Walmart Inc. (WMT) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Walmart's Fiscal Year 2019 Third Quarter Earnings Release. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Dan Binder, Vice President of Investor Relations. Please go ahead, Mr. Binder.

Good morning, and welcome to Walmart's investor relations call to discuss third quarter earnings. This is Dan Binder, and I'm joined today by Kary Brunner, James Mann, Michael Brigance and Kshitij Gupta from our IR team. Hopefully, you've had some time to review our press release this morning along with our other Q3 earnings documents. I'll hit on some key points and then we'll open it up to Q&A. As a reminder, our Q3 earnings press release, management commentary and accompanying slide presentations are available on the Investor page of our corporate website, stock.walmart.com. We may make forward-looking statements during this call. Please review the Q3 earnings presentation for a cautionary statement regarding forward-looking statements. In terms of key takeaways, we had good quarter with strength in many areas of the business. On a constant-currency basis, net revenue was up 2.4% or $2.9 billion year-over-year and exceeded plan. On a reported basis, this was just under $125 billion in revenue and currency negatively affected the top line by about $1.2 billion and operating profit by nearly $60 million. Adjusted EPS was $1.08 per share and that was about an 8% increase over last year. From a GAAP perspective, we posted $0.58. Now let me give you a little bit of color on sales. We continue to see strong momentum in the Walmart U.S. business with both comp transactions and comp ticket growth. As you saw, Q3 comps were, in the U.S., up 3.4%, and on a 2-year stack basis, were up 6.1%. It has been well over 10 years since we have seen back-to-back quarters with 2-year stack comps above 6%, so we're pleased with the momentum in the business. At the time of our last call, we were about halfway through the back-to-school season, and I told you that we were seeing strength in that business. I'm pleased to say that the season wrapped up with solid results, and then we ended the quarter with strong sales of fall seasonal goods, including Halloween. While we don't break out grocery comps specifically, I will tell you that it was the best 2-year stack comp in nearly 9 years. I just wanted to point out that the hurricanes last year obviously provided us with some tough compares in that category, and we were pleased with the momentum despite that tough comparison and particularly with fresh. As you also saw in today's release, U.S. eCommerce sales grew 43%, keeping us on track to achieve about 40% growth for the year. We also continue to see good top line results for International and Sam's Club. 9 of the 10 international markets reported positive comps, led by Mexico. In Sam's Club, we saw reported strong comp store sales growth of 3.2% excluding fuel, and 5.7% excluding fuel and tobacco. Sam's Club eCommerce sales grew 32%, and we continue to be pleased with membership trends. Lastly, as detailed in our release, we did raise our Walmart U.S. comp store sales guidance ex-fuel from around 3% to at least 3%. We're now expecting full year adjusted EPS of $4.75 to $4.85, which was raised from our previous guidance of $4.65 to $4.80. Just in terms of a reminder, I'd like to remind you that we will report fourth quarter earnings on Tuesday, February 19, 2019. In addition, we have posted our fiscal year 2020 earnings releases -- release dates on our IR website. So with that, I'm happy to open up the call to your questions. Operator, if we could get started. Thanks.

[Operator Instructions] Our first question today comes from Peter Benedict with Robert W. Baird.

So maybe 2 questions. One, Sam's had 27% private brand penetration. I think that was like 23% or so a year ago. So I'm just curious, what's driving -- which categories are driving the increased private brand penetration there? And how does that penetration compare at Walmart U.S. and maybe the trend that you're seeing in Walmart U.S.? That's my first question.

Yes, sure. So private brand has, in fact, been moving up. As you know, we consolidated down to 1 private brand at Sam's Club, and we've really seen strength in many areas of the club. We don't break it out specifically, but it was pretty broad-based. And then in terms of Walmart U.S., we don't break out private brands specifically, but it has been trending up, and that is not -- I think that the takeaway here is it's not because we're really pushing it as much as the customer is really accepting it or responding to the higher quality, the price points, better packaging, et cetera, so nice trend there as well.

Okay. And then my follow-up would be, is there any additional color you can provide on Flipkart and how it impacted the various line items in the P&L, whether it'd be revenue? Is there a -- is it safe to assume that Flipkart was dilutive to gross margin? Just any kind of color you can provide on Flipkart would be great.

Yes, unfortunately, we're not breaking out a lot of detail. I think you heard from Brett at the Investment Community Meeting, we're going to try and give you color over time on how it's doing, high level, but for competitive reasons, we're not providing a lot of disclosure on that piece of the business, but it was dilutive, as you can see in our operating margin. And it's about all I can say on it at this point. We did have a Great Billion Dollar Day with strength in mobile, with smartphones, record turnouts, so we're pleased with that event.

Our next question comes from the line of Karen Short with Barclays.

So I just want to go to earnings guidance implied for the fourth quarter. So there's a lot of onetimes that were in last year's third quarter and a lot of onetimes that were in last year's fourth quarter, so I'm trying to back all of those out. But when I look at the implied EPS guidance for 4Q and try to back into it, that would mean for EBIT, I get EBIT in 4Q down quite a bit more than it was in 3Q, and this again, is on an adjusted apples-to-apples basis, so I'm kind of backing into like 10-plus percent, 15% down year-over-year EBIT. Is that -- am I kind of ballparking that? And then, I guess, if that's the case, why would it have -- why would it actually get worse in 4Q versus 3Q?

That number sounds high. I'm happy to get into the details of it after the call, but we did have Flipkart in the current quarter for only 44 days just because it's, like many of the other countries, with the exception of Canada, there's a 1-month lag. So you have 44 days of Flipkart this quarter. The next quarter, obviously, we have a full quarter of Flipkart. So that would really be the only callout that I would make. But again, I'm happy to get into the line items post-call.

Okay. And then so my second question just on Flipkart. So we're looking at what the gross margin deterioration was in International. I mean, you call out, obviously, you call out the fact that the deterioration was primarily a function of having Flipkart in the quarter, but as we look to 4Q, should we kind of take the run rate that you had in 3Q and kind of adjust it for only being a 44-day impact in 3Q as we think about the 4Q gross margins?

Yes. So we gave you some guidance at the time of the deal. We updated that guidance at the Investment Community Meeting, indicating we expected about $0.25 of dilution from Flipkart. While we didn't specifically break it out here in Q3, that guidance has not changed, so you should expect sequentially, you're going to have more dilution in the International profit number on a year-over-year basis.

The next question is from the line of Simeon Gutman with Morgan Stanley.

My first question on the U.S. EBIT. Last year, I think it was on the commentary, there was $150 million callout of a negative impact to EBIT from hurricanes. And so my first question is, what's the right way to look at the comparison? Because if we add back EBIT to last year's U.S., it would show EBIT for this year down a little with margin down. If we take it out, it paints a slightly different picture, it shows it up and margin up. So I don't know how -- if there's a nuance, the way we should be looking at it?

So you're correct. We did break out some color last year on the hurricanes. We obviously got hit again with some hurricanes this year, so there was expense related to that for all kinds of things, including equipment rental and so forth, but we didn't quantify it this year. So it's really kind of hard for me to give you a perfect comparison, but just -- no, there was definitely some noise in the number this year as well.

Okay. And then on -- a sales question. So grocery, you don't give us the exact comp, but you told us that the 2-year stack was the best, but we do know it moderated from, I think, mid-single to low single and your eComm business did accelerate, it's up to 40 -- growth is 43%. Bear with me on this inference, but is it fair to say that the non-grocery part of your eComm business is accelerating? Is that a reasonable conclusion?

So we don't break that out specifically, but I -- the color I would add is that the mid-single that you saw in our documents last quarter versus the low single that you see in the documents today for grocery, there was some rounding. So I would just characterize this quarter as strong, you know, at the stronger end of low single. And on a 2-year stack, we called that out in particular because we wanted to highlight obviously that we had this hurricane comparison a year ago, but make sure you all understood that, that business continues to have really good momentum, and we've seen good share gains there.

The next question is from the line of Bob Drbul with Guggenheim Securities.

I was wondering if you could just address a little bit. I think on the ticket growth, did inflation play a factor there? And I was just wondering maybe you can give us a little bit more color on the ticket growth. And then the second question that I have, there is some discussion on taking market share in key categories. Just wondering if you might be able to line up for us exactly what categories you feel like you're taking the most share currently.

Yes. So to answer your question on the ticket, that was not a factor of inflation. We have seen some cost input increases but, similar to last quarter, that's largely been offset by price investment which, as you can see in our gross margin, continues to be a factor, in fact, the leading factor for gross margin pressure. The reason for ticket improvement, I think, is a function of a few things: one, Online Grocery continues to grow rapidly and that is a significantly higher ticket than the average; second, eCommerce also continues to grow rapidly and that is a higher ticket. And then even if you look within the store, fresh is higher ticket. That's been a leading comp category within grocery. And then you saw some strength in areas like apparel, toys and automotive, so good general merchandise mix as well. So those are really -- that would really sort of sum it up. Do you have a follow-up?

Yes, I mean, the follow-up is just -- and so, when you look at sort of the market share in key categories, I'd be curious to see your take on that. You're gaining some share, but maybe if you can just comment on the toy category and sort of how you feel like you're positioned over the next 60 days.

Yes, so for competitive reasons, we wouldn't get too detailed in the market share data, but when we look at Nielsen and the NPD Group, it is very clear that we are gaining share in multiple categories. I highlighted grocery a minute ago, that's been a trend. You can see where others are reporting grocery comps versus ours in recent quarters, but it's pretty broad-based.

You did see that -- you did see that toys had a strong quarter, Bob.

The next question comes from the line of Paul Trussell with Deutsche Bank.

I wanted to just maybe get a better handle around the adjusted guidance. So the at least 3% growth from a U.S. comp standpoint could imply just a 2% comp at the low end. Is that how we should think about the framework of what the EPS guidance is based on? Or any other kind of puts and takes you can help us out with on the adjusted guidance.

Yes, sure. So there is nuance there, obviously, and that was -- we wanted to send a message that we're feeling good about the business and, to your point, if you were at 3%, you'd probably at about a 2% comp in Q4. I just, hopefully, you took away from my comments earlier that we started the quarter strong, we ended it strong. There's momentum in the business so there's a lot of sales still in front of us but we feel good about the business right now. So we did want to make a slight change to the sales guidance and you saw we took the earnings up as well, so.

Got it. Got it. And on gross margins, there's some puts and takes there. You all were lapping the hurricane impact but you did kind of speak to ongoing kind of pricing investments, all planned, it sounds like, but also ongoing increases in transportation costs. Just any additional color you can maybe help us with on what's taking place there.

Yes. So the -- I had a chance to really look at the walk year-over-year and the 3 things that I called out, explain all of it. I mean, it's really very straightforward. You get heavy price investment. As I think I've probably described to you in the past, that's kind of like religion around here. It's very consistent, it's very persistent, it's working, customers are responding, that productivity loop is working for us, transportation costs, no big surprises. That's been pressured throughout the year, continues to be, and then that mix of eCommerce would be the last piece.

Our next question is from the line of Greg Melich with MoffettNathanson.

I'll just start with maybe eCommerce. The 43% growth, going back to that, how much of a driver was the grocery pickup rollout? Was that a majority of the eComm growth?

Consistent with what we said in the last quarter or so, it's been a significant contributor, but we have not broken that out specifically, but it is clearly contributing to that number in a big way.

Okay. So that means it's the biggest thing, but it doesn't have to be a majority of it? Is that -- I just want to make sure I'm translating the words right.

No, I wouldn't characterize it that way. It's a significant contributor, but it's -- I wouldn't start to read into majority, minority.

Okay. And then just on tariffs, the -- I think Home Depot has sort of outlined, and there's different ways you can talk about it, but so far 1% of their U.S. purchases at the current rates are what's on the list. Are you able to give us something similar? I think they said we'll go to 3.5% if we went to 25%. I know in the past, you've said a majority of your U.S. purchases are done domestically. So just anything else, Dan, that you could give us on that front.

Yes. So 2/3 of our U.S. purchases are made in the USA. We do have import -- and part of that's just because we have such a big food and consumable business, that's like mid-50s type mix. And then the rest -- the other 1/3 is coming from other countries besides China. We haven't broken that out specifically, nor have we broken out the specific level of impact that we would expect, but obviously, the world -- many companies are experiencing it. The key takeaway, I think, should be that we're going to manage the margins through this period. The merchants have been in these situations before. We are going to maintain our price gaps with the market, but I think ultimately, it's a case-by-case situation. There's situations where we'll be able to take cost out to offset. So it's not a -- I couldn't describe it in a really simple form for you, but I think what I'd want you to leave the call with is that we're going to be able to manage through it. And at the end of the day, when the consumer is stretched on the dollar, I think Walmart has been in a really good position to benefit from it given our everyday low prices.

Looks great. And then last, if I could, on Sam's. I just wanted to get a sense as to the trend in profit being down despite pretty good comps. Could you help us understand when we might hit that inflection where a comp of 3% or better could actually mean operating profit was up?

Yes. So as you know, when John Furner started to head up that business, he made a lot of strategic decisions to different areas, one of which included price investment, included making investments in the member proposition. This quarter was -- we had some timing issues with bonus accruals that were probably added a bit more pressure than we would have typically expected. But if you look at the overall business, we're pleased with the membership trends. We're pleased with the comps. The gross margin, excluding fuel, was up 6 basis points, that was helped by reduced tobacco volumes. There was some offset though from price investment, eCommerce, fulfillment and shrink. On the SG&A side, it was really a lot about wages, severance, some bonus accrual, timing.

That's great. So that's -- the 43 basis points of increase in OpEx, the big chunk of that was the higher incentive comp. So like -- and that seems like it was, I don't want to call it one-off or unusual, but it seems like that was particularly heavy this quarter and we should expect something more normal there going forward.

That's a fair characterization, yes.

The next question is from the line of Kelly Bania with BMO Capital.

I just wanted to ask a little bit about just prices. It seems like grocery inflation is pretty nonexistent at least in the government data. And so I was curious if you could talk about what you're seeing there, if you're seeing any deflationary categories and what you're seeing in the competitive environment. And as we think about next year, is maybe there's some more pressure from the tariffs on some of the discretionary categories. Is -- I guess, do you think it's an advantage to kind of maybe balance the 2 where there's maybe not some pressure on the food and grocery categories, but maybe some more on the other side? And I guess, just how you're thinking about that into 2019?

Yes. So in terms of inflation, we did see some cost inflation in the food category, let's say, meat and dairy, more so, some produce, there was some offsets. But net-net, if you look at the retail inflation, that was pretty much nonexistent. As I mentioned earlier, that was a function of price investment. So hopefully that adds some color. The -- I'm sorry, the second part of your question was whether or not we would take some of the tariff pressure through price increases in other parts of the store. Was that it?

Yes. Just as you kind of look at the cost pressures, it seems like there's more maybe on some of the discretionary categories and maybe less on the food and grocery side. I don't know if that's accurate, but do you think that you kind of look at balancing those across the categories or relative to some others that maybe are more in each category specifically and don't have that balance.

So we would not take prices up in food to offset cost pressures in a category hit by tariffs, if that's -- if I understand your question correctly. So we're going to deal with those that are affected by tariff -- the products that are affected by tariffs on a one-by-one base -- on an each basis, and we'll try and take cost out where we can. We're going to maintain price gaps at or better than current levels, and that's all I can really say at this point. We will manage margins around it though.

Okay. That's very helpful. And as we think about the gross margin outlook into next year, I think, the fuel and transportation and freight costs were one of the factors, and I guess with oil prices just coming down so much over the last several weeks, I was just curious how that or if that, at all, impacts the outlook for next year.

Well, I'm not going to pretend to be able to predict oil prices, but certainly, it has been a factor. I think certainly, the driver shortage, the -- has been a bigger issue, the freight piece of it has been a problem too, that continues to persist. So for the time being, we're anticipating continued transportation cost pressure.

The next question is from the line of Oliver Chen with Cowen and Company.

Regarding the upcoming holiday and Black Friday, just open ended, what are some of the features that you think are more -- most incremental this year versus last year? The checkout experience sounds very helpful. Will that be a material transaction driver? And then a question we're receiving from clients is the opportunity for the possibility of a fulfilled by Walmart service. Is that something that's entirely possible? Are there any thoughts on your capabilities with respect to that potential, just because it sounds like you've been making so much progress with fulfillment and also just implementing so many changes within your marketplace that have really helped drive results?

Yes. So we had our press release out, I think, it was last week on Black Friday, and so you'll find a lot of what we're doing this year versus last year. Obviously, toys are a big focus this year. So we've got a lot of new toys both in-store, online, there's more space dedicated to it overall for the shopping period. As you highlighted, we've got Check Out With Me, we've got the Store Maps, we've got the new website design this year, which we didn't have last year, so better online shopping experience. The overall assortment, I think, is more robust. So we feel really good about the position. And I think we'll come out on the other side being winners. So in terms of fulfilled by Walmart, we have nothing new to announce today. So I really couldn't comment on speculation.

Okay. And then our last question is just the eComm growth was so robust this quarter and your guidance for the full year is around 40%. What do -- was there -- is there an opportunity to raise that? How are you thinking about next quarter and what you just printed because the momentum is on your side? And we just feel like the momentum is more likely to continue favorably.

Yes, certainly, we've seen a nice acceleration now 3 quarters in a row. And that eCommerce growth rate, it's been helped by Online Grocery, it's been helped by a lot of things that we've done on the website, on the assortment, private brand, pricing, I wouldn't point to any one thing, but there's momentum there. I think we are certainly against a good consumer backdrop that's helped, I'm sure, us and many other retailers, but if we had anything new in terms of the guidance, we would have said something today.

Okay. And the dispensaries, somebody is asking me about those. And we were impressed by the tests you've been doing there. Will those be in a position to roll out next year? Do you think it's something where you'll see Net Promoter Scores at the same elite tiering as you have for curbside pickup? It really seems automated and seamless and you've made some really nice strides in what you've demonstrated at the Investor Day.

So the Net Promoter Scores have been consistently strong for the Online Grocery experience, both pickup, which is obviously more advanced in its rollout than delivery, but we're pleased with the customer response on both.

[Operator Instructions] Our next question today will be coming from the line of Edward Kelly with Wells Fargo.

I wanted to ask you about click-and-collect. Can you just talk about the impact click-and-collect has had on the grocery comp? I know eCommerce overall had about 140 basis points. It seems like maybe that could be more for grocery, just thoughts there. And then how much of it, click-and-collect, do you think at this point is incremental?

So the great thing about our grocery business is that there's so many different things that we're doing that are allowing us to take share and certainly Online Grocery as a service, one that's free if you pick up in-store, which is a pretty compelling value proposition relative to the market. That's -- it's been additive. We haven't broken that out specifically, but we are confident that it's allowing us to gain share of wallet with existing customers, but more -- also importantly, gain new customers, but we haven't broken that out specifically, but we think it's significant enough to mention.

Maybe a different way, is there reason to think that the benefit would be any different than what it is for the overall eCommerce benefit?

So you're asking me if the contribution from Online Grocery to eCommerce?

I'm asking is the contribution from Online Grocery to the grocery comp, if that -- if there's any reason to think that it would be different than what eCommerce is driving for the overall company.

Yes, I think they're 2 different -- that's 2 different analyses, but I can comfortably say it's -- Online Grocery is adding to both, but we've got grocery traffic in the stores as well. So it's not -- I don't think it's -- maybe the takeaway here is it's not cannibalizing us. We think a lot of that business is new business.

Okay, perfect. And then just as a follow-up on Flipkart. Dan, I don't know to the extent that you can talk about the management change that's happened there. Should we be concerned at all? Maybe any color on the strength of the bench within that business.

Yes. So obviously, we're disappointed that the situation arose. You've probably, at this point, read a lot in the press and we've had our 8-K to refer to. We've taken actions to change the reporting structure and we feel good about the bench. I think it's really important that when you look at a company like Flipkart, when you get to that size and that level of complexity, it's not only about one person. So we've made the appropriate changes and outlined that in the 8-K. Probably wouldn't say much more than that at this point, but we're committed to India. We still really love the business. We're going to continue to push forward, but we felt it was appropriate to make the changes we did.

The next question comes from the line of Edward Yruma with KeyBanc.

I guess, first, on the U.S. stores gross margin line, you guys have done some changes to eComm changing minimum order sizes or how many of an item you need to purchase to get delivery. Have you been able, do you think, to moderate the eComm drag in the face of what are accelerating results? And then second, I think you guys are lapping, in the fourth quarter, the removal of the co-manager position in stores. I guess, if we just step back broadly, do you think you're going to be able to continue to leverage in-store OpEx?

We don't comment a lot on margin rates in eCommerce, but we do like what we're seeing in the variable cost per unit. We were fairly clear, I think, at the investor meeting that there's work to do on mix, and probably I'm not going to say much beyond that at this point. You've seen a lot of the smaller acquisitions we've made. You've seen the increasing SKU count over time. We've talked about editing the SKUs online, I think, to the tune of 20 million added, 20 million reduced, and so we're working towards the goal of improving the mix. And as I said, the variable cost per unit is coming down, so that's good. So I'm not sure if I would say much more than that at this point. But in terms of your other question on operating expense leverage, I think you said in the stores, there's still a lot to do. Stores are leveraging really well. You saw 28 basis points of expense leverage for Walmart U.S., stores were even better. Obviously, that number is affected by eCommerce when you look at it in total, but there is more to do, and I think some of that's going to come through some of the automation that you saw us put on display about a month ago.

The next question comes from the line of Kate McShane with Citi.

This question is kind of in the same vein as the previous question, but with regards to the Walmart U.S. store expenses and being able to leverage that, how much of that would you attribute to the U.S. comp acceleration versus your own cost control initiatives?

Yes. So what you heard from us about a month ago was that the cost culture at Walmart is back. There's a -- everything from zero-based budgeting that we've been pursuing to just getting greater productivity out of associates with the use of technology, there's a lot of different things that we're going after. And there's also a lot of levers that we can pull in different types of comp environments. I think Retail 101 would suggest if your comp goes from 3.5% down to 1%, you're going to have a lot of adjustments to make, but that's not what we're planning for. Certainly, that's not where we're seeing in our business. But the things that we do control, we are doing well, I would say, and I think there's more runway in front of us to go after a lot of other items. I think you probably heard Brett talk about a list of 300 cost-cutting initiatives on his desk right now. That's a long list.

The only thing I'd add to that is that the stores, keep in mind, that there was a wage rate increase at the beginning of this year, so they're delivering this amount of leverage despite the fact that there's this incremental headwind. So Greg Foran and the team just continue to find new ways. A lot of that has to do with inventory management and the effectiveness there as well as Dan mentioned, the automation that we're testing, we're finding new ways through automation as well through process changes to be more efficient, and that's bidding us on the operating expense line.

Okay, great. That's helpful. And I have an unrelated question, a little bit more specific. We noticed in your management comments that it was called out there's a meaningful price gap versus competitors in Canada. And I just wondered, is that how the competitive environment has been for some time and what is the thinking behind an eventual closing of that gap?

Well, price gaps are good. I mean, we've been investing in price in Canada as well, and you see that in various markets around the world where we're not only focused on omni-channel integration but also improvements. So I think when we mention price gaps, it's more -- it's to the benefit that we're pleased with where we are and continue to expand it, similar to the U.S.

The next question comes from the line of Christopher Horvers with JPMorgan.

So my first question is trying to diagnose the gross margin a little bit. So as you -- in light of having sort of that hurricane compare on the gross margin, I think it was about 1/3 of the degradation last year, these storms seemed pretty small. So in light of that, what factor drove sort of like the incremental headwind on a year-over-year basis? Was it the price? Was it transportation costs getting worse? Or was it the eCommerce impact becoming larger as that business has accelerated?

So the price investment has been pretty steady. Certainly, transportation has been a growing pressure through the year. I wouldn't say the eCommerce impact was significantly different than last quarter. I hope that...

Okay. That's very helpful. And then, you know, the Home Depot yesterday or the other day made some commentary about -- some bullish commentary about the upcoming tax refund season. I think they said that they're like 60% of the benefit of tax reform is -- still lies ahead and that's going to come through higher tax refunds year-over-year. Just curious, given your customer base, have you looked at that? How are you thinking about that internally? And is there any quantification or any way you could help us think about it, that would be great.

Yes. Sure. Well, obviously, we pay a lot of attention to the macro factors. We think there's probably been a benefit this year already from tax reform, whether it's money directly in people's pockets or the business -- the stimulation in the economy. We're not economists, so we're not trying to set an economic forecast here, but we like the momentum in our business. And if tax refunds -- these tend to ebb and flow over the years, as you know. Some years, there's timing issues, other times, there's absolute benefits. Clearly, if it's putting more money in the pockets of our customers, we would hope to get that share of it, our fair share of it.

The next question is from the line of Seth Sigman with Crédit Suisse.

My first question is around the inventory growth for Walmart U.S. it seemed like comp store inventory was flat. I think that is a change in trend after being down for some time. Is there anything there related to tariffs? Or a function of sales growth? Or anything else to highlight?

We said we were positioned well for holiday and toy is a big focus this year. But there's more to do, I think. The level of improvement early on was significant because there was a lot of things that we're doing to pull inventory out of the backrooms. Obviously, once you've moved further down that initiative, there's a diminishing return from that, but I think the goal of our team is to continue to get productivity out of our inventory up. I think in this particular quarter, as I mentioned earlier, there's some big opportunities this year that we're going after.

And it's strong sales growth, so the inventory management is still really effective.

Right, understood. Okay. And then a follow-up question on the online growth, 43%, a little bit better than last quarter. I know it's been asked a couple of different ways, but I'm curious more just directionally whether Online Grocery contributed more or less to that total online growth this quarter, I guess, relative to last quarter? I would just think more, given that you have more stores with Online Grocery, so any context on that. And then related, the stores that have Online Grocery for more than a year at this point, and I think you have an increasing number of those, just how are those performing relative to the base?

So your first analysis seems pretty sound. There are more stores with more Online Grocery, so the contribution is higher. Your second question in terms of the stores that have had it for a longer period of time continue to improve and grow. But we haven't quantified what that maturity curve looks like exactly.

NPS scores continue to remain really high for that initiative.

The next question is from the line of Charles Grom with Gordon Haskett.

Just on the eCommerce side of the business, Danny, in the script, you guys talked about improving the margin profile. I'm just wondering if you could amplify on that for us just in terms of the opportunity, how long you think it's going to take, what do you think needs to get done?

So the margin profile is a function, obviously, of 2 things. One, what you're selling? And two, how you distribute it, and we're working on both. We've got sort of the head of the assortment that we're focused on with the rollout of Online Grocery, the tail of the assortment that we're focused on is to add sellers to the base, get a more robust set of SKUs and make these small acquisitions in both digitally native brands as well as vertical brands as well as specialty retailers. And we like the direction, but there is more work to do, and we just haven't laid out a specific margin profile by quarter. So I don't know if that helps at all, but there's a lot of work going on, on both sides.

Okay, great. And then I apologize if you answered this already, Dan, but I hopped on late. The Flipkart dilution here, is it still expected to be $0.25? And then my second follow-up would be the cadence of the comp and traffic throughout the third quarter.

Yes. So $0.25 is the last guidance we gave you, that hasn't changed today. So that's -- nothing more to really say there. In terms of the cadence of the quarter, I mentioned earlier that we started the quarter strong with back-to-school, really wrapped up that season with solid results as we progressed through the quarter, a great fall seasonal sales relating to Halloween. So really happy with the cadence of the quarter overall.

The next question is from the line of Chris Mandeville with Jefferies.

Dan, how are you feeling on pricing relative to peers at Sam's? Just based on the ticket it would appear as though you've maybe accelerated some of your investments in the quarter while traffic seemed relatively consistent on both the 1- and 2-year basis. But I guess, I suppose, maybe some of that was related to the shift from closed stores. So as we progress into calendar '19, how should we be thinking about that level of price investment going forward? And what are your kind of early reads from a return basis?

Yes. So the ticket is affected by many things, certainly, some price investment. But I think the lower sales of tobacco are affecting it, and we're also seeing more frequent trips with Scan & Go, so a little more traffic, but maybe a little bit lower ticket on each of those trips. So there's -- we haven't broken it out to the basis point, but those are some of the factors that we're seeing.

Sorry, but just in terms of also the level on price investment, how do you guys feel in terms of your price gap today at Sam's versus competition?

So well, we make price investments in different parts of the country, different categories. Similar to Walmart, we wouldn't break that out, but it's something that we like the results from in terms of what we see with retention and membership trends and comps, et cetera, sales. So it's work in progress, to answer your question.

Sorry, what was that?

That's work in progress.

Got it. And then my follow-up would be just in terms of China, you guys saw some solid improvement sequentially on really the overall 2-year as well as in traffic. So any ability to speak to the contribution from that omni-channel event you referred to that took place in August?

Overall, we've been pleased with the results in China. As you've seen, it's been an economy that has seen some slowdown in GDP and it's a very competitive market, obviously, but the dot-com business, the flagship stores on JD.com are doing well. We're pleased with the overall execution. I'm not sure I'd say much more than that, but moving in the right direction.

The next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch.

Dan, I had a follow-up question on the dot-com's growth. So for the fourth quarter, last year going into the fourth quarter, you guys had amazing dot-com momentum, and then in the fourth quarter, eCommerce only grew 23% in the U.S. And can you just remind us what happened last year? And then how we think about that as a comparison this year or sort of what's different this year, where you wouldn't see that kind of drop-off? Because I think to get to the close to 40% for the year, it kind of has to be close to 40%, I think, for the fourth quarter. So it would be kind of similar trends, but last year, the trends were kind of cut in half.

Yes. So last year, we highlighted that there are 2 primary issues. One of the bigger ones was the promotional position we took year-over-year. So we basically lapped that and our philosophy around that issue hasn't changed. So the other issue was capacity. We feel good about our capacity and our inventory position today, so I think we're in good shape.

And keep in mind, Robbie, last year, we lapped the Jet acquisition as well. So sequentially that's why it slowed down.

So we should think of it as an easy comparison, not a -- it's tougher to drive momentum in the fourth quarter?

Well, if you break it apart, right? So we're not going to -- we've already lapped Jet, so that's not -- that was part of the drop, as Kary just highlighted. The other piece was our position on promotion, which hasn't changed. So that's not really an easy comparison either. The only piece that you would maybe characterize as maybe being easy would be the capacity issue, which I think we've addressed.

The next question comes from the line of Scott Mushkin with Wolfe Research.

So I guess the first thing I wanted to understand a little bit, I think, at the meeting, Greg talked about competition getting a little bit more intense. It seems as I look at your fourth quarter, you guys have left room potentially to get a little bit more aggressive on price and we've certainly seen competitors in consumables get more aggressive mainly. So I just wanted to see what -- how we should look at the fourth quarter, statistically on products and [flow-through risk] and how able are you to react if the environment gets more competitive or continues to be more competitive, as Greg talked about?

Yes. So it varies by market. I think when I look at our forecast, while we don't break out margins and SG&A specifically, I think there's, as I mentioned earlier, there's been a very consistent approach to price investment, and I think that systematic approach has produced results that we've been pleased with, and I wouldn't expect that to change in Q4. We're obviously going to be very aware of what's going on in the market. We have lots of people dedicated to pricing. And as we've said in the past and nothing changes today in my comments, that we will maintain price gaps and we will be EDLP. We're finding, as you've seen in the numbers, the offsets in expenses to help fund that and that really starts to get the definition of the productivity level, get the cost out, drive prices down, drive sales and then do it all over again.

All right. So then my follow-up question goes to the club, Sam's. You have a competitor in the marketplace offering free memberships. Wondering if you guys have seen any kind of impact from that. And is that something you guys would consider or are you doing it as well?

No, we have -- we haven't seen any discernible impact. We're pretty pleased with our membership sign-ups and overall improvement in membership trends. Certainly, some of that's been helped by the Plus membership penetration moving higher, which has been, in part a function of a lot of things going on inside the club to make it an attractive place to shop, but also the value proposition around free shipping with Plus membership, but no, I think we're executing to the plan and it's as we expected.

The next question will be coming from the line of Michael Lasser with UBS.

If we trend out your eCommerce growth on a 2-year stack basis, in the fourth quarter, it would imply you're going to grow 70%. It seems like what you're saying is because you're not going to be as promotional, we should be modeling something less than 70%. So, a, is that fair? And when you say you're going to be less promotional, is that alluding to the fact that you are requiring a $35 minimum threshold purchase for free shipping, whereas Amazon and Target are requiring no minimum threshold for free shipping?

Yes. So my comments around promotion are not related to this year specifically. I was just highlighting that last year -- well, if you think about holiday 2016, there were some promotional events that we did not repeat in '17. Here we are in '18, and we are growing the business, we're aggressive. You can do the price comparisons, we're -- on a basket we are lower than many of our competitors on the basket, many of the big ones, and we're happy with that position. We're getting the results we want at the top line and our 40% guidance, or around 40% guidance for the full year implies something in that range of, call it, low to mid-40 type growth in Q4. You can do that math, right? So it's fairly, I think, clear at this point how we think about Q4 growth in eCommerce.

I guess, the reason why -- trying to understand the reason why it's so much lower on a 2-year stack basis, because you have anniversary-ed the Jet acquisition for the last 3 quarters, so that's going to be fully embedded in the 2-year stack. Is it also because a lot of your growth or some substantial portion of your growth has come from the Online Grocery pickup and that becomes less meaningful as a portion of the mix in the fourth quarter?

So grocery is a smaller percentage of sales of total versus the other quarters simply because it's the holiday quarter and -- but it continues to contribute probably to the overall eCommerce business.

Your next question will be coming from the line of Budd Bugatch with Raymond James.

A lot of my questions have been answered, but you used to disclose the average wage per hour in the U.S., and obviously, with a lot of the moving parts and the wage increases, can you disclose that number anymore, what that average is in the U.S?

Yes, I mean, the starting wages is, as you know, it's $11 an hour and the average, I think, is $13.50, somewhere around there for U.S. stores and of course DCs will be higher than that.

Okay. And my follow-up is -- relates to some of the pretty sophisticated applications you have in the stores both in Walmart U.S. and in Sam's. When I'm in the stores and use Walmart Pay, I always ask the people at the register if people use it, and I get very, very rare usage of things like Walmart Pay. Can you talk about the usage of Walmart Pay? And maybe even Scan & Go in Sam's? And maybe what kind of increases you've seen in the penetration of the usage of those apps?

So Scan & Go has been a really popular app, actually, at Sam's Club. I spoke a little bit to how we think it's impacting our traffic numbers and ticket numbers, great response from customers on that. And so we're really pleased with the ramp-up in Scan & Go. In terms of Walmart Pay in the Walmart stores, that is also growing, but we haven't broken out the specific stats around it.

These are all just areas, Budd, of increasing the level of convenience for a customer, and as they choose to shop with us, they have a choice in how they do that. And so as Dan mentioned, we're pleased with the Walmart Pay trends and we would only expect that to grow.

I certainly hope so, Kary, because I really look for it when I'm in the stores and I'm in the stores for fair amount, and I just don't see a reasonably decent usage of it. So, would love to see...

It's incredibly easy to use. So I think as customers -- as there continues to be more communications around it and signage and advertising and so forth, yes, I think once you convert a customer to Walmart Pay, they really like it. It makes it very simple.

I think there's also...

I agree with that.

I'd also think that as we add more features to the app and draw more people to download the app, that should help our adoption rates of Walmart Pay.

The next question comes from the line of Joseph Feldman with Telsey Advisory Group.

I have a couple of quick ones. With Sam's Club, the traffic was up a lot, and I know some of it may be just the transfer from the stores that were closed, but is there anything else driving that big 6.2% traffic number?

So the traffic, as I mentioned earlier, there's a lot of pieces that go into that, but closed Clubs obviously is significant this quarter until we lap that event. But we're also getting more frequent visits with the Scan & Go, people. Just the behavior of the member changes there. So that would probably be the other big callout that I would make.

Got it. And then one other one was with Sears going away or -- and sort of, it may sound unrelated, but like even the wildfires, like those kind of exogenous pressures or factors, are you seeing any impact from them? Or maybe transfer sales or things that you're doing to help in the -- like the wildfire community, so kind of a 2-part question there.

No, I haven't seen anything specific on -- as it relates to the fires, I mean, it's one small part of the country. We obviously have our store base. It would have to be pretty monumental to have a major effect. Not, that's not a monumental event. It's obviously terrible, but there's nothing specific that I would speak to on that today. I think the other part of your question was around Sears, but there's a lot of retailers out there that are struggling and we pay less attention to what they're doing a lot more and what we're doing and what we can control, and market share is going to flow. Obviously, the big focus for us in the near term is in the toy business just given what's happened in the retail landscape in that particular category, but we're in the market every day, every week, every month getting better. It's getting better on price, it's getting better on private brand, getting better on assortments on store level, shopability, experience of the customers. So as long as we're doing those things, I think we're going to be able to take share from a lot -- in a lot of different places.

The next question is from the line of Scot Ciccarelli with RBC Capital Markets.

Dan, earlier in the call, I think you mentioned some of the drivers to your average ticket growth and you seemed to highlight both eCommerce penetration as well as fresh. Are there any other big contributors to the average ticket you've experienced -- increase you've experienced in the last few quarters? Or are those 2 factors really about the lion's share?

We've seen some good general merchandise growth last quarter. As you recall, we had some seasonal benefits that we've got from the way the weather broke. And certainly, this quarter, we've seen really good strength in the apparel business, the toy business, automotive, so these tend to be higher ticket categories, and I think that mix of business has helped us as well.

Got you. And when you look at your eCommerce contribution, the 140 basis points that you highlighted, does that have a bigger impact on traffic or ticket?

Traffic, but ticket as well because you're getting a higher ticket on eCommerce. So I wouldn't necessarily try and break that out here today.

Our next question comes from the line of Ben Bienvenu with Stephens.

I wanted to ask about the receivables. How much of that decline year-over-year is being driven by Brazil? And how much of it is sustainable as we lap over that? Should we expect receivables to begin growing again as we move out of 2019?

Certainly, Brazil and Flipkart play a role in that as well as FX. So we don't break out the specifics, but those are the 3 pieces that have had an impact. Flipkart is adding; Brazil, detracting; FX, detracting, but there's nothing -- when I look at the underlying numbers, there's nothing unusual or concerning.

Okay. And then on the International inventory, for the last several quarters, you guys have grown -- have been growing inventory at a slower rate than sales. You had partial contribution of sales from Flipkart this quarter. Is it reasonable to assume that with a full quarter's contribution of Flipkart sales that, that trends you've seen in the past should sustain inventory growing at a slower rate than sales?

So yes, inventory, obviously, being a snapshot in time as relative to our sales would be a little bit out of line or misaligned. So yes, the next quarter, you should start to see more normal trends, but we don't predict specifically or forecast inventory levels for the business overall, never mind international. You can -- it's safe to say that inventory is, it's a focus around the globe. We've made good progress as a company, so I'll just leave that as a takeaway.

And FX has an impact on that line as well. So...

The next question is from the line of Rupesh Parikh with Oppenheimer.

So on your free shipping threshold, so clearly Amazon recently removed it for the holiday season. So I was just curious how you guys feel about your -- the competitiveness of your offering in light of their actions?

Sure. So we feel good about the offering. We feel good about our price points. We feel good about our price gaps on the full basket and there's nothing to announce today on shipping.

Okay, great. And then there wasn't commentary this quarter on the consumer electronics category. So I was curious how that performed for the Walmart U.S. segment.

We had broad-based strength in general merchandise. I mean, electronics didn't pop up at the top of the list this quarter, but we did see strength in areas like mobile, for example. We're pleased with the TV business. We've certainly seen -- we've moved with the market, shifting towards larger screen sizes. We've gotten better assorted in connected home, so we feel pretty good about the direction of that business both from a merchandising perspective and sales perspective overall.

Yes, gaming had a good quarter as well and we showed off some of the new innovation we have there with the arcade games. You might have seen them in October when you were here. That, amongst a number of other new offerings, are really driving that business. Pleased with that.

Our final question today comes from the line of Mark Astrachan with Stifel.

I wanted to go back to traffic in the U.S. and try to understand how it flowed through from the U.S. grocery standpoint. So I think it was roughly constant and overall grocery comp was even at the high end of low single digits. Is it fair to assume there was some moderation in traffic sequentially in terms of contribution to comp?

Traffic moderated largely because of the comparison to last year's hurricanes. We had hurricanes this quarter, but not as significant as last quarter -- last year. But overall, we are pleased with what we are seeing in the broader traffic trends. And if you look at the 2-year stacks on traffic over the last few quarters, you can see, really, over the last, actually 4 to 8 quarters, you can see a nice progression, and I would say, on a 2-year stack basis, there was nothing -- we were pleased with what we saw.

Okay. One last housekeeping question. So on interest expense, debt balance up in the quarter. Is there anything exceptional we should know in trying to model that from a floating versus fixed rate standpoint?

So we do have some lower interest rate debt that helps. And we had the Flipkart piece in there, and I think there may have been -- is there any other factors? I'm just trying to think.

These are the main ones.

I will hand the floor back to management for closing remarks.

Great. Well, we appreciate the time. We went a little bit over. I just wanted to make sure we fit everybody in. In closing, we are really pleased with the Q3 results. We have good momentum in the business. We feel good about our competitive position headed into the holiday season, and we are positioned to win. The IR team here at Walmart, along with our executives, wish you all a happy and safe holiday season, and have a great day. Thanks.

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