沃爾瑪 (WMT) 2021 Q2 法說會逐字稿

Welcome to Walmart's Fiscal Year 2021 Second Quarter Earnings Call. (Operator Instructions) Please note that this conference is being recorded.

At this time, I'll turn the conference over to Dan Binder. Please go ahead, Dan.

Thank you, Rob. Good morning, and welcome to Walmart's Second Quarter Fiscal 2021 Earnings Call.

I'm joined by a few members of our executive team, including Doug McMillon, Walmart's President and CEO; Brett Biggs, Executive Vice President and Chief Financial Officer; and John Furner, President and CEO of Walmart U.S. In a few moments, Doug and Brett will provide you an update on the business and discuss second quarter results. That will be followed by our question-and-answer session.

Before I turn the call over to Doug, let me remind you that today's call is being recorded and will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. These risks and uncertainties include but are not limited to the factors identified in our filings with the SEC as well as risks and uncertainties resulting from the ongoing COVID-19 pandemic. Please review our press release and accompanying slide presentation for a cautionary statement regarding forward-looking statements as well as our entire safe harbor statement and non-GAAP reconciliations on our website at stock.walmart.com.

It is now my pleasure to turn the call over to Doug McMillon.

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unusual, and I want to thank our associates for rising to the occasion. They're adapting to changing customer needs and tackling new challenges while positioning our business for the future, and we're grateful.

As I shared last quarter, we're operating with a clear set of priorities to guide our decision-making through this crisis. Those priorities are: one, supporting our associates on the front lines in terms of their physical and financial well-being; two, serving our customers as safely as possible and keeping our supply chain operating; three, helping others, which includes hiring so many that need work, supporting our suppliers and marketplace sellers and serving the communities where we operate, including accelerating our efforts to increase fairness, racial equity and justice; four, managing the business well operationally and financially in the short term; and five, driving our strategy to strengthen our business for the long term.

First, our associates. They continue to be inspiring, and it has been a pleasure to visit with so many of them as I've made my way around the country visiting stores, clubs and distribution centers. During this call last quarter, we outlined a number of measures we have in place to support them, and those continue.

Globally, we've hired more than 500,000 new associates since the beginning of the year. We've continued our COVID-19 emergency leave policy, which includes the removal of our attendance requirements related to our quarterly cash bonus program called MyShare. That enables people to stay home if they're diagnosed with the virus or feeling sick, need to care for others or feeling uncomfortable working. And globally, this year, we paid or announced $1.6 billion in MyShare and special cash bonuses to support our associates financially.

After supporting our associates, our next priority is serving our customers. Consistent with our purpose, we remain committed to EDLP, ensuring the lowest prices on a basket of goods. During the second quarter, our customers were spending so much more time at home that we experienced strong sales in categories like TVs, computing and connected home. Customers also took advantage of time for outdoor entertainment and sports, which led to strength in those categories.

With significant operating restrictions for restaurants across the country, families continue to prepare more meals at home, and our business has benefited from that trend. As you would expect, there continues to be extremely high demand for disinfectants, cleaning supplies and paper goods. At times, we saw a return of stock-up behaviors in certain food and consumable categories in specific geographies where hotspots occurred.

While there's volatility in the supply chain levels, we're starting to see some categories recover in terms of in-stock. From a seasonal standpoint, back-to-school is negatively impacted by the health crisis in terms of timing and demand. We've been thoughtful in our approach, both in stores and online, and we believe we're well positioned whether students or teachers work from classrooms or their homes.

The third priority for us has been to help others in the communities we serve. I'm proud of the many ways we're supporting communities, including our support for food banks. This quarter, through our Fight Hunger. Spark Change campaign and food donation program, we helped provide access to an estimated 300 million meals for people in need. We're also continuing our support for communities through COVID-19 testing sites with more than 420 across 33 cities.

Communities across America have become rightly focused on racial equity and justice, and so are we. Our work starts inside the company with our diversity and inclusion efforts. In addition, we've also established a team to look for places where we can put our core business and the size of our business to work to influence our nation's financial, health care, education and criminal justice systems for good. In addition, Walmart and the Walmart Foundation have launched a center for racial equity, committing $100 million to fund philanthropic initiatives that complement the company's efforts to shape the 4 systems I just mentioned.

Even during this crisis, the team is managing our business well and executing our strategy to build omnichannel solutions globally. In the U.S., we continue to expand pickup and delivery services, including Express Delivery with customers receiving their orders in well under 2 hours. In Mexico, we've now launched same-day delivery from 70% of Sam's Clubs. And in India, we've launched Flipkart wholesale, a business-to-business solution that will leverage our omnichannel capabilities to better serve kiranas and other small businesses as our cash-and-carry business joins Flipkart.

There's been a lot of buzz recently about membership at Walmart. We've been testing membership with delivery unlimited subscriptions since late last year. That customer offer was limited to a grocery and consumables delivery service as the reason to sign up.

Since that launch, we've proven to ourselves that we can pick and deliver a broad set of categories across the supercenter, not just food and consumables, but a wide assortment of general merchandise. We think that assortment breadth and our ability to deliver with speed nationally, combined with a few other benefits for customers, will result in a compelling proposition, so we've been moving towards a new membership launch. We'll share more about that membership and timing when it's appropriate.

As it relates to our Q2 performance, I'll begin with the Walmart U.S. segment. Comp sales were strong again this quarter at 9.3% excluding fuel. There were several tailwinds affecting our Q2 performance, including government stimulus, more people eating at home, a focus by customers on entertaining themselves at home and investing in their homes and yards. We also had some headwinds, including reduced store hours and out-of-stocks. As the benefits from stimulus waned towards the end of the quarter, we saw comp sales settle into a more normal range.

We're pleased with the progress we're making on Walmart.com. We had really strong sales growth and significantly reduced losses. The tailwinds we're experiencing are accelerating our progress to build a healthier eCommerce business as we add new brands, improve product mix, grow the marketplace and achieve more fixed cost leverage. The stores and online merchant teams are now integrated, and we believe we'll benefit from that change going forward. The improvements in contribution profit and reduced operating losses are really good to see.

We've made several structural changes within Walmart U.S. during the quarter as we continue on our path to transform into an omnichannel organization. These changes were made to increase innovation, speed and productivity. This is obviously a difficult time for these associates to experience changes like this, so we're providing additional financial support and time to look for another role, along with other forms of support, to make that easier than it would otherwise be.

Turning to Sam's Club, where the team delivered comps of 17.2% excluding fuel and tobacco and grew membership income 7.8%. We saw improvements in member count, renewal rates and Plus Member penetration. The popularity of Scan & Go is accelerating, which is great to see. The membership value proposition is strong, and the team is executing well.

Walmart International sales increased 1.6% in constant currency, and 7 of 10 markets had positive comp sales. The team delivered good top line results given we faced significant headwinds from currency and the government-mandated closure of Flipkart for about half the quarter as well as parts of Africa and Central America for portions of the quarter. Canada, China and Mexico led the way as customers choose one-stop shopping in omnichannel solutions.

In India, Flipkart reopened in mid-May, after which we saw GMV exceeding pre-COVID-19 levels. Excluding fuel, Asda's performance demonstrated the resilience of the business with growth in a challenging period. Profit for international was also better than we expected when you remove the effects of FX and a discrete tax item.

I'll close today once again by thanking our associates for their incredible work. Our integrated omnichannel offering continues to resonate with customers around the globe. It's positioned the company well during this crisis, and we remain convinced it will be the winning strategy going forward.

I'd also like to mention that we'll be releasing our ESG report next week. I encourage all of you to spend time with the report to better understand the incredible work our team is doing in this space. I wish you and your families good health.

And I'll now turn it over to Brett.

Thanks, Doug. Good morning, everybody. Let me start by thanking our associates for their fantastic work serving customers during this unusual time. Every day, we're navigating through a broad set of challenges while positioning the company to win. I'm so proud of how the team has quickly adapted to new ways of working and respond to the changing needs of our customers.

The health crisis continued to affect shopping behavior in the second quarter, with trip consolidation and larger basket sizes in stores as well as channel shifts toward eCommerce. Our results are a reminder that customers will have multiple ways to shop with us and we're innovating and leveraging our unique assets to provide solutions for them. Our financial position is very strong, and we remain laser-focused on operating efficiency even as we have incremental COVID-related costs to support associates and customers. We've maintained our strong cost culture and took recent steps to further streamline the organization to better support our U.S. omnichannel strategy.

So let's get to Q2 results. Total constant-currency revenue growth was strong, up 7.5% to more than $140 billion despite operating limitations in some markets early in the quarter. Walmart U.S. comp sales increased more than 9%, International net sales grew nearly 2% in constant currency, and Sam's Club grew comp sales more than 17% excluding fuel and tobacco.

Gross profit margin was strong in each segment and increased 63 basis points for the total company, benefited by strong sales in higher-margin general merchandise categories, which in the U.S. is aided by government stimulus, lower markdowns and better fuel margins. This was partially offset by the carryover of price investments from last year.

SG&A was negatively affected by approximately $1.5 billion in incremental COVID-related costs, about 75% of which related to associate bonuses and expanded benefits, including the recently announced third special bonus of the year. The quarter was also impacted by U.S. business restructuring costs of about $380 million and a discrete tax item. In total, these costs negatively affected expense leverage by about 130 basis points and, as a result, expenses deleveraged by 42 basis points. Adjusted operating income on a constant-currency basis was up more than 18%, and adjusted EPS increased about 23% to $1.56 versus last year's Q2 adjusted EPS. Currency fluctuations negatively affected EPS by about $0.02.

Operating cash flow to date -- year-to-date increased nearly $8 billion versus last year. Free cash flow was up more than $9 billion with higher sales, lower inventory levels, continued operating discipline and lower CapEx, some of which is timing. Inventory was down about 7% year-on-year mainly due to heightened demand. While we didn't repurchase any shares in the quarter, our capital allocation strategy is unchanged, and we continue to feel very good about the position of the company.

Now let's discuss the quarterly results for each operating segment. Walmart U.S. had a strong quarter. Comp sales excluding fuel increased 9.3%, with eCommerce sales growth of 97%.

eCommerce sales were strong throughout the quarter, contributing approximately 2/3 of the segment comp growth. We saw significant increases in repeat rates and weekly active digital customers, and we continue to make progress on assortment expansion and seller tools with eCommerce marketplace sales growing triple digits. We're accelerating investments in omni fulfillment solutions, including the continued rollout of same-day pickup and delivery services to more stores, expanding store pickup and delivery slots by nearly 30% since February and permanently increasing ship-from-store capabilities from pre-COVID levels.

The second quarter started strong as general merchandise categories had accelerating growth, both in-store and online, as government stimulus funds were disbursed. As families spent more time at home, we saw strong increases in categories like home, sporting goods, landscape and electronics. Grocery sales had another strong quarter, including robust growth in fresh.

As stimulus funds tapered off toward the end of the quarter, sales started to normalize, but July comps still grew more than 4%. Trip consolidation continued throughout the quarter, resulting in an average ticket increase of about 27% and a transaction decrease of about 14%.

Gross profit rate was strong, up 42 basis points due to increased sales of higher-margin general merchandise categories and fewer markdowns. We also saw improvements in eCommerce margin rates, reflecting continued progress on product mix and faster growth in marketplace sales.

The carryover of last year's price investment and the temporary closures of our auto care centers and vision centers negatively affected the margin rate. The approximate $1.2 billion of incremental COVID-related costs as well as the restructuring costs negatively affected expense leverage by about 170 basis points. As a result, the U.S. segment deleveraged 41 basis points. However, underlying productivity is strong both in physical stores and eCommerce operations. Adjusted operating income was up almost 17% for the quarter, aided by significantly lower eCommerce losses.

Inventory declined about 4.6%, reflecting strong sales and higher-than-normal out-of-stocks in some categories. While we continue to make progress in our in-stock position, there are some specific areas that are still challenging. Overall, we're in a good position.

As noted throughout the market, the back-to-school season is off to a slower start than usual given the uncertainty around the timing of students physically returning to school. As a result, we expect the season to be choppy and come later than normal. Items like laptops, tablets and home office furniture are performing well while others like basic school supplies, backpacks and apparel are understandably soft. Despite the slow start to back-to-school, overall U.S. comps are in a fairly normal rate at the start the quarter.

International's results are better than anticipated coming into the quarter. Despite operational limitations in several markets due to the crisis, including the government-mandated closure of Flipkart, net sales increased 1.6% in constant currency, including nearly 40% growth in eCommerce. 7 of 10 markets posted positive comp sales. Sales in Canada and China were exceptionally strong, and Mexico showed solid results. Excluding fuel, Asda comps were also solid, with online grocery growing faster than the market. Customers are responding favorably to expanded eCommerce and omnichannel offerings, driving triple-digit eCommerce sales growth in most of these markets year-over-year.

We faced extensive government-mandated closures in markets like India, South Africa and Central America, particularly early in the quarter. Flipkart operations were closed for around half the quarter, but since reopening in mid-May, GMV is exceeding pre-COVID levels.

In Africa, about 1/4 of the stores were closed for a portion of the quarter, and certain high-volume sales items were restricted. In the U.K., decreases in travel pressured fuel sales.

Currency fluctuations were a significant headwind to sales, approximately $2.4 billion during the quarter. International operating income declined about 9% on a reported basis but increased 11.5% on an adjusted constant-currency basis, excluding the previously announced discrete tax item.

During these challenging times, we continued to execute the strategy of building strong local businesses powered by Walmart and announced additional investments in China and India focused on positioning the portfolio for growth. For example, we're excited about the launch of Flipkart wholesale, creating a B2B marketplace to help small businesses in India source directly from manufacturers and producers. We'll also continue to evaluate opportunities to strengthen our position across the portfolio.

Sam's Club had another terrific quarter with strong comp sales growth of 17.2% excluding fuel and tobacco, with positive contributions from both increased transactions and average ticket. eCommerce sales grew 39%, with strong demand for direct-to-home delivery. The business showed broad strength across categories, including food and consumables, which were particularly strong, and our Member's Mark brand also performed well. The sales strength reflected strong member growth and benefits from government stimulus.

We're pleased with the strong membership trends at Sam's. Membership income grew 7.8% in Q2, the best quarterly performance in more than 5 years. New member sign-ups and renewal rates were very strong, and Plus Member penetration was at a historically high level.

Sam's also incurred incremental COVID-related expenses. However, the approximate $100 million of additional cost was more than offset by strong gross margins, which resulted in Sam's operating income increasing more than 24% excluding fuel.

Consistent with our first quarter release, we aren't providing FY '21 financial guidance due to continued uncertainty around key external variables related to the health crisis and their potential impact on our business and the global economy. The health crisis has created tailwind -- both tailwinds and headwinds to our business. In Q2, we saw stronger-than-expected sales due in large part to stock-up buying and stimulus spending, but the duration and extent of future government stimulus remains uncertain. In Q2, stimulus spending improved our sales mix and, in turn, gross margin and operating profit.

We've also managed the greater operational complexities and incurred incremental cost to ensure associate and customer safety, and some of those will continue. Currency headwinds also remained quite strong. If rates stay where they are today, the top line impact will be more than $1.1 billion in the third quarter.

Despite the various challenges, our strong performance throughout the dynamic and challenging first half of the year reinforces the strength of this business and the omnichannel strategy we're leading. Walmart's financial position remains excellent, allowing us to position the company for success now and in the future.

Thank you for your interest in Walmart, and we would be happy to take your questions.

(Operator Instructions) Our first question is coming from the line of Karen Short with Barclays.

I want to focus on eCom growth a little bit. So wondering, first, if you could just give an update on the customer mix and where you think you're gaining share. And I did ask this last quarter, but I'm obviously very interested in that in terms of the demographics.

And then I wanted to get a little more granularity on the attachment rates on general merchandise, given the consolidation of the app. And then the last part of that was if you could give any more color on marketplace. Obviously, you called out triple-digit growth on that. Maybe anything you could provide in terms of number of sellers, number of SKUs or any more granularity would be helpful.

Karen, it's John Furner. Thanks for the question. As we said, eCom was up 97% in the quarter, and we're excited by new customers that have joined and retention rates. And I think we've also been pleased to see the improvement in mix in categories that are selling online, which ties a bit to your second question. We've had stronger growth rates in both home and apparel online, which also -- home has been strong in the stores as customers moved into their homes and have set up offices and now beginning to have school from home. Those have all been strong businesses.

And then the third point that you made, marketplace, which is a very important part of the strategy, also performed well in the quarter. In addition to marketplace, we've been opening up new supplier -- or seller tools, I should say, and including -- which is now a small business, but our Walmart fulfillment service business is up and running, and we're excited by the prospect that it brings as well. So again, the team did a nice job in the quarter reacting to customer changes and trends. More and more customers are buying from Walmart online, and we're happy to see the new customer segments and the retention rates.

The next question comes from the line of Paul Trussell with Deutsche Bank.

Congrats on a strong second quarter. Brett, you spoke to back-to-school shopping being negatively impacted by all that's going on, but comp's in a normal range. Just any additional color you can provide on what you're seeing is to date or at least maybe any other puts and takes that we should be factoring in as we think about how to model the third quarter.

And Doug, most Americans shop at Walmart in some form each year, and the company has always had this like everyday low price model. So maybe just help us understand big picture what a membership program can achieve for the consumer as well as for the company.

Thanks, Paul. This is Brett. I'll start.

As we pointed out, we're not giving guidance for the rest of the year. And as you can imagine, with the various puts and takes that we've seen for the last 5 months, that certainly led to that decision. And there's things that -- in the second quarter, some things that helped the business, certainly stimulus is one of those; and some things that were headwinds to the business.

And we know we're going to continue to see headwinds and tailwinds in Q3 and in the back half of the year. And so the balance of those and the timing of those makes it really challenging to try to put guidance out for a longer period of time, and that's why we didn't do that. As we talked about, back-to-school's just slower than would normally be, but that's understandable given what's going on with students and how quickly they'll get back into classrooms. And so we're just not talking much past that just given everything that's going on right now.

I'll just chime in on back-to-school and say that it's just one component of the quarter and we'll have to sort out how customers want to shop as we go. But we think our inventory is well positioned, and we'll just react location by location. I don't think we've got a lot of liability exposure there. The sales exposure will be mixed as we go through the quarter and manage other parts of our business.

As it relates to the question about membership, Paul, I think from a customer point of view, they'll continue to get everyday low price. They'll continue to get the broad assortment that we sell in the stores and increasing assortment online. But the reason that they would want a membership is because of the increased levels of service that we can provide, and it kind of starts out with the thread being about pickup and delivery. And if you want delivery from Walmart frequently, it's just more efficient for the customer to buy it in bulk, and that takes the form of an annual membership.

And then we'll add some things to it beyond just delivery so that it's really more of a membership and a relationship. Building repeat is going to be an important aspect for the company to focus on. We'll also get the benefits of data and learn how to serve customers more effectively in time as that membership grows. So I think in a nutshell for the customer, it relates to experience.

And we keep talking about how omnichannel is a winning strategy. And what we really mean by that, I think, is the customer is ultimately in charge. We are going to be flexible. We're going to have multiple ways to serve them, and those families will decide in that moment how they want to shop. And sometimes they'll be in the store and sometimes they'll do pick up and sometimes they'll do delivery and many of them will buy a membership. And when they do, they'll get benefits from that. And we'll make sure we manage that in a way where we're able to still keep our shelf prices low and offer EDLP to customers that really need that value and are focused on opening price points. We'll manage the P&L in a way that prevents any kind of risk for them.

Our next question is from the line of Simeon Gutman with Morgan Stanley.

I have 2 topics. My first also on membership and the second on Flipkart.

In terms of membership, Doug, I don't know if there's any more detail you can share in terms of how you plan to differentiate the offer. You mentioned that you're going to add some features. And is there any indication of interest from work that you've done and then how it fits into profitable growth, if that relationship can be maintained?

And then on the second topic of Flipkart, right, there was a valuation on the quarter. I think it was a little less than what the market was expecting. So can you talk about the performance of it and what's the proper read that we should take away from the latest round of financing?

Yes. This is Doug, Simeon. I'll take Flipkart first. And then, John, you can chime in on membership more.

As it relates to Flipkart, Simeon, I think we're really pleased with how this whole thing has gone since we made the investment, and the team's managed this environment, COVID-19 environment in a really effective way. And it was nice to see, once the government restrictions started to get lifted, how the volume came back. And we're staying close to the decisions that they're making and excited about the strategy going forward and the investment, just wanted to make sure that they've got enough room, enough cash to operate.

This is a time when there's so much of an opportunity, the size of the prize in India is significant. We want to make sure that we're on our front foot and being aggressive. So we're not really getting hung up on the valuation in the short term. Over time, I think everybody will understand just how valuable that business in India is, whether it's the Flipkart portion or the PhonePe portion.

And Simeon, first, thanks for the question on membership. Now it's important that we first acknowledge our strength in the entire business' offering, a wide assortment of everyday low-priced products across multiple channels, and that won't change. What we're thinking through with membership, as Doug said, is how to remove friction from customers' lives and make it easier to access those assortments at everyday low prices throughout the multiple channels. So we don't have too much else to offer this morning other than to say that in addition to the delivery component, which we have tested now since last year with a program called Delivery Unlimited, we're confident that that's a great base of an offer, and we'll have more to offer when we're ready to come out and talk about it.

Our next question is from the line of Michael Lasser with UBS.

Recognizing that you have an everyday low price strategy and some of your competitors within the grocery category have a high-low or promotional strategy and the promotions were less intense for them this quarter. Your grocery sales were up high single digits, fresh was probably better, but a lot of your competitors reported mid-teens or better comps during the period. So do you think you lost market share in this important category on a unit basis? And why was that the case?

Michael, it's John. First, I'd say we were up high single digits for the quarter, and that equates to sales growth of about $3 billion. And for the year, we're somewhere around just over $8 billion of sales growth in grocery for the year. So pretty big dollar gains for the year.

We did keep our prices at the levels they were throughout the entire quarter. So being an everyday low price retailer, we have seen average unit retails that have resulted in wide price gaps and even wider price gaps in the second quarter than we saw in the first quarter. So that's probably an important point determining the 2 differences.

Then a couple of things that we're focused on that were headwinds that are -- that are ours to deal with. One is we've had a significant level of in-stock issues that happened late in the first quarter and early in the second quarter. While we do think that our inventory levels are now normalizing, we do still have pockets of in-stock issues that are both related to the supply chain and then other factors that have been caused by the pandemic.

Then the last thing that we're doing, we now have 4,100 stores that have shifted from 8:30 p.m. closing to 10 p.m. closing. And we didn't think that was a factor, especially during the summer months as the days got later. But if you look at the entire business, the real positive is, in total, we believe Walmart did gain share. General merchandise was very strong. It looked like the share gains there did make up for anything that could have been lost in food.

But the data, it's a lot to work through, and we'll be reacting to this situation as time goes and we'll be able to tell a little bit further out how this really turns out. But overall, just really proud of the way the team has responded to such an intense change in the way people have been shopping. We had big sales spikes late in Q1 and early Q2, and the team have done a great job reacting to that.

Our next question comes from the line of Kate McShane with Goldman Sachs.

I wondered if we could get a little bit more detail behind your commentary around the eCommerce losses improving during the quarter. Was the biggest driver of that mix driven? And what other improvements did you see within those losses were there that you would expect to continue into the second half of this year?

Kate, it's John. There are a few things that affected the business. First, the sales growth is always helpful because you gain leverage on fixed costs anytime you have growth rates of really any meaningful percentage, but 97%, effectively doubling the business, helps with leverage.

The second thing that has helped is what we call contributed profit rates, CP. Our CP benefits have come from a number of factors, one factor being the mix of sales. We've been stronger in home and apparel than we are in the rest of the business, which are higher CP categories. The second, our marketplace business has been strong, which is also an accretive category in relation to the rest of the business.

And then the third thing, we're excited about the way of working. The 2 merchandise and supply chain teams have come together, and now we have merchants and people in supply chain who are responsible for businesses across all of the channels. So Walmart as a business should be able to gain continued leverage from those. But leveraging fixed, improved CP rates and CP rates coming from both leverage and from mix all contributed to lower losses in the quarter.

The next question is from the line of Seth Sigman with Crédit Suisse.

Congrats on the quarter. I do want to follow up on the online business. Two parts here. One, I think somebody mentioned repeat rates. If you could just elaborate on that, whether you're seeing that more in online grocery or general merchandise or possibly both online. Just want to get a little bit more color on that.

And then the second part of it around profitability. The improvement in losses you just talked about, is there anything that you mentioned there that's unique to this quarter, whether it's the volume or the mix or the marketplace growth? Or should we be thinking about sort of this trend of improving losses to continue?

Yes. Seth, a few things on repeat rates. First, online grocery, you asked about, we've traditionally had a high repeat rate and a high number of customers who are loyal in the channel. And that hasn't changed. At the end of the first quarter, we had to reduce the number of slots due to inventory levels. And then over the second quarter, we got slots not only back to where they were, but picked up slots, up about 30%. So that's a strong part of the business and continues to grow.

Online, your very traditional direct-to-home orders, we have new customers and we have customers who are buying more. So they are positives there.

As far as if there's anything related to this second quarter, this anomaly, I think it's too early to tell. As we said, we're not able to forecast or provide guidance beyond what has already happened in the second quarter. Certainly strong businesses in home, where people were moving home and building home offices and buying office equipment.

Yet to be determined how long that trend could continue, but there are other areas within the eCom business that are also strong. And everywhere that we see headwinds, we obviously see tailwinds. So we'll just have to sort those out over the next couple of quarters.

Our next question is from the line of Peter Benedict with Baird.

Just wondered if you could maybe expand a little bit on the health care strategy, kind of where that sits right now. I know that there's some changes. But just maybe help us understand where you are today and where you're taking that effort.

Peter, this is John. We're really committed to health care. I don't think we'd have any change in strategy that we would talk about at this point other than to say that we were appreciative of the work that Sean did while he was here at Walmart. He was here about 2 years, and he wanted to get some clinics open and get us started, which he did and did a great job.

We now have clinics in Georgia, Arkansas, moving into the Florida market. And then later in the year, we've also announced a couple of clinics that will go into Chicago. So for Americans who are looking for high-quality -- access to high-quality care at an affordable, very transparent price, Walmart will be a great solution for consumers, and we remain committed to the health care space.

Peter, this is Doug. I'll just add that we recently opened another clinic not far from Bentonville, in Elm Springs. And it's a smaller clinic than the one that some of you have seen in Dallas, Georgia. And I think it's an example of us trying to figure out how many sizes we need, what the square footage needs to be and the equipment investment, all those kinds of things. So we're playing around with it, as you would expect.

And it's been interesting to watch how customers are interacting with that experience during a COVID-19 environment. The team is doing a great job, the medical doctor and the other professionals in the clinic, of keeping people safe, and demand is still strong in an environment where people are not necessarily taking advantage of a lot of preventative care. So it's really, I think, interesting and exciting for us to try and figure this out. And even during this COVID-19 period of time, we're learning and figuring it out.

The next question is from the line of Bob Drbul with Guggenheim.

I guess just -- you gave us some commentary around back-to-school being a little slow right now. Just wondering if you could maybe take a step back and give us some thoughts on where you think the consumer is, where you think the economy is. And I guess, most importantly, when you think about the holiday season, you have to plan a little early. If you might give us some color about the holiday season and sort of how you're really thinking about it at this point.

Bob, I'll go first. This is Doug. It's obvious to say this, but there's just a lot of uncertainty right now and so much variance in how customers are feeling about their situation. And this decision that the government's got to make about phase 4 investments is an important one, and I think it's really important as it relates to small business. And this economy and this country is driven so much by small- and medium-sized businesses that we want to see something happen there that will help support those folks.

I think the larger companies are getting things sorted out, and the government is paying attention to the larger companies that need some sort of financial support. But it's that small business group that, in particular, I think we all need to keep our eye on and will probably determine just what this economy looks like on the other side of the phase 4 stimulus.

And I think, Bob, I'd also add, definitely, we see a number of consumers who are feeling better about their personal finances, but the sentiment is a little lower than what they've been a year ago. And then we are also thinking about the number of consumers who are thinking about job security and other opportunities. I think in general, people perceive they're spending more money on food despite eating out less. And so I think with the consumer, we'll be thoughtful about the way we plan the rest of the year, and we'll be very adaptive and react to changes in the trends that we see from our shoppers.

Our next question is coming from the line of Greg Melich with Evercore ISI.

One key question on the costs. I think, Brett, in the first quarter, you said it was $900 million of incremental COVID costs. Is the right number for this quarter the $1.2 billion? And anything you could give us in terms of the breakdown of that on sanitation versus labor costs and what you think might persist into the third quarter and fourth quarter?

Yes. Thanks, Greg. So the $900 million we had in the first quarter would be equivalent to the $1.5 million in the second quarter -- or billion, sorry. The $1.2 billion was just U.S. -- Walmart U.S. only. About 75% of those costs are related to bonuses, payroll, benefits and the like for associates.

So there's about 1/4 of that that's related to cleaning and sanitation and other things inside the store. There's certainly going to be some part of that continues the rest of the year and potentially, I would think, into next year as well. So our ability to continue to be thoughtful about it -- but safety and -- of our customers, our associates are just #1 on our mind as we take on those costs, so it's obviously something that we're going to do going forward.

The bonus, the number in total is a little higher than last quarter. The second quarter -- or the last bonus, the third bonus that we announced was accrued for in the second quarter. So that got picked up. So that would be one additional bonus versus what you would have seen in Q1, and that's the main difference.

Our next question comes from the line of Oliver Chen with Cowen.

All the momentum in curbside, would love your thoughts on what you see ahead with automation and profitability. And also, as you look at your customer insights and data, what are your thoughts about the customer type that would use curbside versus delivery and how that may manifest over time?

Oliver, the question on automation is where I'll start with. First, we have been working on a couple of pilots where we're able to, I'd say, automate but really increase the amount of picks we're able to deliver from a store. We've got a store in New Hampshire with a system called Alert that does our grocery picking and assists with everything right up to dispensing. And we'll be expanding that pilot into Texas over the next few months. So I think mostly, we're optimistic about the number of orders we'll be able to fill from these sorts of installation going forward.

And then as far as the customer who is picking up today and whether they're interested in delivery or not, I think what we learned from Delivery Unlimited is that there are a wide range of people who appreciate delivery and are looking for ways to be able to buy delivery and pay for it in a way, as Doug said, that's in bulk. So I think it's largely the same customer, and we'll, of course, learn more as time goes on. But Americans all over the country are looking for convenience, and with Walmart's everyday low price plus a convenient delivery fee, we see a lot of customers who are interested in this type of service.

It's also been nice to see the Sam's Club team get curbside rolled out so quickly. And I think when small business comes back online, we're well suited to serve bigger transactions from them that, currently, the restaurants being closed, aren't happening as much as they will after the pandemic is over.

Our next question comes from the line of Kelly Bania with BMO Capital.

Just wanted to ask, with so much discussion about membership and the potential there with Walmart -- with Delivery Unlimited or down the road with what may evolve into Walmart Plus, I was just surprised to see the headlines about the test with Instacart. So I was wondering if you could just help elaborate on the thought process there.

Yes. Kelly, we are excited about the prospect of customers being able to access products and prices at Walmart any way they choose, including delivery, as you said. And then the specific question on Instacart, it is a test in California and then 1 market in Oklahoma. And what we're hoping to learn is does the combination of those do reinforce the value proposition that Walmart has to offer.

Certainly, it's early. It's only been about a week, so really no read or anything to report on at this point. But we're looking forward to learning about the data as it comes in.

Our next question is from the line of Edward Kelly with Wells Fargo.

Yes. Just a few mostly kind of follow-ups. Just first on July, any color on the gross margin performance in July?

And then as it relates to holiday, I'm just kind of curious, early thoughts on the current environment, what we should expect on sort of consumer behavior and how are you preparing to win in a shopping environment that probably will be different than anything we've seen historically.

Edward, on the margin, we don't break out by month, but across the quarter, the results are, of course, in the release, stronger mix and then fewer markdowns as a result of higher sell-throughs in general merchandise. And then as far as the holiday season, it's August now and we're in the midst of the beginning of back-to-school, so we're carefully thinking through each of the different holidays and how they may change as a result of what's happening. But even like with schools, we're still learning day to day which schools are open or planning to open. And I think every one of the holidays that will be experienced over the next couple of months, we'll have to decide as we get closer.

So the team is really working on plans and contingency plans and making sure that we are ready for the customer any way they want to shop. They've shifted purchasing online. You can see that in our online results of up 97% and with the growth of pickup. We'll make sure that we're ready with both of these types of fulfillment options in addition to store shopping. So however the customer wants to shop, we'll be ready.

Our next question comes from the line of Scott Mushkin with R5 Capital.

Actually, I did want to follow up on something that came up earlier in the call on the grocery business. I think -- the second quarter, I know food was up high single digits, but the overall grocery business was up mid-single digits. And I know you guys referenced some out-of-stock issues, but that was kind of a challenge across the industry.

So if you kind of take a step back, I mean, it looks like a lot of your competitors ran in the high teens, and so that's a pretty big difference. And I was wondering if you can maybe revisit that again and say what you think drove that big delta between you and some of your grocery competitors.

Yes, Scott. This is John again. As I said earlier, we were high single digits in the food category, stronger comps in general merchandise. And the growth in the quarter in food was about $3 billion in sales. And what we're really focused on is the change in the number of stock-up trips, which you've had a pretty big increase in the average ticket.

And then internally, what we're working through, as I said earlier, we've now got over 4,000 of our stores back open until 10:00 p.m. We think that had an impact. And then again, early in the quarter, coming out of the first quarter, we dealt with a number of issues in -- with out-of-stocks. And Walmart has been improving, over the years, its ability to run a very lean and efficient supply chain. And with the spikes in sales early -- or late in the first quarter, early in the second quarter, those had a disproportionate effect on our business because of out-of-stocks.

But for the most part, I'm feeling much better about normalized inventory levels and our recovery. And now we're -- we'll just work through different categories and issues we have with the supply chain not being able to fill at the right time. But in general, the inventory levels are coming back into a more normalized position.

The next question comes from the line of Chuck Grom with Gordon Haskett.

Can you guys just unpack the ticket-versus-traffic dynamic throughout the quarter? And I guess I'm curious, was the slowdown in July mostly ticket? And then when you look ahead to 2021, how are you thinking about lapping these great results? And then the final question would be if you guys could elaborate on Walmart fulfillment services.

Yes. Chuck, the question on lapping next year, we're working on the month of August...

We're all smiling at each other, Chuck. If you could please tell us what's going to happen in 2021, we would appreciate it.

That's right. That's right. And so we're just constantly reevaluating -- evaluating how to dynamically make sure that we are staying ahead of where the customer is and what the customer needs from us. Back to -- what was your first question again?

Traffic....

Traffic and ticket. Yes. Traffic was -- again, we don't break out the months, but the quarter -- but you saw the quarter number down 14% and stock-up trips are up. So customers are coming less often, but they're buying a lot more while they're there. And the combination of those 2 factors are what resulted in the 9.3% comp. So just much bigger baskets.

And our pickup business, which is growing faster than the total -- or our eCom business is growing faster than total. So the pickup business is a much larger ticket than what you'd see as a permanent store shopper. And then on the marketplace and fulfillment services, again, early in the journey. We're just a few quarters in, but excited about the leadership and the team and what they're able to do for sellers. And this will -- the combination of this, along with marketplaces and then other relationships where sellers can easily list a number of items on the site, we think will provide a really valuable place for sellers to come and sell to our customers. So we're excited about the prospect of all these businesses.

I think as it relates to the future, I would just remind everybody that at this point, we've got stores pickup, delivery, a growing eCommerce, fulfillment center assortment and set of capabilities, and so we're positioned to serve them how they want to be served, how they want to shop. So I think the flexibility to respond in 2021 and beyond is there, and the team is doing a great job of reacting with speed. The cadence inside the company has picked up.

We kind of smile when we think about the holiday because while we have to plan some aspects of the holiday, we're managing near term much more actively than we would in a different environment. So I think we're set up to have a business that will grow at a fast rate and to manage the profitability of it. It was good to see in the last few years our general merchandise business online grow, and you guys know we've had a lot of brands and a lot of items. And then in this last quarter, it was unique because people -- a lot of people are at home and stimulus checks supported purchasing and things for them to use at home, to entertain themselves or to fix their home up. So that was unique, but the commonality of it is that the GM business in Walmart is strong, and that contribution percentage -- contribution profit percentage of eCommerce is an encouraging metric.

So I know you're all trying to figure out what the future looks like. I think we're fundamentally well positioned for it, and then we'll manage the short term to react to the opportunities that are presented.

The next question is from the line of Paul Lejuez with Citi.

Two questions. One, I'm just curious, can you maybe talk about the gross margin improvement? How much of that was from simply mix shift versus maybe if you can talk about which categories or segments did you see gross margin improvement on a year-over-year basis?

And then second, just back to eCom profitability. Doug, if eCom runs up about 100% for the rest of the year, what does profitability look like for 2020?

A lot better. It's a lot better. We figured that out. Brett was reminding us this morning, if you get more sales, it helps everything else. So we've written that down, and we're going kind of follow up on that.

I think John walked through the components of eCommerce earlier. I won't repeat all the pieces, but there's some big pieces of eCommerce P&L that are moving in the right direction. And they were before, it's just that these tailwinds accelerated that.

So we don't know what the economy will look like next year in the U.S. We'll have to wait and see. But this theme of an omnichannel presence is happening inside the company all over the world. We focused in this conversation a lot on the U.S. because that's where your questions went. But if you dig into what's happening at Walmex, look at what Canada is starting to do, it's exciting to see that thematically, this work is looking more and more common. And of course, we're learning a lot from Flipkart and how they operate. But these conversations about strategy and the eCommerce P&L are increasingly common from country to country.

And on gross margin, it was a number of different things, which I mentioned. A lot of it was mix. Certainly, general merchandise, as Doug say, we've been very focused on our general merchandise business, and it's nice to see that really come to fruition in the second quarter. But also, we just sell more fewer markdowns, and markdowns were a big part of the story. And our lack of markdown is a big part of the story in Q2. Fuel margins were also better. So it's really all 3 of those things that were in our favor for the quarter.

Our next question comes from the line of Edward Yruma with KeyBanc.

I guess really quickly on last mile. I know you've been innovating a lot there. Could you give us an update on kind of your ability to roll out this membership from a SMART perspective. If you've seen any changes in California due to AB5. And then second, just as you think about store comps, when some of your nonessential peers opened up, did you see any discernible difference?

Edward, on last mile, today, we're delivering from about 2,800 stores, with line of sight to expanding more. We've now got Express, which is a service that you can expect the delivery in just under 2 hours, in some cases even faster than that, in around 2,000 stores. So those are big numbers and getting bigger. So I think the ability for Walmart to expand its delivery service is strong.

Spark is a program that we're running, as you're aware, mostly in the center of the country, in the Midwest, and it's doing well and growing. And we're excited about the innovations that the team are working on in Spark to make this a business platform that's easy -- easier for drivers and others. And then...

On the last question, it's, Edward, my sense that the order of things -- the order of tailwinds that impacted the business were: one, stimulus; two, eating at home; three, being at home and all the things that you wanted to do to have the indoors and outdoors be more pleasurable. And you weren't spending money if you're a customer on travel and lodging and things like that, so those dollars were available for you to buy things for your home as well. Those are the things that were more impactful tailwinds than whether or not other competitors were open.

The next question is from the line of Ben Bienvenu with Stephens.

I want to ask around working capital and inventory in particular. Obviously, working capital has been a really nice tailwind for the business for the last couple of quarters in light of what inventory and receivables and payables have done. You built up a pretty sizable cash balance on the balance sheet. Could you help us think about how you think about positioning the cash balance going forward, whether it's preparedness for a normalization of working capital or otherwise?

And then if I think about inventory, in particular, down 7.5%, where would you have liked that to have been in a normal environment? So we can get a sense of kind of where you guys are positioning that line item.

Yes. Ben, this is Doug. Brett will respond to the working capital questions. We're laughing here because if you've been in some stores with us in the second quarter, early in the second quarter, we could have used inventory everywhere. I saw some stores that were remarkably light. Just it was deeply concerning, and the team was obviously scrambling that we could walk you across the supercenter.

And we've got pressure in eCommerce, too. But we were obviously feeling pressure in the beef and pork categories as was well reported. But we were out of stock on fabrics. We were having challenges in sporting goods. We needed a lot more inventory than what we had during the course of the second quarter. Now we look a lot better today, but we were really a lot lighter than we would have wanted to be.

Yes. Just an example, Ben. We think about 25 million Americans would go fishing on a regular basis before February, and that number has now moved to 35 million. So 10 million people decided to pick up just this one hobby and...

Bicycle and golf.

Yes, bicycle is the same way, golf.

I looked at fishing in the store this week, and we're still really light, just basic terminal tackle, hooks and bobbers and stuff like that. It's got a lead time on it different than what this environment requires.

Ben, on working capital and just how we think about capital allocation in general, it really hasn't changed. We're going to continue to support the business. You saw CapEx down a little bit, but I would think about that more as timing, just not want to interrupt our stores with everything that's going on.

We have built up a little more cash than normal. And some of that is just because we're generating more cash than we have in the past. But also, it's not a bad time to have a little bit of extra cash on hand as opportunities come about and just ensuring that we protect the business. But I wouldn't -- as far as how we think about capital allocation, I wouldn't view any changes in that.

At this time, we've reached the end of our question-and-answer session. Now I'll turn the floor back to Doug for closing comments.

Yes. We don't have anything else to say other than thanks for paying attention to the company, and we appreciate you dialing in today. Thank you.

Thank you, everyone. This concludes today's conference. You may now disconnect your lines at this time. We thank you for your participation, and have a wonderful day.