On August 15th, Walmart had a call with financial analysts to discuss their second quarter earnings. Walmart has about $1.5 billion in inventory “that if we could just wave a magic wand, we’d make it go away today,” said chief financial officer (CFO) John David Rainey. Walmart estimates that inventory is still 15% above optimal levels. “We’ve also cancelled billions of dollars in orders to help align inventory levels with expected demand.”
Clearing the inventory will still take a couple of quarters. Categories with excess inventory include apparel, electronics, and home and sporting goods. To cut the inventory, the company has slashed prices on overstocked items. Clearing the stale inventory has helped the world’s largest retailer relieve pressure on their stores and through their supply chain.
While revenues grew, operating margins were down 6.8% and gross margins declined 132 basis points in the quarter. Executives say the top three reasons for this are: the high inventory levels; a change in product mix as consumers bought more groceries and fewer high margin products to cope with inflation; and finally last in first out (LIFO) inventory accounting.
LIFO matches the rising price to acquire inventory against revenues. In times of high inflation, LIFO alleviates the “inventory profit” that would result if old inventory, purchased at a lower price, was used to calculate profits. Thus, LIFO depresses current margins but also results in tax savings.
Other headwinds included higher fuel costs and storage costs associated with the backlog of shipping containers. Further, the wage increases from the fourth quarter are still pinching.
Walmart executives fairly pointed out how difficult it is to forecast demand in times of economic turbulence. When inflation hits, consumers buying activities change. We’ve seen more pronounced consumer shifts and trade-down activity” Rainey, explained. “As an example, instead of deli meats at higher price points, customers are increasing purchases of hotdogs as well as canned tuna or chicken.” Consumers also shift to buying lower cost private brands.
“As a backdrop, the shifts that we’ve seen in consumer behavior through the pandemic, shifting from in-store to online, along with big swings in the purchase of goods versus services. and then the reversion back to pre-pandemic norms has been sharp and difficult to predict. These trends have been exacerbated by inflationary pressure on the consumer that many of us have not experienced in our lifetime, the effect of which has recently changed consumption patterns in certain categories for us, notably general merchandise.”
But what is purchased is not simply the result of forecasts the CEO of Walmart – Doug McMillon – pointed out. Human instinct plays a role. “As we worked with the merchants over the last few weeks, it’s been kind of fascinating to think through how you make choices on it category by category. You don’t want to go into too much of a defensive mode. As we were looking at Halloween decor last week,” there were some items like inflatables, that are really fun, cool, new items. And when you see them, you’re like, we can sell (those). Oh, you can buy that. We’re going to blow out of some of those (items). And we want the buyers in some categories to have that mentality and be aggressive. In other places, we want to be more conservative so that we don’t repeat the mistakes that we’ve had in the first half of this year.”
Controlling Supply Chain Costs
The CFO, Rainey, pointed to the investments in automation and technology to help drive greater efficiency. “Through my first couple of months here, I’ve been able to get out and visit our stores and see our distribution and fulfillment centers and witness the supply chain automation and technology that we’re putting in our stores and centers. One example is the VizPick technology that we’ve rolled out to our associates across U.S. stores. This tool uses augmented reality to speed the inventory management process, enabling associates to get needed product from the back room to the sales floor more efficiently. This not only saves associate time but also helps avoid missing sales through side counter out of stocks. It’s a win-win. In summary, our business is resilient.”
In effect what Walmart has done is turn the back of their stores into miniature warehouses. Store level inventory accuracy, as a result is much higher. E-commerce fulfillment also becomes more accurate. These devices, and automation in the warehouses, has also led to labor productivity gains. It is also known that Walmart has made large investments in supply chain software from Blue Yonder.
Walmart is also putting pressure on suppliers to sell them goods at a lower price. Mr. Rainey diplomatically phrases it this way: “We’re encouraged by the initial steps taken by some suppliers to help us reduce product acquisition costs. We’re achieving significant savings in the procurement of goods.” You have to feel for the suppliers. They are pressured by double digit inflation while Walmart pressures them to drop prices.
The Ecommerce Supply Chain
It is not all bad news. Ecommerce continues to grow. McMillon explained, “growth is improving on Walmart.com, including the marketplace. And more people are choosing to be a Walmart Plus members.” A Walmart Plus subscription offers free unlimited deliveries from the store, mobile scan and go, and also offers its members early access to upcoming sales promotions, and discounts on fuel across its partners’ gas stations.
But to support ecommerce, “the team is also working on getting items to customers faster, while lowering the cost of delivery through a significant increase in the number of orders fulfilled by stores.”
McMillon also point out that “speed matters, whether it’s how quickly we get items to customers or how quickly we scale new businesses.” He touted their Spark Driver platform.
Spark Driver is a platform that makes it possible for service providers to earn money by shopping and delivering customer orders from Walmart and other allied retailers. Customers place their orders online; orders are distributed to service providers through the Spark Driver App; and then service providers accept and complete the order delivery!
Rainey added: “Our business is resilient, and with the omni capabilities we built, we’re better positioned now than we were in prior periods of economic softness.”