Walmart COVID-19 Employee-Leave Costs Topped $450M in Q4

Consumer demand was strong, and Walmart’s team overcame COVID-19 and supply chain challenges in Q4 FY 2022 to post 7.6% sales growth to $152.9 billion, excluding divestures of the Japan and U.K. businesses, said CEO Doug McMillon on the company’s Thursday earnings call.

Walmart U.S. comparable sales grew 5.6% to $105.3 billion for the quarter ended Jan. 28, its first quarter of above-$100 billion sales, McMillon said. E-commerce sales grew 1% and 70% on a two-year stack, said the company. Transactions rose 3.1% and average ticket increased 2.4%, the company said.

Full-year revenue grew 2.4% to $568 billion, with e-commerce penetration nearly 13%, said Chief Financial Officer Brett Biggs. Supply chain costs were over $400 million higher than expected. COVID-19 costs were lower than last year, but Walmart had “significantly higher associate leave costs” in the U.S. than anticipated. Employee leave costs for the first three quarters totaled about $600 million; they jumped to over $450 million in Q4, “presenting an unexpected headwind of over $300 million," Biggs said.

Q4’s COVID-19 leave peak was “larger than anything we’d experienced in 2020 or previously in 2021," McMillon said. It hired more associates to fill the gap, “which negatively impacted expenses, but it was clearly needed.” Revenue grew 17% from the beginning of FY ’21 in February 2020 through the end of FY 2022 in January, he said. Walmart’s percentage of digital sales during the span grew from 6% to 13%, he said.

Walmart continues to face elevated levels of inflation and is acting to manage pricing “while having slightly wider price gaps than pre-pandemic,” Biggs said. The company is balancing “growing market share” with “shareholders in mind.” The advertising business’ robust sales, a “higher margin initiative,” has large growth opportunities after 130% sales growth in 2021, he said. The company expects Walmart Connect to become “a top-10 ad business in the midterm.”

In Q&A, Walmart U.S. President John Furner said Walmart plans to increase price rollbacks in stores, taking a “long-term view.” Walmart is “constantly monitoring our share, our price gaps to competitors,” he said, and sees an opportunity to institute more price cuts. It expects to have about the same number of rollbacks as it had at the end of Q1 last year, he said.

Walmart U.S. had growth across all income groups and geographies last year, Furner said, crediting the breadth of shopping choices it offers customers through e-commerce, pickup, in-store shopping and home delivery. During periods of inflation, middle- and lower-income families -- “even wealthier families” -- become more price-sensitive, said McMillon, “and that’s to our advantage.”

“I think it’s clear that we’re changing,” McMillon said, underscoring the retailer’s new business model focused on stores, the Walmart+ membership service, its fintech startup, and fulfillment and advertising services. Walmart is becoming more digital and automated, he said.

McMillon wouldn’t disclose membership numbers for Walmart+. The company increased capacity by about 20% last year and expects a 35% increase this year. More homes have access to Walmart InHome, now 30 million, which gives delivery personnel one-time access to a door or garage for deliveries inside the house when a customer isn’t home. The company is “creating roles” for over 3,000 delivery drivers to support the service and is building a fleet of electric delivery vans.

Walmart locations are now hybrid, serving as stores and fulfillment centers, McMillon said. In 2021, it increased the number of orders coming from stores by 170% after 500% growth the year before: “Having inventory so close to so many customers is a competitive advantage,” he said, saying in some cases customers are getting items in “hours rather than days.”

Walmart added 20,000 U.S. sellers to its marketplace platform last year and anticipates 40,000 more in 2022. It grew the gross merchandise value of its fulfillment services by 500% last year and expects “robust growth” this year, McMillon said. It’s adding fulfillment capacity to accelerate delivery time. The GoLocal last-mile delivery offering is helping businesses “of all sizes” to reach more customers. He noted Home Depot is using the service, “but I’m most excited about serving small, local retailers.” Walmart plans to grow GoLocal pickup points from 1,000 to 5,000 this year.

As Walmart brings more customers, sellers and suppliers into its ecosystem, it expands the ability to monetize the relationships through advertising, now a $2.1 billion business, McMillon said: “As our e-commerce business, including marketplace, continues to grow, so will our advertising business.”

The retailer incurred higher costs in Q4 from COVID-19, the supply chain and wages that are likely to continue through part of this year, McMillon said. For the first time “in a while,” Walmart expects “some expense deleveraging” due to higher supply chain, wages and tech costs, Biggs said. It will continue a multiyear period of “accelerated capital investment focused on increasing fulfillment capacity, automation and technology to enhance productivity,” he said.

Responding to a question on how the company will continue to grow sales on top of a higher base generated during the pandemic, McMillon said Walmart is “becoming more digital” and automated. Over time, he said, it will become “even more automated.” On gross margin, McMillon referenced higher margin businesses: advertising, last-mile delivery, fulfillment services and the marketplace. “As they become a larger percent of the total, the shape of the income statement changes.”

Walmart’s 2022 outlook calls for total company sales to grow about 4%, 3% for Walmart, U.S. It expects a 1%-2% comp sales hike from Walmart U.S. in Q1 and “somewhat higher” growth over the rest of the year, Biggs said. The stock closed 4% higher Thursday at $138.88.