Greetings. Welcome to Walmart's Fiscal 2022 Second Quarter Earnings Call. Please note this conference is being recorded. At this time, I will now turn the conference over to Dan Binder with Investor Relations. Dan, you may begin.

Thank you, Rob. Good morning, and welcome to Walmart's second quarter fiscal 2022 earnings call. I'm joined by members of our executive team, including Doug McMillon, Walmart's President and CEO; Brett Biggs, Executive Vice President and Chief Financial Officer; John Furner, President and CEO of Walmart U.S.; Judith McKenna, President and CEO of Walmart International; and Kath McLay, President and CEO of Sam's Club. 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. 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.

Good morning, and thanks for joining us. Results for the second quarter were strong. Excluding divestitures, we saw revenue growth of 7.6% in constant currency, leveraged expenses and grew operating income ahead of sales at 24.1% in constant currency. Recent quarters have demonstrated more than ever that our omnichannel strategy is the right one, as we serve customers regardless of how they want to shop. There are occasions when people want to visit a store, times when they want to pick up, and times when they want to have it delivered. We're going to keep innovating and executing to get better at all three as our diversified omni model positions us well to gain share in high-growth markets around the world. I want to thank our associates for the work they did to deliver these results. They continue to step up and serve others in an inspiring way. Since the pandemic began, we've been clear that our priority is the safety of our associates and those who shop with us. We think it's important that as many people in the U.S. get vaccinated as soon as possible, and vaccines be made widely available around the world. As the Delta variant spread and as the potential for future variants persists, we made the decision to require our U.S. teams, above store and club level, to become fully vaccinated by October 4. At the same time, we doubled the cash incentive to get vaccinated for hourly associates in the U.S. to $150. We're grateful to those associates that are already vaccinated. I'm confident in the fundamental strength of our business even as we navigate the benefits from economic stimulus in the U.S. for both this year and last year. We've proven our ability to serve customers in challenging environments and across multiple channels, formats, and countries. The phrase, 'Serving customers', has traditionally meant one thing at Walmart, but today, it includes serving marketplace sellers, our advertising partners, and those that want to use our fulfillment services or proprietary software. Our advertising business in the U.S., Walmart Connect, nearly doubled during the quarter versus last year, with active advertisers up more than 170%. And this isn't confined to the U.S. We're growing ad businesses in Mexico, India, Canada, and most recently in Chile. Our fulfillment services for marketplace sellers continue to scale too. We're on track to hit full-year double-digit GMV penetration by year-end. We also announced during the quarter that we'll serve other businesses through certain in-house technologies used for pickup and delivery. Our partnership with Adobe is an example of that. These are a few examples of how we're using our assets to scale new businesses within the company and build new streams of revenue and profit. Our tech and product teams have made a lot of progress modernizing our technology and way of working. We're starting to see the fruit generated by their efforts as we build innovative solutions that have utility across the enterprise. We're starting to see more examples of where one idea or one tech product can benefit more of our businesses and faster. Cloud-powered checkout comes to mind. This technology enables seamless experiences for customers and associates like mobile Check Out With Me, Scan & Go, and Self-Checkout. More than 30 applications across five countries are leveraging cloud-powered checkout for retail transactions. Things like building a 360-view of the customer using machine learning is important for our business in the U.S., but it's also important in other markets. That's why we're now leveraging this technology in Mexico and in Central America. The Ask Sam app that you've heard us talk about was originally built for Sam's Club associates. Now, the same concept has been adapted for use in supercenters. It helps our associates be more productive and better serve customers. I'm really pleased about the work our tech teams are doing to unlock value across the business. Now let's move on to segment results. I'll begin with Walmart U.S. The underlying business is strong, even as we navigate the many effects of the pandemic as well as government stimulus this year and last year. Customer behaviors changed during the quarter as people were shopping with us more in stores than online. As that shift occurred, we gained market share in grocery. Even as eCommerce growth slowed, as we layered on top of tremendous growth last year, we feel good about our two-year stacks of comp sales and eCommerce growth. The good news for us is that we can serve them either way. And of course, they get to choose. We also saw nearly triple-digit growth in advertising sales through Walmart Connect and added thousands of new sellers on our eCommerce marketplace during the quarter. I like the progress we're making with Walmart Fulfillment Services too. We saw 150 basis points sequential improvement in GMV measured as a percentage of marketplace GMV. Recall, earlier this year, we announced a step-up in capex spending, with heavy emphasis on supply chain in the coming years. This will mean additional capacity and automation from our largest fulfillment centers to our stores. These investments are aimed at increasing assortment to broaden our appeal with customers and get product positioned and picked efficiently to deliver it faster. These investments will increase capacity, help support the growth of Walmart+ and improve productivity. From a merchandising point of view, we launched new private brands in healthcare and pet categories. The new insulin product we're offering is a huge win for customers. We call it ReliOn, and it will save customers up to 75% off the cash price of branded insulin products. Sam's Club in the U.S. continues to impress. 19 years ago, I got the opportunity to become the Chief Merchant at Sam's, and I can confirm there hasn't been a time in at least 19 years when Sam's has had this much momentum. They also have strength in so many key metrics, including our most important membership metrics. We saw that story continue this quarter with membership income growth of 12.2%, the fourth consecutive quarter of double-digit growth. Total membership counts are a record high, and overall renewal rates, and those for Plus members continue to be strong. Similar to clubs in China and Mexico, members are shopping with us in Club for pickup and delivery. Sam's is an innovation engine for the company, and they're showing us all what's possible with technology products like Scan & Go. For our businesses outside of the U.S., we continue to see strong results in continuing markets through a combination of top-line growth and operating discipline. Excluding divestitures, net sales increased nearly 13% in constant currency. eCommerce continues to play a bigger role for us. Net sales penetration for eCommerce was about 19% in Q2, an increase of more than 700 basis points from last year. We're strengthening our omnichannel approach in Mexico, China, and Canada. In Mexico, we launched Walmart Pass, a membership model where customers get unlimited same-day delivery from stores, completed the rollout of Scan & Go to all Sam's Clubs, added new sellers to the marketplace, and grew our online SKU count by 30%. China had a particularly strong quarter, with growth in eCommerce of 75%. During the 618 festival, eCommerce penetration in this market reached 45%. Our business in Canada also had strong eCommerce growth of 41%. We've seen an uptick in Net Promoter Scores there as more customers are shopping with us across channels. Our eCommerce marketplace in India, Flipkart, continues to drive strong growth in GMV, in line with our high expectations. This team has been busy. They introduced Flipkart Camera, a first-of-its-kind technology at scale for the Indian customer that allows users to view products in their physical environment, expanded their grocery business to over 70 cities, and launched a new commerce platform called Shopsy to help reach the reseller community. They're also increasing customer stickiness with Flipkart Plus. It's a tiered program based on spend that helps us drive higher repeat rates. Customers in the program transact more frequently, and we see lower churn than others. They also recently completed a new funding round, which placed a value on the business of about $38 billion, significantly higher than the valuation when we invested just three years ago. There were large votes of confidence from a strong group of investors, and we'll put those dollars to work to deliver growth in key areas such as grocery, fashion, and our supply chain. You should see the common threads and leverage points across our businesses. Increasingly, we think about global businesses and global tech products rather than thinking or working a country at a time. There's more of a digital-first mindset here. Before I close today, I'd like to remind everyone of the new ESG report we published last month. I encourage you to invest time with each of the briefs to understand our priority issues along with the progress we're making against our commitments. For example, on emissions, we've reduced absolute Scopes 1 and 2 greenhouse gas emissions by more than 17% since 2015. Our original target was 18% by 2025. The tremendous progress we've made means we're on track to achieve the updated target we announced of a 35% reduction by the same date. Additionally, our suppliers report having avoided more than 186 million metric tons of CO2 emissions in 2020 for a cumulative total of more than 460 million metric tons avoided since we started Project Gigaton in 2017. I also want to take a moment to mention an announcement we made on July 27 regarding the Live Better U education program. Walmart will now pay 100% of college tuition and books for associates as part of our commitment to invest nearly $1 billion over five years in career training and development. This means that roughly 1.5 million full- and part-time associates in the U.S. can earn a college degree or learn other skills without the burden of debt. This is a fantastic initiative, giving our associates the opportunity to learn and grow. I'll close by thanking our associates for how they serve others and our leadership team for their vision and ability to lead so much positive change so quickly. They built us into a global leader in omnichannel retailing with a model that is uniquely Walmart. Our team is designing with the customer at the center of our flywheel, which is coming together nicely. It's exciting to imagine how far we can go. And now over to Mr. Biggs.

Thanks, Doug. Our strong second quarter and the solid start to the third quarter position us to deliver a great year of financial results while making steady progress against our strategic priorities. Our results continue to demonstrate the power of the omni strategy, providing customers with new products, services, and tools. No matter how customers want to shop, we're here for them. In some periods, in-store shopping will lead the way, and in some, eCommerce will lead the way. While we're always striving for more in each part of the flywheel, I'm pleased with the overall growth of the business. In Walmart U.S., comp sales grew 5.2% and transactions grew more than 6% as customers are returning to the convenience of one-stop, in-store shopping. eCommerce sales grew 6% in Q2 and 103% on a two-year stack. We continue to build a very sizable eCommerce business around the world. In fact, we're on track to deliver $75 billion in global eCommerce sales this year and on our way to $100 billion in the near term. We're also seeing continued strong U.S. market share gains in grocery, which is a key part of our business. Sam's Club members are increasingly utilizing curbside pickup for online orders, and the adoption of Scan & Go technology in club is at an all-time high. The success of Scan & Go at Sam's is one of the reasons we included this as part of the Walmart+ offering. In international, eCommerce penetration is now at nearly 19% of sales, and we're rapidly expanding omni services in key markets such as Mexico. We're also rapidly expanding higher-margin businesses like advertising, data monetization, and eCommerce marketplace, which gives us flexibility to invest aggressively for the future while growing profit in the near term. These businesses are in different places along the maturity curve, but we're scaling them. For example, Walmart Connect U.S. advertising sales nearly doubled in Q2, and we expect the rapid growth to continue. While businesses like our new Fintech JV are still in a start-up phase, we know the opportunities are significant, and we'll share more in the coming quarters. Now let's discuss Q2 results. As a reminder, the previously announced international divestitures significantly affect year-over-year comparisons, so my comments today will focus on the underlying business, excluding the effect of divestitures. In addition, the pandemic continues to create both tailwinds and headwinds for the business. U.S. government stimulus benefited sales this year and last year, but many international markets continue to be negatively affected by COVID and related government operating restrictions. COVID costs remained elevated, but significantly lower than last year. Total constant currency revenue growth was strong, up 7.6% to more than $138 billion, with strength across all reporting segments. Walmart U.S. comp sales increased more than 5% in Q2 and more than 14% on a two-year stack basis. International sales growth was strong, up nearly 13% in constant currency, with strength in India, Mexico, and China, while Sam's Club comp sales grew more than 10%, excluding fuel and tobacco. Currency benefited sales by about $2.4 billion. Gross margin rate declined 22 basis points, reflecting category mix shift at Sam's Club and format mix shifts in international, but Walmart U.S. gross margin increased with favorable mix and strong Walmart Connect results. SG&A expenses leveraged 78 basis points, reflecting strong sales, lower COVID costs, and a 36 basis point benefit from last year's adjusted items, partially offset by increased wage investments in the U.S. Adjusted operating income on a constant currency basis was up 15.1%, leading to strong adjusted EPS of $1.78 with a $0.03 benefit from currency. As anticipated, free cash flow declined about $8 billion due primarily to inventory increases from improved in-stocks and higher capex. We repurchased $2.4 billion of stock in Q2 and $5.2 billion year-to-date, which is up significantly from last year. This is one of the largest quarters for buybacks over the past two years, demonstrating our financial strength and belief in the value of our company. Now let's discuss the quarterly results for each segment. Walmart U.S. had another strong quarter. Underlying business trends continue to be solid, including strong grocery market share gains, according to Nielsen, and an acceleration of store traffic. In fact, comp sales increased each month through the quarter, and we're off to a good start with the back-to-school season. On top of extraordinarily strong growth last year, eCommerce sales were up 6% and have more than doubled over the past two years. Strong sales trends were led by grocery, health and wellness, and apparel as well as reopening categories such as automotive, travel, and party supplies. Grocery sales were up 6%, including the benefit from modest ticket inflation and increased low double digits on a two-year stack basis. That results in $2.4 billion of growth in food sales year-over-year and about $5.5 billion of growth on a two-year stack. Strong price positioning, great fresh quality, and improved in-stocks are driving results. We're excited about the traction we're seeing in strategic growth businesses. Walmart Connect sales roughly doubled in Q2 versus last year as we ramp up new advertisers. The Spark Driver platform continues to grow, supporting last-mile deliveries from stores. Over the past 12 months, we've doubled Spark's coverage to more than 500 cities nationwide, providing access to more than 20 million households. Our eCommerce Marketplace is also expanding, and we expect to make hundreds of thousands of additional items available for fulfillment services this year alone. The Walmart business model is evolving, and these newer businesses are contributing to results in a more meaningful way. Walmart U.S. gross profit rate improved 20 basis points with lower markdowns and strong advertising revenue, partially offset by increased supply chain costs. Margins were also helped by administering COVID vaccines this year and lapping last year's COVID-related closures of Vision and auto care centers. We're continuing to see a bit more cost inflation than normal, but our merchants are working with suppliers and monitoring price gaps to keep prices low while managing margins. Operating income was strong, up about 12% on an adjusted basis. Inventory increased 20% due to lapping COVID-related inventory effects last year and strong sales growth this year. We continue to monitor industry trends related to transit and port delays. Our merchants continue to take steps to mitigate challenges, including adding extra lead time to orders and chartering vessels specifically for Walmart goods. Out-of-stocks in certain general merchandise categories are running above normal, given strong sales and supply constraints. International had a great quarter with strong sales and profit growth. Net sales grew nearly 13% in constant currency, including strength in India, Mexico, and China. It's encouraging to see the continued progress of our large and growing eCommerce business in our markets. eCommerce sales grew 86% and penetration accelerated more than 700 basis points to nearly 19% of constant currency sales. Comp sales in Mexico increased 4.7% as the omnichannel strategy continues to accelerate. We're seeing a strong response to the launch of Walmart Connect Media in Mexico with the number of advertisers and campaigns growing rapidly. Flipkart had another good quarter. Sales growth was strong even as they dealt with COVID, and we continue to see improving trends in monthly active customers and users. We were excited to take another step to position the Flipkart Group for future growth with the completion of a $3.6 billion funding round in July that included strong representation from external financial investors valuing the business at nearly $38 billion. In Canada, COVID-related government restrictions on the sale of nonessential categories like apparel and general merchandise pressured sales and profitability, but we're optimistic that we'll see a more normalized sales and profit environment in the back half. China comps increased 2.9% and were up 11.6% on a two-year stack, and eCommerce penetration has now reached more than 25% of sales in China. International operating income was strong, increasing about 28%, reflecting sales strength, the benefit from lapping last year's discrete tax item, and lower COVID costs. Excluding the discrete item, adjusted operating income increased over 12%. Sam's Club delivered excellent results with strong growth in sales, membership, and profit. Comp sales grew 10.6%, excluding fuel and tobacco, and were up nearly 28% on a two-year stack basis, including strong eCommerce growth. Membership trends were also strong as we achieved a new high for overall member counts, saw significantly higher renewal rates, and delivered record Plus member penetration. Sam's operating income was up 11.5%. Now let's turn to guidance. We're closely monitoring the evolving COVID impacts around the world. Guidance discussed today assumes a continued strong U.S. economy with no new significant government stimulus for the remainder of the year. All of the guidance discussed excludes the impact of international divestitures. We now anticipate higher full-year sales growth due to the strong first half performance and an expected good back half of the year, with consolidated net sales growth expected to be up 6% to 7% versus prior guidance of a low- to mid-single-digit increase. Walmart U.S. comp sales are expected to increase 5% to 6%, representing about $20 billion of growth. We anticipate Sam's Club comps to increase 7.5% to 8.5%, excluding fuel and tobacco, and international constant currency sales growth of 7% to 8%. We're also raising full-year guidance for operating income and EPS. On a constant currency basis, we expect full-year consolidated adjusted operating income to increase 11.5% to 14%, which is a material step-up from our prior guidance of high single-digit growth and an even more significant increase from our initial guidance in February. Walmart U.S. adjusted operating income is expected to increase 11% to 13.5%. Full-year adjusted EPS is now expected to be in the range of $6.20 to $6.35. This is an increase from prior guidance of low double-digit growth as well as above the initial guidance of flat to up slightly. The third quarter has started off well as back-to-school shopping is underway, and we expect grocery market share gains to continue. We now anticipate Q3 adjusted EPS in the range of $1.30 to $1.40, with Walmart U.S. comp sales, excluding fuel, increasing between 6% and 7%. Again, I'm very pleased with the second quarter results and feel good about the underlying momentum of the business. Thank you for your time and interest this morning, and we'd be happy to take your questions.

Thank you. Our first question today comes from Bob Drbul of Guggenheim. Please proceed with your question.

Hey, guys. Good morning. I guess the question that I have is you guys talked about inflation running through. I was just wondering if you can maybe give us some categories that you're seeing the most pressure, how you're adjusting with price, and, sure, what you're seeing competitively with pricing throughout the business. That would be helpful. Thank you.

Hey, Bob. Good morning. It's John. Just a couple of things. First, I want to say thanks to my team for the quarter they just completed and the work they've done to position the business so well for now and in the future. Our merchant team, that's as broad as the team at Walmart, fortunately, they have a lot of levers that they can use all across the business to make sure our value is right for customers. We've seen strength in food and general merchandise and other categories. And, as the environment changed, the team, they've just done an amazing job reacting to so many things over the last 18 months and continue to do so. And they've been quite deliberate about ensuring that our value remains strong. I'm happy to report that our price value is as strong as it has been throughout the pandemic and above what it was before the pandemic began. So the team's doing things like driving strong businesses in apparel and home and general merchandise in addition to food, helping them mix out. Inventory management is another key to this. We finished the quarter up about 20% in inventory, which I think we're well positioned going into the rest of the year based on where the inventory is. And we've had strong sell-throughs. The comp sales always help. So with the cost pressures that we do see across the supply chain, and you heard Brett mention that we're doing things like chartering vessels and securing supply to ensure that we are ready for the third and fourth quarter. We've seen some inflation in the low single digits. But the thing I watch that I think is just most important is that we see our unit share in categories like food growing faster than our dollar share to ensure that we can position ourselves well in terms of retail value for the customer and play a role in keeping inflation down for the country.

Thank you.

Our next question is coming from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey. Good morning, everyone. I have one for Doug and one for Brett. And Doug mine for you is two parts. First question is if you can give us a sense of the most important strategic imperative that's on your plate. And I was going to throw out a couple, like supply chain, associates, and/or alternative profit pools. And I know it may be hard to pinpoint one, but I'm curious where the focus is. And then the second part for you, Doug, is how active of a debate is there about plowing money back into the business because EBIT dollars are growing well above the algo. And I'm curious why not put more back into the business when the business is overdelivering.

Hey, Simeon. Good morning. As it relates to the most important strategic imperative, the thing that came to mind first was speed. I think innovation and speed may be together. We're trying to change the company. And as we've said to everybody for a while now, our purpose and our values are constant, but everything else is open to change. And we're becoming more digital. We're learning how to work differently. The reason that I would have that at the top of the list is because that's what bears fruit forever. We've launched new businesses. We've scaled new businesses. A year from now, we're going to be doing the same thing. Five years from now, we're going to be doing the same thing. And so my focus, working with this team and with Suresh and everybody else, is to try and get into how we're working and increase the speed, innovation, and productivity of the company. As it relates to putting money back in, I think we've been on our front foot for a while, and we'll stay there. We're not going to give you any additional guidance today as it relates to capital needs or things like that. But as we shared with you back in February, we've got opportunities to play offense. We're confident in what we're doing. We like the assets we've got. I think some people view stores these days as boring; we don't. We love the business that we've got, and we love what we're adding to it. If we see opportunities to be more aggressive, either on the income statement side or the balance sheet, we'll take them, and we'll share at that time.

Thanks. I have a follow-up for Brett. Reflecting on 2022, and without providing specific guidance, you initially designated 2021 as an investment year. Now that your fiscal growth for 2022 is exceeding your expectations, has this influenced your projections for next year, or are you still confident that the business can continue to grow going forward?

Yes, thank you, Simeon. In February, when we provided guidance for this year, we did so under the assumption that there would be no government stimulus. However, we have indeed received some stimulus throughout the year, and we have benefited from it. We have been transparent about that. As Doug mentioned, we have been proactive. We continue to make necessary investments and are not scaling back on anything we believe is critical for the long-term value of the company. Looking at the long-term growth we discussed, which is around 4% for the company, I still feel confident about that. I am optimistic about our ability to grow profits at a faster rate than sales, as we indicated in February. None of that has changed. However, we noted that growth in the first couple of years will depend partially on the stimulus we experience this year, of which we have received a considerable amount. So, on a year-by-year basis, we will address that as it comes. But in the long term, I remain very optimistic about the company's prospects.

Thank you. Our next question comes from the line of Karen Short with Barclays. Please proceed with your question.

Hi. Thank you very much. Following up on that, I think the net operating cycle for Walmart indicates that you have been in a continuous investment phase. It appears that you are now in a more stable position. Could you provide more detail on the long-term outlook regarding capital expenditures and wages beyond fiscal year '22? It seems that the sales relationship with U.S. EBIT appears to be more sustainable.

Karen, this is Doug. I'll start, and then Brett can add his thoughts if he chooses. It's interesting to consider the business in relation to investment cycles. The business will always make investments and grow, and it will continue to grow earnings. Why can't we accomplish both simultaneously? For instance, we can invest in automation to enhance productivity while also achieving the earnings growth we desire. We manage both short-term and long-term aspects. As everyone knows, our company is particularly focused on long-term goals and the top line, while we will ensure the bottom line is managed. I would like to challenge the notion of whether we are currently in an investment cycle or will be in one tomorrow. We will consistently announce investments and you should anticipate our top-line growth and overall returns as we progress. The business is evolving. That's the key point. We are not merely buying and selling products in supercenters anymore; we are transforming the structure of the company. If you envision a bar chart of revenue or profitability, you would see that the mix is changing. As we persist with this transformation, it leads to a different financial equation compared to what we experienced years ago.

Yes. I was thinking about, Karen, so five years ago, almost six years ago now when we talked about that we needed to take the opportunity to invest in wages and eCommerce. And we were a little bit behind where we wanted to be in some areas. And now when we invest, it feels very offensive, feels like we're improving our competitive position. It's very broad-based. When you look at the results this quarter, as an example, of Walmart U.S. and Sam's Club and International, very broad-based, strong performance. And to Doug's point, I think we'll continue to be able to do both, grow top line returns, grow bottom line while we continue to invest in the business. I think all of those are a critical piece of what we're doing.

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

Hey, guys. Good morning. Thanks for the questions. Just one follow-up on one of the previous questions. Just Brett, you mentioned stimulus impact. I don't know if you can maybe build on that a little bit more. I mean, we obviously know that there's been a lot out there, but I don't know if you're able to frame that at all. And then my other question, just more around supply chain management. Inventory levels looking good and stock's better. How do you feel about kind of as we look forward to the second half holidays? Obviously, the comp guide is good, but just access to product for whether it be Halloween, Christmas, that timing of events you're planning. Just how are you thinking about that as we pick more toward the fourth quarter? Thanks.

Yes, Peter, it's Brett. I'll start by saying that we provided guidance in February that did not account for any stimulus, as we were uncertain about future developments at that time. With the introduction of stimulus, it has become quite challenging to determine the specific impact on different areas of the business. However, we recognize that we have benefited from the stimulus. That said, the core business remains robust. John will discuss this shortly, but it's worth noting that our food business is significant and sometimes overlooked. The back-to-school period has been particularly strong. Overall, I am confident in the strength of the underlying business, irrespective of the presence or absence of stimulus.

Good morning, Peter. This is John. I'll continue from where Brett left off. As Brett noted, the comparisons improved steadily throughout each month of the quarter, and we are pleased with that momentum. Our team has made significant efforts this year to position the business effectively for what appears to be a promising back-to-school season. We are satisfied with the performance in categories like apparel, stationery, and others that are typically strong during this time. Regarding the supply chain, I am very proud of our team's efforts and grateful for their experience in handling the disruptions we've encountered globally. As Brett mentioned, we've chartered vessels and secured capacity for the third and fourth quarters, feeling optimistic about our inventory situation, which is up 20% compared to last year across the segment. We're well-prepared heading into the upcoming quarters and will continuously manage the situation while expecting strong results in the third quarter.

Good to hear from Kath and maybe, Judith, if you want to on supply chain challenges around the world. Sam faces the same set of issues, whether it's the tailwinds from stimulus or what's happening with supply chain. And you've got some seasonal categories where you can read sales earlier than we would in Walmart U.S.

Yes, certainly. We saw strong seasonal sales through Q1, particularly in our GM areas. And that was certainly assisted by stimulus. But what we're seeing in Q2 is that same strength continuing. So whether we're seeing it in back-to-school and Halloween or fall, we're seeing our members highly participating in those categories. And we thought we bought aggressively. We wished we bought even more aggressively, I think there's a lot of upside in that space.

In International, we are observing trends similar to those that John mentioned in various markets. One of Walmart's distinct advantages is its scale and the ability to leverage it effectively. We have collaborated with the U.S. businesses, especially for our Canada and Mexico operations, to ensure that keeping products in stock remains a top priority for our customers. We continue to experience strong performance across all categories, but our focus is on the upcoming holiday season. Additionally, in India, we are gearing up for the Big Billion Day event, coinciding with the Diwali Festival in early November.

Thank you. Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Good morning, everyone. Thanks for taking our question. We'd like to focus on omni and e-comm, if we could. I think, Doug, you mentioned in your prepared remarks that the business is becoming more global in orientation versus regional. And I think you also said or stated some really strong penetration levels for e-comm in some of your International markets in places like China on 618 and other events. I'm just wondering if you can talk about your $100 billion e-comm channel goal through that lens of International. How do you think about the International markets influencing maybe the domestic market or vice versa in terms of your investment strategy? Thank you.

Yes. Thanks for the question. I'll get Judith to chime in here, too. It's exciting to see what's happened. And it hasn't been forced by us, but the world changed as it became more digital and the business models and the products we need to build, the work we need to do ends up being even more common than it was before it feels like. And so with the shift in the International portfolio that Judith has led, we find ourselves positioned, with the Flipkart investment in particular, toward more of a digital business and more of an e-comm business. I started learning about e-comm from food from the U.K. many years ago. Then we all saw China explode. Now we're living in a very different environment in India versus what we see in the U.S. And Walmex, Judith, has become more of a digital company and looks more like the U.S. in some ways. And so it's exciting to see a pure eCommerce percentage for International and for the total company grow. I think the story that gets buried there is that the business overall is becoming more digital in its mindset.

We've definitely seen a transformation in the way the businesses are thinking. India is slightly different because Flipkart, of course, and PhonePe, our payments business there have always been digital-first. And we've learned an awful lot from them. And I'm so encouraged by what I'm seeing out of India. You've got to remember, this is a market where digital penetration was really quite low when we made our original investment. And that has just continued to increase. I think the circumstances of the pandemic have helped to reinforce that as well. And we were really pleased to see the $38 billion fund raise for India that we did recently. The quality of the investors that we've got there, I think, is testament to the way that that business has a future growth trajectory as well. But all around the world, where we've seen the real step-up is in omnichannel, very similar again to U.S. trends. Canada, you saw that we reported a 41% growth for the quarter, that business continues to build. But really, Mexico Walmex is the one that's building out an ecosystem and it had been through a digital transformation for the entire business to work in a much more agile way and looking at the way that they're connecting the customer with a digital offering. So while you have got the pure online business, which is Marketplace, you've got the omnichannel business, they're also expanding into areas such as telephone and Internet, provision of services for customers, which is absolutely critical because so many people in Mexico don't have access to Internet services. So this is a way of bringing people in to the top of the funnel. So yes, really pleased to see the level of online penetration in the scale of the business that we're building in International.

The only other thing that came to mind was the difference between input metrics and output metrics. The $75 billion number on its way to $100 billion is an output metric. We're focused on how do you do a better job with all the inputs related to omni. And that's hard work. Building digital products that marry eCommerce with stores takes more work than just building an eCommerce solution, takes more time, takes more complexity, but that's where the secret sauce is. If we can continue to blur the lines so that customers and members can shop however they want to shop, whenever they want to shop, the output metrics that we sometimes measure of e-comm versus store growth, for example, they'll be what they are. But this quarter is kind of a good example of the fact that we can be somewhat indifferent. We're trying to build a model where we're completely indifferent top and bottom line as it relates to how people shop. And so I think we started that and still have a lot to do to deliver on that goal.

The next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

Hi, guys. Good morning. Two-part question. Gross margin in the U.S., could you just talk about your expectation as we think about the back half of the year. You're up on a two-year stack basis, about 30 basis points in Q1, that accelerated in Q2. Is that difference really vaccine? And then over the next couple of quarters, how are you thinking about that dynamic given that it does seem like some of the inflationary pressures and product costs probably accelerate? And then the second thing I just want to ask about is Sam's Club. Grocery really seemed to accelerate sequentially unless I did the numbers wrong here. Can you just provide us a little bit more color in terms of what you saw there? Thank you.

Hey, Edward. It's John. I'll start with the first question and then pass it to Kath to discuss the progress at Sam's. Regarding the margin rates reported in earlier quarters, our focus is on delivering value to our customers and the mix of products we're offering. We're proud of the price gaps we're currently seeing, which are at pre-pandemic levels and even better. It's encouraging to note that the unit growth in key categories, such as our food department, is outpacing the dollar share gains we observe. We prioritize relative value in our strategy. The results you've witnessed are influenced by product mix and strong performance from our U.S. supply chains. Our teams have implemented several measures to maintain strong flow, including optimizing our distribution network. Specifically, our food distribution team has excelled in ensuring smooth product movement. As we conclude the quarter, I am pleased with our inventory status, particularly with the successful back-to-school season, which encompasses our apparel, stationery, lunch boxes, and backpacks—all essential for returning students. Our inventory levels heading into the quarter are up roughly 20% from a year ago, contributing to the stronger comparisons we are seeing each month as the quarter went on. Now, I'll hand it over to Kath to share insights on the strong momentum at Sam's.

Yes. So thanks for the question. I think we're proud of the comp of 10.6 this quarter, most proud also of the two-year stack of 27.8. Strength is coming through grocery, you're right, we're seeing that grow in the mid-teens. But I'd also call your attention to the GM side of it as well too, because we were really proud to see the home and apparel business growing at the rate it's grown over the last few quarters as well. So some real strength coming through across the box.

Thank you. Our next question comes from the line of Robbie Ohmes with Bank of America Securities. Please proceed with your question.

Hi, good morning. I wanted to follow up on the U.S. eCommerce business, which has slowed to 6% due to challenging comparisons. Could you provide more details on how pickup, delivery, Spark, and ship-to-home have performed? What are the expectations for eCommerce in the second half of the year, and how should we approach that? Additionally, if there is a trend of shifting back to in-store shopping, will that impact or support gross margins for the U.S. business in the second half?

Yes. Looking at the business, first thing that I would just remind everyone that we've been talking about for a while, that we're positioning this business to serve the customer however the customer wishes to be served, and that would include pickup, delivery to home, and shopping in store. So late in the first quarter, we definitely saw a traffic shift back into store from eCommerce and pickup. That continued early in the quarter. Just as a reminder, as you said, we were up against strong comparisons particularly early in the quarter. That resulted in the total business running about 103% for the two-year stack. So we doubled the business over the last few years, and we feel great about that. We also feel great about the capacity that we've put down last year. Our pickup business was quite strained early in the pandemic as well as inventory availability. Over the last 18 months, the team have done a great job building more capacity into pickup and also finding new ways that they can ship customers. So when a customer orders from walmart.com, at times, we fill from fulfillment centers, other times it's from stores and sometimes it's a combination of the two, wherever the inventory is. We try to keep the customer promise in mind to ensure that we're fulfilling in the best way possible. So the mix of the business definitely shifted in the quarter. I think what we're seeing early in the third quarter, as I said, again, a strong back-to-school season, which would include apparel and brands that we've launched online. We've launched about 1,000 brands in the last year online and feel very great about the potential those have. So we'll be positioned and ready, depending on where the customer shifts. Certainly, we're monitoring changes geographically around the country as it relates to the pandemic and the Delta variant, which are some of the things that caused the changes that happened last year in the first and second quarter.

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

Hi. Thanks. Good morning. Thanks for taking my question. I was curious with regards to Walmart Connect, just with regards to the advertisers you're signing up, is it really across the board in terms of your vendor base? Or is it mostly in grocery? And is there a way to quantify how much this contributed to the margin?

Well, let me talk about just general mix and business. Doug mentioned earlier that we're focused on changing the way of working all across the business. Really proud of the work that our product team and our tech teams have done in the last few quarters to ensure that we are ready for the customer however they wish to be served. Over time, what we've seen and what we'll continue to see is a really positive change in mix to the overall structure of the way we think about the business, our input metrics, our output metrics, and our P&L. Those mix improvements are coming from things like advertising, our Marketplace, fulfillment services, rental incomes are stronger in the physical environment, and our membership income. Then as we said earlier, doing things like having software licenses and using Software-as-a-Service to others. So all of those are strong. We did say that advertising just about doubled for the quarter, we're up 95%. Our active advertisers were up even more than that. There's strength among the advertisers across the board and an expansion of our marketplace and fulfillment services will only enable future growth of the advertising business.

Thank you. Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning. Thanks for taking my question. I wanted to dig deeper into the drivers of the grocery acceleration you saw during the quarter. I was curious if you can comment more on some of the internal factors supporting that acceleration. And then also some of the external factors, whether it's travel tax credit or COVID cases spiking. Thank you.

Grocery performed strongly throughout the quarter. As Brett mentioned earlier, there have certainly been benefits from stimulus and various programs that contributed to this performance. What I find most encouraging is the capacity and capabilities developed by our supply chain network this quarter, along with the support from our suppliers. I want to express my gratitude to them, as we wouldn't be able to achieve what we're doing in food without their efforts. Our business is running record volumes through the supply chain network every week. We have observed extremely high volumes in stores, as well as growth in our pickup and e-commerce food businesses. Overall, we are excited about the progress and product improvements in categories like produce and meat. The momentum is very beneficial. Additionally, the share numbers are positive. I’ve mentioned this several times, but it’s worth repeating: we are very encouraged that unit growth in grocery is outpacing dollar share growth.

There's a lot of tonnage going through. And I'd just underline fresh. John mentioned produce and meat. The team, back before the pandemic started, had a rollout of something we call Produce 2.0, which improved the presentation of fresh produce but also capacity. So it was really well timed given what happened during the pandemic. As I go into stores, produce is standing tall and has throughout, from an in-stock point of view, it's been one of the bright spots in terms of us being able to get product and display it well. Sam's Fresh performance has been really strong too. It's one thing to stay in stock on cornflakes; it's another on merchandise fresh, and the teams have done a nice job during this period.

Yes. And I think we've started remodeling half of our fleet in what we call bold and blue, and it really makes the merchandise stand tall. I think taking away some of the clutter in the clubs and making the merchandise the hero has enabled our fresh sales to kind of continue to grow as well.

Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. On this subject of market share, it's done a sharp reversal from the last year. How much would you attribute to your initiatives, whether it's fresh presentation, pricing impact versus just the macro where the consumer might have got extra money from the child tax credit or stimulus check went to the store to buy general merchandise and while he or she was there stocked up on groceries? My follow-up is on Walmart Connect. Really good advertising businesses in the eCommerce space, represents 5% to 10% of GMV. Is it fair to think that you're still in the nascent stages, maybe 1% to 2%? And where can your penetration go? And are you seeing that it's incremental to your relationship with your vendors? Or is it coming at the expense of other forms of payment that might be making to you? Thank you.

Hey. Good morning, Michael. Thanks for the question. Let me talk about food first. I think everything you said would be on the list of things that are helping, and that would be better pricing, better availability in stores, quality of product, supply chain again, my hats off to them for all the work that they've done in the last 18 months, but in particular, the last quarter, they have just performed very well. Also, just a reminder that last year, we had shorter operating hours in stores across the country, in many cases. Some of our entrances and exits had been closed. Some of our peripheral services like optical and the auto care centers were closed to free up staffing to run the core pieces of the business. I think in general, the entire business is positioned better than it was a year ago. Certainly, we'll react geographically and ensure that associate safety and customer safety are prioritized throughout this wave of the pandemic, but our team is well equipped to make the best decisions to be able to do that. As far as the Connect business, it's growing. We certainly would say that we're in a good position for growth now, but continued growth in the future, being able to double in the most recent quarter is exciting. The strength of the eCommerce business, including the Marketplace, is what enables that growth over the long term. We rebranded the business from Walmart Media Group to Walmart Connect last year, and that was just to make sure that it was very clear that this opportunity is going to help us connect buyers, sellers, suppliers, and customers altogether in a way that's accretive to the customer experience. As long as we do that, I will remain very, very bullish on the growth potential in this business.

Thank you. At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Doug McMillon for closing remarks.

I want to thank you again for your interest in the company. And I want to thank this leadership team, and of course, our associates. This team is building for the mid to long term, and they're doing a great job of managing and performing in the short term, navigating a pandemic, keeping the stores in stock, serving customers and members while we change the business to be more digital, as I mentioned earlier, to get faster, more innovative, more productive as we build it. It's actually a lot of fun. It's challenging. This continues to be a challenging year, and our folks on the frontline are doing a great job, but I just want to express my gratitude. Thank you all.

I want to express my gratitude to our team for their excellent work in managing and performing under the current circumstances. They are successfully navigating the challenges of the pandemic, ensuring our stores are well-stocked, and providing great service to our customers and members. As we transition the business to be more digital, we are making strides to become faster, more innovative, and more productive. This has been a challenging year, but it is also quite rewarding. Thank you all.