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Major themes:

‍Inflation / Supply Chain

Walmart building a customer-centric flywheel

MarginInventory

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Walmart Stores Inc. conducted its 52nd annual shareholder’s meeting on June 1^st, 2022 in Bud Walton Arena on the University of Arkansas campus in Fayetteville AR, 60 years after Sam Walton opened his first Walmart store in Rogers, AR.  The event, hosted by James Cordon (for the second time) with performances from the Jonas Brothers and Jon Batiste among others, contained a lot of the typical raw-raw of such events that bring in shareholders, stakeholders, and employees from all over the world gathered to join in on the fun and hear from company leaders.

But there were also some ominous tones, as when Non-Executive Chairman Gregory Penner stated, in his opening paragraph in the opening statement of the event that,“….we remain focused on delivering on our promise to help people save money and live a better life, a purpose that has proved to be essential for customers and communities around the world as we continue to work through some of the most challenging times in our history.”

These challenging times include near record high inflation, ongoing multi-year supply chain capacity struggles as well as rapidly changing consumer spending patterns that nearly no national US based retailer fully anticipated, even 6 months ago.

During the Q&A portion of the meeting a question was asked regarding Walmart’s view of the ongoing supply chain struggles that have plagued US retail for the last two holiday seasons.  Walmart CEO Doug McMillon replied by emphasizing his concern regarding inflation.  The two are inextricably linked.

“It has been quite a couple of years as it relates to the supply chain. …So, during the pandemic, with people being at home more, we saw a greater level of demand for an extended period of time, call it, two years that really stretched supply chains, both domestically and as it relates to imports, just focused on the US. And then, during the first quarter, other things happened, including the war in Ukraine, that drove up costs related to fuel further than they were already and put more pressure on things like grains. So, our suppliers that were already feeling some pressure and had been talking to us about cost increases, some of which we had received, continue to feel more intense pressure.

And so, today, when I think about supply chain concerns, I’m less worried about what’s happening with container flow and more concerned about what’s happening with inflation itself.”

I was born in 1979 and 1980 was the highest year of inflation in my lifetime…so far.  So, my 40-something and younger friends and I have never really lived through inflation and what it means to an economy, retail sales or even, how it impacts families.  We are now receiving that education.

This is the primary reason for Walmart exceeding its sales forecast for Q1 (due to retail increases, i.e., inflation) and for missing their profit estimates (cost increases not reflected at retail, transportation, and labor costs).  Walmart continues to signal sales will be higher than originally budgeted (again, inflation) but that profit is the focus for the duration of 2022, along with liquidating excess inventory, which does not seem to be as concerning at the C-suite level, as CFO Brett Briggs believes the inventory glut will be cleared out in Q2 and possibly as late as Q3.

Ending on a high note, McMillon finished his answer with, “So, I think demand will stay fairly strong. We’ll have a successful sales year… But we do think that that inflationary pressure is something we should all be keeping an eye on, particularly for some of our customers.”

High Impact expects to see retails for food and basics to remain as low as possible, possibly putting a crimp on margins.  The exception being private label, which consumers are moving to, considering inflation and higher gas prices.  However, margin and markdown support will likely be a major theme through the rest of 2022 and possibly into 2023, particularly in hardlines, softlines and seasonal.

In response to a different question, McMillon provided insight to Walmart’s strategy, dictated by the US economy stating, “If the world is under more pressure and people are generally more value-conscious, we’re the place to go. If the world is a little … brighter than that and people can experience more convenience, then we’ve got delivery and e-commerce and everything else.”

Walmart’s e-commerce business globally produced $73 million in sales in fiscal 2021.  Walmart US saw growth of only 1% in Q1 2022, but that after several consecutive quarters of significant e-commerce growth, driven in large part by OGP (online grocery pickup) and OGD (online grocery delivery) increases, driven by changing consumer habits because of the pandemic.

Which brings us to the Walmart Consumer Flywheel.

McMillon’s initial presentation to the shareholders meeting largely emphasized a flywheel that incorporates brick-n-mortar retail, e-commerce, health and wellness and financial services as well as B2B (business to business) sales and services that, along with more products and services in stores and online, and lowering costs, is the formula that Walmart is pursuing to continue to grow profits as well as sales, and compete with the elephant in the room (Amazon) that has used non-e-commerce business models to provide margin support to their e-commerce and retail business, whose margins are lower and less able to be forecasted at this time in US retail.

To this, McMillon contributed, “Globally, our e-commerce business, which includes pickup and delivery, grew to over $73 billion in sales last year. We’re saving people money and time. Increasingly, we’ll also support their desire to be healthier and improve their family’s financial position. There are natural connections between food and health and wellness and retail and financial services, that enable us to serve them more holistically and strengthen our business model at the same time.

So, we’re building a customer-centric, mutually reinforcing flywheel that not only connects health and wellness and financial services to retail and vice versa, but it also opens up opportunities for us to serve other businesses, large and small.”

What “opens up opportunities for us to serve other businesses, large and small,” is yet to be disclosed fully, but we can see part of the plan.

Walmart Luminate and Walmart Connect are pivotal elements of this strategy.  Walmart Luminate partners Walmart suppliers with Walmart to purchase Walmart created software to identify trends and insights from the data that Walmart has on their consumer, while Walmart Connect attempts to compete with Amazon’s advertising regime (AMZ), which is a major contributor to Amazon’s profitability in the retail and e-commerce segments.

If this initiative includes more B2B products and services is yet to be seen, but High Impact predicts that it will, in many areas of the business.  One example already in usage today is Walmart’s beef production capabilities, of which roughly 80% is sold to foodservice entities and never reaches a retail shelf.

As always, Walmart Shareholder’s 2022 not only looked at this year, but looked to the future.  Walmart announced that they will build four e-commerce fulfillment centers that rely largely on automation, transitioning from a 12-step fulfillment process to only five steps.

These centers will employ largely control technicians, quality audit analysts and flow managers, adding 4,000 jobs to manage the output of four centers that can provide one-day to two-day delivery to 75% of the US population.  The first of these fulfillment centers are to be opened in Illinois in 2022 and completed in 2024.

In summary, High Impact sees 2022 as a year of top-line sales growth for Walmart in the US, driven largely by inflation and gains in market share from consolidation of retailers that either closed or filed for bankruptcy protection, that has taken place over the last few years (Toys R Us, Belk, Francesca’s, Stein Mart, GNC, JCPenney, Tuesday Morning, Pier 1 Imports, Fred’s, Payless, Shopko, not to mention individual store closings, which are increasing at a rapid scale).  But margin is going to be a challenge as is inflation, with inflation hitting the consumer and limiting purchasing power and margin in the areas where Walmart and suppliers absorb the increasing costs of fuel and transportation at large, as well as Walmart increasing the pay and benefits (education reimbursement) that store and distribution center associates receive.