Q1-Conservative because of the environment (WMT)
Walmart reported Q1 EPS of $1.47, above consensus expectations of $1.32. U.S. SSS ex-fuel increased 7.4%, above expectations of 5.5%, boosted by 27% growth in e-commerce (accelerating from 17% in Q4). Transactions increased by 2.9% while ticket grew by 4.4%. Food and consumables grew low double digits in the quarter. Sales trends moderated as the quarter progressed while inflation decelerated by 400bps, but still up double digits in food, from early Q1 to the end of Q1.
Sam’s Club SSS increased 7.0%, above expectations of 6%, led by the grocery category. Average ticket grew by 4%, transactions grew by 2.9%, and e-commerce growth was 19%. Average spend per member increased MSD%. Management noted that the majority of grocery share gains were coming from households earning more than $100,000. International sales grew 13%, driven by double-digit growth in China (+28%), Walmex, and Flipkart.
Gross margins contracted 18bps due to a 360bps shift of higher mix of grocery sales gaining from general merchandise, greater than the 330bps shift in 2022. In Q4 gross margins contracted 110bps. Lower supply chain and freight costs were tailwinds. Walmart's U.S. gross margins contracted 41bps due to a category mix shift. Private label penetration in grocery categories increased by nearly 110bps, less than the 160bps increase in Q4. SG&A leveraged 58bps. Total operating profit margins expanded 34bps to 4.1%. Sam’s operating profits decreased 6.8% YOY. Inventories decreased 9.4% in the U.S., tighter than the 0.1% growth at the end of Q4.
Management guided Q2 EPS to $1.63-$1.68, below consensus expectations of $1.71. The guidance implies operating income to be flat to up slightly. When management provided Q1 guidance of $1.25-1.30, consensus expectations were at $1.37. Management set a low bar with Q1 expectations due to their cautious view of the consumer rather than visibility into recent trends. “There continues to be a great deal of uncertainty looking out over the balance of this year as macro pressures on the consumer have gradually intensified.” Management raised EPS guidance for the year from $5.90-6.05 to $6.10-6.20. Revenue growth guidance was raised from 2.5-3% to ~3.5%. Our estimates remain above management’s guidance. We have not lost sight of the headwinds facing the consumer, but the headwinds are one of the reasons Walmart is on our Best Idea Long list.
Grocery inflation (KR)
Food at home inflation has slowed to 7.1% in April from a peak of 13.5% in August 2022, but some categories continue to see elevated inflation. According to the Catalina Shopping Basket Index of ten common food and personal care categories, inflation was 16% in Q1, well above food at home CPI of ~10%. The highest inflation rate was in yogurt and cereal at 21% inflation in the U.S. Closely following was the soft drinks and water category with inflation of 19%, followed by frozen foods inflation of 17%. Coffee inflation was 16% and paper products inflation was 9%. The same categories had high rates of inflation in Europe as well. In the U.K., France, Germany, and Italy the same categories had inflation of 12-14%. The high rate of inflation has caused consumers to trade down by brand, store, unit, or substitute item.
Gen Z’s restaurant (LANC)
Members of Generation Z frequent QSRs the most frequently. 26% of the generation eats at fast-food chains weekly and another 40% do so monthly. That compares to 22% and 32% of the general population respectively. Generation Z also has a higher favorability towards the top QSR chains. The most popular chain among Generation Z is Chick-fil-A with 70% favorability. The general population also gives Chick-fil-A the highest favorability among the chains.
Lancaster Colony manufactures Chick-fil-A’s sauces and dressings. Lancaster Colony is the best way for public investors to participate in the growth of Chick-fil-A, as it represents >24% of sales and represents half of its sales growth. Lancaster Colony is a best idea long.
