Walmart CFO John David Rainey joins Yahoo Finance Live to discuss earnings, consumer trends, inflation, supply chains, advertising, share buybacks, and expectations for the holiday season.

Video Transcript

BRIAN SOZZI: Shares of Walmart are higher this morning after the retail giant saw US same store sales for the third quarter rise 8.2% year over year and reporting a much needed pullback from the 25% spike in inventory it reported in the second quarter.

Joining us now to discuss further is Walmart CFO John David Rainey. John, good to see you here. I went back to my notes from when we talked three months ago, and we were talking about consumers trading down to tuna fish from various other items. A big shift in tone here from your company. What's the takeaway for investors?

JOHN DAVID RAINEY: Well, in the face of a pretty challenging macro environment, Brian, we're seeing that consumers are looking for value. And Walmart's value proposition is really resonating with consumers right now. And you see that in our third quarter results, as we grew ourselves almost 10%, grew operating income 4.6%.

And we're still doing that. We'll invest in these important aspects of our business that we refer to as our flywheel, things like advertising, marketplace, fulfillment. And so quite excited about the progress that we're making. But it's definitely a challenging macro backdrop right now.

BRIAN SOZZI: Anything in these numbers suggest that a recession is imminent, John?

JOHN DAVID RAINEY: Well, I can't tell you that. But what I can tell you is what we see among our consumer-- or with consumer behavior of our customers. And if you look at things like private brand penetration, we saw an increase in our private brand penetration of 130 basis points in the quarter. And similar to what we discussed last quarter, we're also seeing tradedown into lower, less expensive proteins, things like beans and peanut butter and hot dogs from higher priced meats.

And that's all at the same time when we're seeing share shift. We're actually gaining share in areas like food. And incidentally, similar to last quarter as well, about 75% of that is coming from the income demographic or the household that's making more than $100,000 a year.

JULIE HYMAN: John, it's Julie here. As I said earlier about the numbers, it seems as though consumer behavior is still going sort of in the same direction, more cautious, what you're describing. But Walmart has now sort of shifted to meet that. And so I'm curious if you can tell me sort of tactically what you guys did to work down the inventory, for example, and to make some other changes.

JOHN DAVID RAINEY: Yeah, we couldn't be prouder of the progress that the team has made. And so just as context, at the end of the last quarter, our inventory was up about 26% year over year. That's down to 13% this quarter. And fully 70% of that is just related to inflation and high prices. And so if you look at where the inventory is today, a quarter ago, two quarters ago, it was all stuck in-- or up further into the supply chain. It was in the ports.

We've been able to get that inventory to our stores now, which is important because that allows us to sell it. But we've been very targeted by category. If you look at the areas or the categories where we've struggled more, it's been in areas like home, electronics, apparel. And so that's where we're challenged, and we're trying to get that inventory out and sell it with promotional activity during the holiday season.

BRAD SMITH: John, I want to talk about this advertising business because when you think about not taking a lot in terms of the investment, but at the same time, having a high margin that Walmart could potentially see over the coming years, I mean, this business grew over 30%.

What type of margin contribution would you like to see this business grow out to over time? And are you seeing any drying up of ad dollars among some of the what typically would have been some of the larger spenders, as there is kind of this cost restructuring within marketing expenses for many companies right now?

JOHN DAVID RAINEY: Sure. Well, advertising is a business that has a much, much higher margin than the rest of our retail business. And so it's something that we're quite excited to grow and add to our platform. We're actually not seeing much of a decline in advertising because I think it speaks to the relevance that we have with consumers right now. Walmart is the place that advertisers should be wanting to advertise as consumers are coming to our store, and we're gaining share.

But if you step back and think about the bigger picture here, adding things like advertising or fulfillment services or expanding our marketplace, this allows us to be more relevant to consumers. But very importantly, it diversifies our income streams over time that are more durable and more sustainable.

BRIAN SOZZI: John, is the worst of inflation behind us?

JOHN DAVID RAINEY: I can't call that, Brian. What I can tell you is that food inflation, in particular, has been pretty persistent. We see it in that mid-teens growth year over year. I wish it would come down. In areas like general merchandise, we've seen more progress in terms of what's happened with inflation. But I can't call a peak on that just yet.

JULIE HYMAN: I want to ask a little bit about the buyback here, John. What kind of cadence do you expect to actually enact that buyback, and whether you think that this is something that Walmart is going to continue to do? In other words, once this one's up, do you expect to renew it? What's the sort of return to cash-- return cash to shareholders strategy going forward?

JOHN DAVID RAINEY: Well, one of the great things about Walmart is the amount of free cash flow that we generate each year. We have an abundance of resources, and we've been able to take a very balanced approach in how we allocate that capital over time, providing a dividend, buying back shares, but also, importantly, investing in the growth aspects of our business. We'll continue to be balanced going forward and opportunistic when it comes to share buyback. We haven't been specific with the time frame in which we expect to utilize that 20 billion share authorization, though.

BRAD SMITH: This most recent quarter, you saw some softness in discretionary categories which included electronics, home, and apparel. If we zero in on electronics for a moment, we know we're going into a heavy promotional and sales period for the holiday season. How does that alter or shift your forecasts, knowing that we've already seen some weakness in some of the home electronics that have been able to move through into consumers' hands and homes?

JOHN DAVID RAINEY: Sure. Well, probably the most pronounced impact on our financial statements this year have been around the share shift in our business, as we see consumers spending more on fuel and food and less on general merchandise, where, at least in the US, it's a higher margin business for us. And home and electronics is one of those areas.

And so as we get into the fourth quarter, we've started some of our promotional activity already. And what we're seeing is that consumers are actually using discretion about when they purchase those general merchandise items, those home electronics. And so some of our bigger selling items during this promotional period have been things like TVs or AirPods or even air fryers as an example.

BRIAN SOZZI: John, every CFO I talk to right now is reevaluating their cost structure. Of course, this is budget planning season for the year ahead. But we've seen some large layoffs in tech. Meta-- you name it. Amazon reportedly now, too. Do you think you have to tighten your belts, too, at Walmart as you look towards next year?

JOHN DAVID RAINEY: Well, let me be clear. Walmart is hiring. We're actually adding associates over the holiday period to meet the demand that we have from our customers. But we've made our mark in this business by being efficient and being very disciplined with respect to the headcount that we add or just cost in general that we add. And so we'll continue to do that. This is certainly a time where we need to look inward and make sure that we are as efficient as we possibly can be to provide the best returns for our shareholders.

JULIE HYMAN: John David Rainey, thanks for being with us to talk us through these Walmart numbers. Walmart's chief financial officer. Appreciate it.