Supply chain disruptions of the past 28 months have hit hard in many industries — retail is among the hardest.
In the first calendar quarter of 2022, there was a slew of earnings disappointments driven largely by supply chain and inventory problems, at companies including Walmart, Target, Macy’s, and many others.
For this beleaguered sector, there appears to be good news in Walmart’s earnings report of last week: Its inventory levels appear to have peaked, while its considerable investments in supply chain and related technologies appear to be paying off as well.
Walmart exceeded financial analysts’ expectations with $159.2 billion in revenue, operating income of $6.9 billion, and earnings per share (GAAP) of $1.88.
“We finished the quarter on a strong note…and ahead of our updated Q2 guidance provided last month,” CFO John David Rainey said during the company’s earnings call. “Contributing factors to the better performance included strong sales at the end of the month with good flow-through to the bottom line and lower-than-expected supply chain cost.”
This report presents commentary from Walmart’s CEO and CFO directly from their earnings call, with an analysis of what it means to Acceleration Economy readers. As both the world’s largest retailer and largest company, Walmart leaders’ commentary provides timely, broadly applicable insights on inventory and supply chain challenges affecting businesses across industries.
Technology Investments
CFO John David Rainey:
“We are also excited about the build-out of automation and technology throughout our business and how it will continue to help drive greater efficiency. Through my first couple of months here, I have 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 are putting in our stores and centers.
“One example is the Vizpick technology that we have 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 products from the backroom 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. And with the omni capabilities we’ve built, we are better positioned now than we were in prior periods of economic softness.“
Analysis: Walmart Technology Investments
Per this blog post, Vizpick is an app that speeds the process of getting items from the backroom to the sales floor. Instead of scanning each box individually, associates hold up a handheld device and the app uses augmented reality (AR) to highlight the boxes that are ready to go. The result: Products get onto shelves faster.
This internally developed app has some similarities to an app developed by the startup Wisy, which uses photographs to identify proactive or corrective inventory actions to ensure products are available for consumers.
Other noteworthy measures that likely helped in the quarter, or should have near-term impact:
- In June, Walmart said it is expanding its use of robots from Symbotic to all 42 of its regional distribution centers. The robots accelerate responsiveness to store orders while creating increased inventory accuracy and higher capacity for receiving and shipping freight to stores. The technology’s ability to build palletized loads of inventory supported by department enables Walmart to get products onto shelves at its more than 4,700 stores more quickly, the two companies said. Intelligent Symbotic software orchestrates a team of robots to receive, store, and retrieve a virtually limitless number of SKUs.
- Walmart also invested in Symbotic in late 2021, underscoring the value it places on this company.
- Earlier this month, Walmart said it acquired Volt Systems, the developer of an application that delivers current store-level data, analytics, and shelf intelligence for suppliers to plan, forecast, and optimize their product assortment. Among other benefits, this reduces out of stocks. Walmart said at the time the technology will help to “better anticipate customer demand.”
Finally, it’s important context to consider other moves Walmart has made to increase technology staff and compete in the industry cloud market, as Cloud Wars founder Bob Evans has been reporting for several months. It’s just one more indication of the strategic importance Walmart is assigning to the cloud and its technology investments.
Inventory
CEO Doug McMillon:
“We have made good progress to reduce inventory levels where we focused and taken markdowns. The aggressive approach we took to move through apparel, in particular, put financial pressure on us, but it helped relieve pressure on our stores and through our supply chain.“
CFO Rainey:
“General merchandise inventory growth rates are down more than 15 percentage points from Q1, but still with more work to do. We have cleared most summer seasonal inventory, but we are still focused on reducing exposure to other areas, such as electronics, home, and sporting goods. We have also canceled billions of dollars in orders to help align inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is still above optimal levels…
“During the quarter, we also made progress reducing inventory, managing prices to reflect certain supply chain costs and inflation, and reducing storage costs associated with the backlog of shipping containers. We are encouraged by the initial steps taken by some suppliers to help us reduce product acquisition costs.
“We also made progress selling through excess inventory, especially in hardline categories. At the end of Q2, Walmart’s U.S. inventory growth was 26% versus last year, reflecting over 750 basis points of improvement from Q1 levels. Notably, about 40% of the year-over-year increase relates to inflation.
“As a backdrop, the shifts that we have 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 have 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. The result of all of this put pressure on our inventory levels which peaked in the last quarter.“
Analysis: Walmart Inventory Progress
The supply chain crises that continue to play out have sparked much debate about inventory levels, whether or not companies should pad them to protect against being out of stock, and other measures they can take amid quickly shifting consumer demands that have caused massive inventory challenges.
From Walmart’s earnings, it’s clear that discounting was a big part of the strategy, and that it will continue to employ that time-honored page from the retail playbook. The company made significant progress in chipping away at excess inventory in the quarter.
What could be the first sign of light at the end of the inventory tunnel is Rainey’s statement that inventory levels peaked in the previous quarter (Q1, that is). There are other positive signs, namely that inventory growth rates are down quarter over quarter — hopefully a positive indicator not only for Walmart but other companies and industries as well.
Walmart Summary Comments
WalMart CEO McMillon summarized the most recent quarter nicely with these two remarks:
- “We are becoming more digital, even more relevant as an omnichannel retailer and the related businesses, like fulfillment and advertising, continue to grow. We are building a different business and we are making progress.”
- “We made good progress throughout the quarter operationally to improve costs in our supply chain, and that work is ongoing.”
Closing Thoughts:
What I didn’t find in the remarks of Walmart execs is an indication that they were able to get a better handle on forecasting — a gap cited by countless inventory and supply chain experts as one of the company’s biggest challenges and blind spots — that has created supply chain difficulty across industries. That being said, the Volt Systems acquisition appears it could be at least part of a solution to developing more granular forecasting that accurately reflects customer demand.
Walmart did not respond to a request for an interview and more in-depth discussion.
Finally, an indicator that Walmart may be ahead of the pack: Rival Target’s profit was down nearly 90% from a year ago, in large measure because of markdowns to clear out inventory.
Just how big of a deal are inventory issues in terms of financial performance? The “inventory” term is used more than 70 times in the Target earnings call.
The Target results were worse than Wall Street was expecting (earnings of 39 cents per share vs. expected 72 cents), even after the company lowered its guidance on two occasions. The company, however, said that taking the decisive actions that it did means it can maintain its full-year forecast because it has positioned itself for a rebound.
Maybe so, but inventory at the end of the second quarter was still slightly higher in dollar value than at the end of the first quarter as well as the fourth quarter of 2021.
That outcome underscores a key point for Target, as well as Walmart and other retailers: Much work remains to resolve the supply chain issues of the last couple of years. Walmart just appears to have a leg up at this point in time.
For more exclusive coverage of innovative cloud companies, check out Cloud Wars Horizon here: