Productivity, efficiency take center stage in Walmart’s growth outlook

Entering its 2024 fiscal year, Walmart is zeroing in on productivity and profitability as growth catalysts in building out an omnichannel business that drives its “save money, live better” consumer mission, President and CEO Doug McMillon and CFO John David Rainey said at this week’s 2023 Investment Community Meeting.

At the annual event, held last week in Tampa, Florida, McMillon and Rainey said Walmart is targeting 4% sales growth over the next five years, a rate that would add more than $130 billion in sales atop the retail giant’s current $600 billion base.

“We’ve grown revenue at 6% these past five years and 8% over the last three years, as recent tailwinds kicked that number up. In the three years before the pandemic, we grew between 3.1% and 3.6%,” McMillon told investors at the meeting. “We know there will be variance from quarter to quarter and year to year. But regardless of the headwinds and tailwinds, we believe we’re now positioned as a total company to grow at about 4% over time going forward. That growth will be enabled by our strength in physical retail and our expanding digital relationship, fueled by pickup and delivery. We’ll build on that digital relationship with our first- and third-party e-commerce assortment and general merchandise, in particular.” (Event transcript provided by AlphaSense.)

Walmart forecasts fiscal 2024 consolidated net-sales growth of 2.5% to 3% (constant currency), including comparable-sales growth excluding fuel of 2% to 2.5% for Walmart U.S. and about 5% for Sam’s Club. Overall operating income is pegged at 3% growth, including a 100-basis-point negative impact from LIFO.

Source: Walmart 2023 Investment Community Meeting, John David Rainey presentation.

“More than ever, we’re taking advantage of benefits across segments as a total company in the areas of talent, knowledge transfer, enterprise services like sourcing and technology, including back-office software solutions. This is not just a U.S. brick-and-mortar business. We built a set of mutually reinforcing businesses that drive growth and engagement from customers and members,” McMillon explained. “Our five-year plan calls for us to grow profitability faster than sales. We know where our price gaps need to be, and we’ll manage them as we grow profit faster than sales through productivity and business mix.”

Walmart noted that its investments center on sales growth via its omnichannel business model; diversified earnings streams through improved category and business mix; and scaling “proven, high-return” investments that drive operating leverage and improve incremental operating margins—with all propelling the company’s everyday-low-price and convenience value proposition.

Rainey highlighted Walmart’s “aggressive digital growth strategy” over the past five years, which has lifted e-commerce business to $82 billion, or 14% of the retailer’s net sales, from $25 billion, or 5% of net sales. Recent monthly volume, growing in the high teens year over year, is putting Walmart on a path to reach $100 billion in the near-term, he added.

Source: Walmart 2023 Investment Community Meeting, John David Rainey presentation.

“What’s important to understand is this: The investments we’ve made in people, price, e-commerce and high-value technology capabilities are why we are at an inflection point today. The benefit of any technology platform is being able to scale it at a lower marginal cost,” Rainey said at the event. “The investments in our supply chain, coupled with the retail ecosystem that we’ve created, are what we believe will allow us to realize more attractive returns through operating and fixed cost leverage.

“When we reflect on where we are today, we believe that approximately 4% sales growth and growing operating income at a faster rate are still the appropriate targets for us for the next three to five years,” he told investors. “The investments we've made have positioned us well and stand to generate steady and sustained growth at higher margins. In fact, we think the opportunity for operating income growth over the next three to five years could be better than what we’ve outlined.”

Automation will play a pivotal role. By the end of fiscal 2026, Walmart expects about 65% of stores to be serviced by automation, with approximately 55% of fulfillment center volume processed through automated facilities.

“The bigger and newer news, the supply-chain automation investments have attractive returns individually and in total,” McMillon said. Walmart’s omnichannel supply-chain network spans a mix of ambient and temperature-controlled distribution centers, e-commerce fulfillment centers, market fulfillment centers (micro-fulfillment), consolidation centers and other facilities, as well as its stores and Sam’s Club locations.

Walmart CFO John David Rainey said at the investor event, “The investments we've made have positioned us well and stand to generate steady and sustained growth at higher margins." / Photo courtesy of Walmart

“As it relates to the automated storage and retrieval systems, we’ve taken enough time to prove them out. It wasn’t easy. Teams of engineers and operators put in years of work on the software, kept continuously improving the hardware, and assembled new and existing datasets to make it all happen. And we’re getting faster at converting,” according to McMillon. “The first DC took about 12 months to complete. The most recent one, six months. We’ll keep improving in all those ways and keep making those assets meet or beat our financial and operational expectations as we grow. This isn’t a leap of faith. It’s a methodical building of our next-generation supply chain.”

Walmart estimates a potential 20% improvement in unit cost averages through its automation investment.

“Underpinning these growth drivers is a focus on improving unit economics. We’re building a scaled system of supply chain capabilities that requires a combination of data, software and robotics. The investments in automation are already far exceeding our productivity targets, in some cases 30% better, as we’re able to better flow inventory at lower cost with less manual labor,” said Rainey. “Importantly, this automation has been designed with a human-centered view, improving how merchandise arrives at stores.”

In bottom-line guidance, Walmart projects fiscal 2024 adjusted earnings per share (EPS) of $5.90 to $6.05, reflecting a 14-cent EPS impact from LIFO. The company also cited a 12-cent EPS headwind versus a year ago from its acquisition of the remaining shares of Massmart and of automation specialist Alert Innovation, as well as a strong contribution from Walmart Mexico.

Analysts, on average, expect full-year adjusted EPS of $6.12, with estimates ranging from $5.95 to $6.74, according to Refinitiv. For fiscal 2023, Walmart posted adjusted EPS of $6.29.

Source: Walmart 2023 Investment Community Meeting, John David Rainey presentation.

“Walmart seems to be entering a new phase now that the operating environment is normalizing from COVID-19, supply chain bottlenecks, excess inventory and record inflation,” CFRA Research analyst Arun Sundaram wrote in a research note on Thursday. “The company is now focused on growing profitably and expanding margins over the next three to five years.”

As part of Walmart’s investor event, Jefferies analysts Corey Tarlowe and Randal Konik said they got the chance to tour the retailer’s next-gen regional distribution center in Brooksville, Florida.

“Walmart has been working on these supply-chain solutions for some time, and management’s confidence level in Walmart’s new plan is high. The solution focuses on data-driven processes and automation to better serve customers in a faster, more accurate and cost-effective way,” Tarlowe and Konik observed in a research note on Wednesday.

“The financial impact of these initiatives should not be overlooked,” they noted. “By fiscal 2026, Walmart believes that these investments could improve average unit costs by 20%. At its core, the new supply-chain automation improves capacity, provides better accuracy, creates new less-manual jobs, reduces costs and adds value to the P&L and shareholders.”