneath the surface, there's still fundamental growth to be had?
04:05I love that conclusion, or I think that's fair.
04:09I mean, I'm not going to sugarcoat it.
04:11I mean, comps decelerated and even traffic slowed 150 bif sequentially.
04:15I think part of that is last quarter, basically retail sales were stronger back in March and April
04:21when we had the benefit of all the tax cuts and the refunds from last year.
04:25But what you are seeing this quarter is a deceleration.
04:29I mean, Target had a good quarter, but they also had a deceleration of 150 basis points from their last
04:34quarter.
04:35So I think you are seeing a slower consumer environment.
04:39And I think Walmart has all the tools to compete effectively in that.
04:43And expectations, I think, got high with where the multiple had gotten earlier this year.
04:49And now the reality is, as we settle down, I think they can still grow numbers,
04:53still grow their earnings at probably half the rate of sales as we go into next year.
04:58And I think ultimately that's why people end up finding a nice bottom in Walmart here.
05:04It's still a good company with growth.
05:06There was this narrative, though, around Walmart in quarters past that weakening consumer sentiment might be good for them
05:11because you have more middle and upper middle income consumers trading down and shopping at Walmart.
05:17Were they absent this quarter?
05:18Did that phenomenon not take effect?
05:21I think that effect is still there.
05:23I think what's shifted a little bit, and this happens a lot of times with volatile energy prices,
05:28and it could speak to why maybe we'll see some of the other retailers still reporting a lot of the
05:34dollar stores, etc.
05:36Because their stores are further away from people, so sometimes when gasoline prices go up, they'll consolidate trips.
05:43That could be an excuse or a reason, a perfectly good explanation.
05:47Or just because it might cost you $5 to fill up your car with gasoline to drive to the Walmart,
05:53maybe you'll go to the dollar store where you can just walk there.
05:56So we've seen this in the past.
05:58When we get volatile energy prices, that can be a consumer reaction, at least in the near term, while they
06:04remain volatile.
06:05That can't be great.
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