Wal-Mart execs respond to analysts and media questions on e-commerce, corruption investigation

The 2017 Wal-Mart shareholders’ meeting followed a solid first quarter performance and an unexpected 63% jump in e-commerce sales. Several questions posed to Wal-Mart execs during meetings that followed Friday’s main event dealt with the e-commerce business, led by CEO of Walmart U.S. e-commerce Marc Lore.

Wal-Mart Stores CEO Doug McMillon opened the meeting with equity analysts by noting, “We like omni channel and the data we are seeing supports the fact that some combinations of stores and e-commerce are going to be the winning strategy. We are trying to get faster … using more creativity, more risk taking and more innovation and more speed. We got into a period with this company, and I was part of that , where we were replicating, running in silos  … but to solve problems for today’s shoppers you have to work in a different way … and be more creative and innovative and I am pleased we are seeing some progress there.”

McMillon, while pleased with the first quarter, said market competition and the ever-changing retail environment means the company can’t rest and has not arrived at any destination.

“It was a good quarter,” added Chief Financial Officer Brett Biggs during his opening comments. “There are some things we want to do better but it’s nice to see this good start to the year. … We will continue to focus on growth, but it will be the right kind of growth and we will be more disciplined in how we operate. We must grow sales and manage expenses better and as a management team we all know that and we will continue to execute on that.”

Lore has been in his new role for about nine months and during that time he’s restructured the division so there is a group of specialists constantly innovating toward improving the overall shopping experience at Walmart.com and Walmart U.S. stores. He gave details on Jet Fresh, a program of delivering fresh items like tomatoes and milk to customers signed up for the service. The program has a money-back guarantee if products don’t meet the 100% fresh claims. Lore said Jet Fresh is in a test-and-learn phase, and said the company doesn’t believe there is just one way to deliver fresh items.

“We have an amazing pick-up program and we will be in over 1,000 stores with grocery pickup this year at Wal-Mart. We are delivering groceries home the same day in some test markets and Jet Fresh is the idea of shipping fresh out of a central warehouse that serves half the country. This allows you to get a lot of scale and be able to offer a longer-tail product (items like apparel or shoes) or product that’s not available in a local store. But now we are just testing and learning,” Lore said.

E-COMMERCE GROWTH
Wal-Mart execs were asked about the 63% sales growth in e-commerce in the recent quarter when margins weren’t up. McMillon said as the physical stores did better behind wage investments and store changes made by Walmart U.S. CEO Greg Foran two years ago, it allowed the company to focus more on e-commerce. McMillon said the e-commerce investments of the past three years – around $2 billion – was nearing completion when the deal with Jet.com was made. Online inventory went from 10 million items to north of 50 million at the same time.

“I am not saying we don’t still have work to do on Walmart.com, we do. But he (Lore) stepped into a foundation that allowed him to make some things happen pretty quickly when we were able to pair with Jet.com. There’s not just one thing we can point to about that quarter. It’s price, it’s assortment and experience. It’s a number of things coming together and we are working aggressively on all three of those things,” McMillon added.

Biggs said it’s easy to get caught up in the booming e-commerce number but the 1.4% rise in store traffic is rare in today’s retail world. He said gross margin will continue to fluctuate quarter to quarter because many things impact margin. He said Wal-Mart is doing a good job of buying product at the right price.

McMillon said scaling the e-commerce business is what matters now. He told analysts when they think about Wal-Mart to not just consider running good stores and delivering on e-commerce but to consider the possibilities that some of the digital applications now available to managing departments within stores is essentially applying machine learning to inventory management.

“We can be in some ways a tech company, but people don’t think of us that way,” McMillon said.

Analysts also asked execs what they could expect to see going forward with e-commerce growth and if there was a point where that growth would level off.

“We are not talking about growth going forward but we are happy with the progress we are making,” Lore said. “We’re happy with the results we are seeing on two-day free shipping with no membership and easy reorder is bringing online customers back more often and we are seeing a nice uptick in the number of (general merchandise) orders being picked-up since we launched the pickup discount. Now, we are really focused on the value proposition and that’s something we have to work on,” Lore said.

‘WIN WITH THE CUSTOMER’
McMillon did not give analysts an idea on how much or when the retailer will leverage its e-commerce business to bring costs down for the entire company following its “productivity loop” operating plan.

“We are not calling out any e-commerce leverage point at this stage. Think of it as moving parts … the speed of change has picked up. Marc is moving fast as we all are and with some of the changes we are making it’s hard to forecast but we are going to win with the customer,” McMillon said. “We have a lot of ideas on how we can make that happen.”

Analysts also asked Lore about intentions to grow online inventory further for the two-day free shipping plan. Roughly 2 million items are now slated for the free delivery. Lore said growing the inventory is more about getting the right items than just procuring more items. He said they will continue to add more products into the two-day program. He said the top 1 million items sold online represent about two-thirds of all online sales. He said a million items is equal to all the items a shopper will find adding up all the products in mass retailers or specialty retailers within a 10-mile radius of their home.

Lore said working at Walmart.com feels like he’s working at a startup. He also said the growth in e-commerce is attributed to new and existing customers ordering more products amid a better assortment and price leadership.

U.S. STORES
Foran, happy about the recent quarter’s results, told analysts there’s much work to do in the U.S. business and he assessed the turnaround job he began over two years ago as only one-third complete. He said as you lap year one and then year two and you see marked improvements and the “goal posts” may be moved because of potential that emerges.

“I see a lot more we can do with Marc and Dave (Cheesewright, CEO of Walmart International) so a reference I have used before — fixing to leading — I think we have bent our back and fixed the fundamentals in the business and now have earned the right to start leading in a number of things. We have a bit of head room now to do some interesting things with Dave and his team. Clearly, the intersection with Marc’s business and our 4,676 Walmart Stores, excluding Sam’s Clubs, is a pretty exciting proposition,” Foran said.

McMiillon said he likes the prospects for stores to continue doing well, all while Lore’s team focuses on conveniences like pick-up options and skip-the-line in pharmacy while reordering prescriptions via the Walmart app. He is reminded that in the United Kingdom, where Walmart ASDA has been doing grocery delivery for 20 years, 90% of sales still come via stores.

“I like that,” McMillion added, noting that consumers want options that include online and in-store experiences. Cheesewright said the U.K. shopper who uses stores and online spends more than the shopper justing buying in-stores and those buying only online.

MEDIA SESSION
McMillon took 15 minutes to address the media after the analyst question and answer session.

“Wal-Mart is trying hard to win with customers and we are working on cost and price, we are working on assortment and working on experience where there is a lot of innovation now and we are starting to find ways to not only build an e-commerce business but to change the way everything works including the store experience. We have to get to where we can make things faster and easier for them (customers) and we are really excited about doing that. We are still working to try to take advantage of the size and scale of the company to do good things, shape how supply chains work — whether it’s fishing in Thailand or factories in Asia or here in the U.S.— to make sure everything is happening in the right way. We are proud of the progress we’ve made and the goals we set and we still have a lot to do. … But that’s why I like working at Wal-Mart.”

McMillon was asked what the company was doing to fix pricing differences on items sold in stores compared to like products sold online. He said online pricing mechanisms move faster than in physical stores. He said pricing in stores should come down in some instances but in certain categories prices are cheaper in-store compared to online. He said the challenge is the retailer can’t ignore competition which includes online which makes for a tricky puzzle to solve. He said Cheesewright, Foran and Lore have worked to try and harmonize pricing and also manage margins.

“We are in this business for the long term and we can’t do things overnight. We have to plan to do things to fix problems like this over time by category,” McMillon said.

He also was asked if President Donald Trump’s withdrawal from the Paris Climate Accord would cause him to withdraw from  the President’s Advisory Council. Tesla owner Elon Musk stepped off the council following Trump’s decision.

“We are disappointed by this and the administration is aware of that. We are going to continue to work on it here … on ways to be more sustainable that will allow us to lower costs and connect the dots and we’ve told the administration that. I do not plan to withdraw from the forum that I am participating in because I’d like to participate and there will be other issues that come up and I didn’t expect what we wanted to happen would happen in every case. Engagement gives us a chance to share point of view and do good things and I want to keep doing that,” McMillon said.

He also was asked about the potential impact to Walmart U.S. from German discount grocer Lidl, which is opening its first 15 stores in the Carolinas, Virginia and Pennsylavania in the next two weeks.

“Competition is good for the customer and over time it has made us better. In the U.S. we saw this coming and we started working on our private label specs and other things very early on which puts us in maybe a better position. We still have work to do on fresh presentation, rotation and management of fresh but we are working hard and making progress. We are more comfortable with our position today than I was before, but we still have a lot of work to do. We can get better,” McMillon said.

McMillon also was asked to provide some lessons learned from the now six-year investigation of the Federal Corruption Practices Act that has cost the retailer time and more than $837 million defending itself against violation claims, and also reinforcing its own internal compliance protocol. McMillon was CEO of Walmart International when the investigation began in late 2011.

“One of the things I have learned in this process is that the disciplines and (14) areas of compliance have to be stood up … things like permits and licenses, pharmacy compliance and food safety. You need expertise in each of the 14 areas, give them the right investment class processes, support them with systems and then you need visibility to see across. We had compliance resources scattered all over the place. In some cases, they were functioning very well reporting up to operational leaders. But over the last few years, we have put things together and connected the dots in a way that has strengthened our compliance and ethics programs, and it’s one of the things I am really and sincerely proud of. You have to be vigilant. There is always work to do, but we have learned a lot and benefited from the things that we have done. Over time, I think our business is stronger as a result of the changes that we have made.”