5 things grocers need to know about Walmart’s Q4 earnings

Walmart on Tuesday offered up a mixed report in detailing its fourth quarter and full-year earnings.

On the one hand, the retail giant said it had a $1 billion month in December—the largest sales month in company history. On the other, Walmart executives used the words “cautious” and “uncertainty” so many times during a call with investors, one might suggest they stroll their own aisles to find some calming tea and soft blankets.

As Walmart U.S. CEO John Furner noted, “We’re thinking about the year cautiously given all the unknowns in the operating environment.”

What’s prompting all of that cautious uncertainty? Well, lots of things, including a hazy inflationary picture, a product mix that continues to favor low-margin grocery, unstable consumer spending patterns and, of course, the still-looming prospect of economic calamity.

“With respect to our cautious tone and the fact that we tend to do well when the consumer is pressured, look, we recognize that,” Walmart CFO John David Rainey said Tuesday. “We also think that we’ve got a great value proposition for consumers, and in good economic times too, and we’re eager to demonstrate that. But again, I would just point you to the fact that there’s a lot we don’t know. We could tilt into a recession.”

Amid all that uncertainty, though, Walmart reported that some clear trends are emerging:

Retail advertising is becoming a big deal

Grocers big and small are diving into retail media networks right now. Walmart launched Walmart Connect, formerly known as Walmart Media Group, in 2021. Last March, it beefed up the platform with additional capabilities, such as new ad units, video and improved online search functionality. During Q4, Walmart Connect grew more than 40%, while Walmart’s global advertising business grew nearly 30% during the year, to $2.7 billion.

“The business model itself, the business mix, is changing,” Walmart CEO and President Doug McMillon told analysts. “That’s been our strategy, and now we’re starting to see some of those numbers grow, as with advertising income.”

Grocery keeps growing and growing, but that’s not necessarily ideal for Walmart

As food-at-home inflation made its double-digit climb, big box retailers saw increasing business from grocery shoppers looking for value.

Walmart’s grocery share continues to grow, the company said, with same-store grocery growth in the “mid-teens” during the fourth quarter. Food sales, meanwhile, grew in the “high teens” and food units sold increased year over year, Walmart said. Overall, grocery sales were up in the low-20% range on a two-year stacked basis.

But Walmart’s gross margins dipped 83 basis points during the quarter, fueled in part by “mix headwinds,” the retailer said.

Walmart continues to grow its grocery dominance. / Photo: Shutterstock

“The effects of product mix shifts have negatively impacted our margins,” Rainey said. “Over the last year, grocery and health and wellness sales, which have a lower margin than general merchandise, have increased by 330 basis points as a portion of our mix.”

Grocery is profitable at Walmart, executives were quick to emphasize; it just doesn’t make as much money as general merchandise, so the key is to get shoppers to pick up a pair of pants or some new earbuds with their bread and milk. The retailer is starting to see more of that, Rainey said.

“We’re accelerating share gains in our food categories and seeing signs of improved attach rates in consumables and high-frequency purchase areas of general merchandise,” he noted.

Private label is not slowing down

It is certainly no secret that private-label products have been red hot over the last year. And their popularity is not dimming, Walmart said Tuesday.

Private-brand penetration increased more than 160 basis points at Walmart in the last year. What’s more, though, even though grocery price inflation has stabilized a bit, Walmart said it has seen “some acceleration” to private brands in just the last 90 days.

“That shift really began last March and continued all year, and the fourth quarter got a bit stronger,” Furner said.

Store-fulfilled delivery drives e-commerce growth

Walmart's store-fulfilled delivery program now brings in more than $1 billion per month. / Photo: Shutterstock

Over the years, Walmart has steadily built up its in-house fulfillment and delivery network. In the last two years, the retail giant said Tuesday, store-fulfilled delivery sales have nearly tripled and now total more than $1 billion per month.

“We’re now positioned to serve the customer how they like to be served, stronger on convenience, as well as being known for value,” McMillon said. “If they want to pick up, we can do that. If they want delivery, we can do that in various forms … The business model is changing. Some of the things we’ve been working on for these last few years are starting to scale, and we’re excited about that.”

Consumers are also feeling nervous and uncertain

Higher-income shoppers continue to flock to Walmart, making up nearly half the retailer’s U.S. growth during the fourth quarter, McMillon said. And Sam’s Club’s warehouse stores are grabbing a “greater share of wallet” from mid- and higher-income shoppers, he said.

Last quarter, Walmart reported that nearly three-quarters of its share gain in grocery was coming from households making more than $100,000 a year.

“Our goal is, for the experience they’re having in our stores and clubs, combined with our current capabilities for pickup, delivery and membership, to result in them choosing us even as inflation eventually subsides,” he said. “When we think about our business today compared to what it was during prior economic downturns, we now have a more compelling offer, a true omnichannel experience that makes us optimistic that more higher-income families will continue shopping with us across categories because we have pickup, delivery and membership.”