#Walmart's Q2 Results

1. 1
Walmart and Target's FQ2 Results (Target is tomorrow AM)
In the context of the overall consumer, Amazon, and COVID.
What does this tells us about the 2H and 2021?
All rights reserved, Inflection Capital Management, LLC
Take-Aways:
1. Underlying profitability and cash generation improving for the Mega-Discounters. Pre-COVID there has been a long going debate
on Wall Street about the sustainability of the mega-discounters' long term margins and cash generative abilities. In our view, the
direction for forecasts for market share, sales, margins, and cashflow are all up materially and we expect that consensus sell-side
estimates are now in a period of sustained positive revisions for at least the next twelve months. As such, the stock prices should
benefit from a sustained higher valuation multiple (the lift has happened, we think it holds) and positive EPS revisions.
2. Amazon and Mega-Discounters gaining share profitably. The remainder is losing both.
3. Walmart U.S. has simplified its business strategy, operations, which should lead to clarity for the organization and better execution.
It appears that U.S. stores CEO John Furner has been internally chosen as the "made man" and that e-Commerce leader Marc
Lore has been passed over. There were pre-quarter press reports about organizational changes. With the results, we also leaned
that the on-line and off-line buying teams have been merged into one and that about 2.5K employees are to be let go. John's
voice was prominently featured on the call during the Q&A. Marc was absent, even for questions directly about the e-commerce
business. Lore get's 3.5M shares if he stays through Sept. '21. We would expect that to be the max.
4. B2S has started soft w/ Walmart saying that US comps for July were >4% and that CEO McMillon was concerned about how the
economic pressure on SMBs and overall concerns about job security would impact the 2H and the business. Congress is key.
5. How these companies cycle the COVID period is going to become THE ISSUE for the stocks once a vaccine is produced and
distributed in mass. Clearly Clorox wipes and cleaning supplies are 1-offs. How these retailers defend the "share-of-stomach" that
they gained during COVID is one of the largest strategic issues that we are watching. Thus far, we haven't seen any moves that
are compelling, in our view. (We do have ideas.) That said, we also believe that the supply destruction to the SMB restaurant
space is going to take time (>2 years) to restore. Moreover, while we do think that food and restaurant entrepreneurs will
recover, we suspect that SMB retail merchants are pivoting to digital (Shopify) and will be hesitant to set up new physical stores.
As such, these SMB's will list/market via 3P marketplaces, and Amazon and Walmart will take 20-25% of those sales; thus,
Amazon / Walmart participate in that demand. Moreover, we also think that the liquidated (Pier-1, L&T, etc.), overly levered
retailers (JC Penney, etc.) and capitulating retailers (Bed Bath, VS, etc.) will dump massive amounts of high margin share onto the
market. We estimate that this share transfer is going to be around $140B in retail sales.

2. Walmart U.S.
First Quarter Second Quarter Third Quarter Forth Quarter
2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020
Catagory Comps
Groc ery Inflation neglible (=) neg neg NC NC
Groc ery +LSD +mSD +LDD 5% +mSD +MSD 2% 5% 5% +LSD
Apparel neg Down 5% weather +MSD 5% neg NC +MSD
Health & Wellness +LSD +mSD +HSD 2% +mSD +LSD 5% 5% 3% +LSD
General M erc handise +0-0.5% +LSD +MSD 5% +LSD Mid-teens 2% LSD 5% neg
Hardlines neg +HSD 7% Strong toys neg
Entertainment +HSD 9% strong neg
Home pos pos +HSD 5% Strong strong
Comparable-store sales 2.1% 3.4% 10.0% 4.5% 2.8% 9.3% 3.4% 3.2% 5.4% 4.2% 1.9% 8.0%
3-yr CAGR 4.6% 7.0% 16.1% 8.1% 9.4% 17.4% 7.5% 8.0% 12.5% 8.8% 14.7%
Ticket 0.7% 2.3% 16.5% 2.3% 2.2% 27.1% 1.2% 1.9% 3.3% 0.9%
Traffic 1.4% 1.1% (5.6%) 2.2% 0.6% (14.0%) 2.2% 1.3% 0.9% 1.0%
2-yr stac k in traffic 2.9% 2.5% (4.5%) 3.5% 2.8% 3.7% 3.5% 2.5% 1.9%
e-Commerc e Lift 1.0% 1.4% 390 bps ? 1.0% 1.4% 600 bps 1.4% 1.7% 439 bps 1.8% 210 bps 499 bps
e-Commerc e Grow th % 74% 40% 37% 97% 44% 41% 75% 43% 35% 35%
Comp e-Commerc e Grow th $ $754 $1,088 $3,133 $787 $1,159 $5,112 $1,088 $1,321 $3,648 $1,558 $1,901 $4,606
Grow th Fac tor 1.3 X 1.4 X 2.9 X 1.5 X 2.9 X 1.8 X 1.2 X 2.9 X 3.1 X 2.9 X 2.9 X
WM TStore Comp Grow th 1.1% 2.0% 6.6% 3.5% 1.4% 3.3% 2.0% 1.5% 1.0% 2.4% -0.2% 3.0%
WM TStore Comp $ Grow th $830 $1,555 $5,266 $2,756 $1,159 $2,812 $1,554 $1,209 $832 $2,078 -$181 $2,768
Grow th Fac tor 1.9 X 1.9 X 3.4 X 3.3 X 0.4 X 2.4 X 1.1 X 0.8 X 0.7 X 1.2 X 1.3 X
Base Period Sales $75,436 $77,748 $80,344 $78,738 $82,815 $85,200 $77,724 $80,583 $83,189 $86,579 $90,520 $92,271
Sq Footage Contribution $728 -$47 $534 $66 $158 $216 $76 $150 $305 $31 $150
Comp e-Commerc e Grow th $ $754 $1,088 $3,133 $787 $1,159 $5,112 $1,088 $1,321 $3,648 $1,558 $1,901 $4,606
Ac quisitions
WM TStore Comp $ Grow th $830 $1,555 $5,266 $2,756 $1,159 $2,812 $1,554 $1,209 $832 $2,078 -$181 $2,768
Current Period Sales $77,748 $80,344 $88,743 $82,815 $85,200 $93,282 $80,583 $83,189 $87,819 $90,520 $92,271 $99,795
2
WMT: Sales Outlook
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We feel that Walmart's business is two related segment but with independent drivers, the traditional store visit
and the online + curbside + delivery segment. Consequently, when we forecast sales, we think about them
individually. We expect store sales to have a weak Q3 due to a soft B2S and weaker SMB and HH confidence.
We then expect store sales to strengthen in Q4 due to building consumer confidence reflecting optimism
about COVID vaccines/treatments and against an easy comparative. In contrast, we forecast the digital-traffic
to be driven by Walmart's internal actions resulting in continued very robust growth rates.
Walmart lost share both in essentials
and non-esentials. Walmart's grocery
was +MSD% in a +DD category due
to it holding price in an inflationary
environment, missing mid-week in-fill
shopping trips, reduced trade hours,
and out-of-stock execution issues.
They also likely preferred curb-side
inventory over shelf-inventory leading
to lower in-store customer satisfaction.
Additionally, lower in-stocks also
adversely impacted their ability to fulfill
surging demand in hardlines. One
would expect the in stock position to
improve going into Q4, given Q2's
learnings.
Terrific e-Commerce results, but not
unexpected given Walmart's
investment in curbside and Amazon's
already reported results. Walmart's
QoQ eCommerce revenue lift of $3B,
or 40%, compares well to Amazon's
QoQ GMV lift $11B and 25%. Walmart
did not disclose GMV, thus, this is an
apples-&-oranges comparison.
Forecasting a weaker store-
focused consumer and a
slightly softer digital
consumer
Forecasting a rebound in
the store-focused
consumer.
2.9X 4.6X
Note the larger ticket
size driven by UPTs

3. 3
WMT's P&L & 2H
All rights reserved, Inflection Capital Management, LLC
1. GM inflection, expense leverage, and lower .com losses drives underlying OM / EBIT up by +164 bps and 40% profit
growth in the U.S. division. Assuming limited COVID and no 1-off expenses in the 2H, profits could rise 60%. Driving
this is the consumer's desire to limit cross shopping and bundle trips into one destination (see Walmart's Q2 ticket up
an incredible +27%). As such, the margin mix is higher, promotional levels are down a lot, and there is little consumer
cherry-picking. This is happing both online and offline; Amazon, Kroger, Target, etc. are all benefiting. As long as there
is COVID concerns and consumers are unwilling to mingle, the boost to margins should continue.
2. Given declining inventory and robust profit growth, cash flows and cash are rising substantially.
3. Q3 and Q4 earnings, excluding COVID charges and other 1-offs, pro-forma EPS should be well above Street
expectations.
Wal-Mart Stores—Quarterly Earnings Model
~$40m per Penny First Qtr Second Qtr Third Qtr Fourth Qtr
$ m illions 2018 % Chg. 2019 % Chg. 2020 % Chg. 2018 % Chg. 2019 % Chg. 2020 % Chg. 2018 %Chg. 2019 % Chg. 2020 % Chg. 2018 %Chg. 2019 % Chg. 2020 % Chg.
Division Model
Walmart USSales $77,748 3.1% $80,344 3.3% $88,743 10.5% $82,815 5% $85,200 2.9% $93,282 9.5% $80,583 3.7% $83,189 3.2% $87,819 5.6% $90,520 4.6% $92,271 1.9% $99,389 7.7%
Est ttl COGS 56,585 3.4% 58,424 3.3% 65,535 12.2% 59,792 61,702 3.2% 67,150 8.8% 55,939 59,904 7.1% 63,039 5.2% 65,419 4.9% 66,984 2.4% 71,732 7.1%
Est ttl GP-$ 21,163 2.2% 21,920 3.6% 23,208 5.9% 23,023 4% 23,498 2.1% 26,132 11.2% 21,785 (1%) 23,285 6.9% 24,781 6.4% 25,101 3.5% 25,287 0.7% 27,657 9.4%
GM Rate 27.2% (23) bp 27.28% 6 bp 26.2% (113) bp 27.8% (35) bp 27.6% (22) bp 28.0% 43 bp 28.0% (28) bp 28.0% (4) bp 28.2% 23 bp 27.7% (27) bp 27.4% (33) bp 27.8% 42 bp
Est Total SG&A 17,236 4.8% 17,778 3.1% 18,236 2.6% 18,250 4.0% 18,839 3.2% 20,702 9.9% 17,848 (1.0%) 19,109 7.1% 19,682 3.0% 20,058 0.0% 20,359 1.5% 21,275 4.5%
Rate 22.0% (25) bp 22.1% 7 bp 22.2% 8 bp 22.1% 23.0% 22.4% (56) bp 22.2% 22.1% (9) bp 21.4% (66) bp
Walmart USEBIT 3,927 (8.0%) 4,142 5.5% 4,972 20.0% 4,479 1% 4,659 4.0% 5,430 42.3% 3,937 2.9% 4,176 6.1% 5,099 59.8% 5,043 (0.3%) 4,928 28.9% 6,383 61.4%
5.1% (23) bp 5.2% 10 bp 5.6% 45 bp 5.4% (10) bp 5.5% 6 bp 5.8% 164 bp 4.9% 5.0% 13 bp 5.8% 79 bp 5.6% 5.6% 5 bp 6.4% 80 bp
Sam'sClub
Sales $13,622 (2.7%) $13,830 1.5% $15,163 9.6% $14,790 (0.6%) $15,049 1.8% $16,375 8.8% $14,521 $14,625 0.7% $16,375 12.0% $14,978 (0.2%) $15,288 3.0% $15,427 0.9%
Sam's Club EBIT 375 451 494 402 (3%) 480 592 23.3% 379 327 491 50.2% 414 $6 384 463 20.5%
3.2% 3.6% 43 bp 2.2% 3.0% 76 bp 2.8% 2.5% 3.0% 49 bp
International $30,260 11.7% $28,775 (4.9%) $29,766 3.4% $31,731 12% $29,139 (8.2%) $27,167 (6.8%) $29,548 0.0% $29,167 0.1% $29,139 (0.1%) $31,025 (3.7%) $33,049 6.5% $31,896 (3.5%)
International EBIT 1,265 $102 738 ($527) 806 $68 1,269 (19%) 893 ($376) 889 ($4) 1,179 ($270) 931 ($248) 889 ($42) 1,170 ($685) 1,105 $80 1,200 $95
Central (413) $196 (386) $23 (378) $8 (400) $7 (449) ($49) (402) $47 (509) $183 (419) $90 (369) $50 (560) $294 (570) $60 (520) $50
EBITConsolidated 5,154 (2%) 4,945 (4%) 5,894 19% 5,750 ($257) 5,583 (3%) 6,509 16.6% 4,986 5,015 1% 6,110 21.8% 6,067 (6%) 5,847 7% 7,525 28.7%
Debt expense (487) (625) (549) (503) (585) (635) (534) (589) (620) (605) (611) (620)
Pretax inc ome 4,610 (1.4%) 4,320 (6.3%) 5,288 22.4% 5,247 4,998 (6.4%) 5,874 17.5% 4,413 4,426 (1.1%) 5,490 24.0% 5,415 5,236 (3.3%) 6,905 31.9%
Inc ome taxes 1,106 24.0% 1,000 23.1% 1,296 1,300 24.8% 1,275 1,350 1,130 950 1,290 1,180 1,257 1,623
Rate 25.5% 23.0% 25.6% 21.5% 23.5% 21.8% 24.0% 23.5%
Net inc ome before M I & subs.3,504 3,320 3,992 3,947 13.5% 3,723 4,524 21.5% 3,283 3,476 4,200 20.8% 4,235 3,979 5,283 32.8%
M inority interest & equity in subs.(142) (64) (84) (134) (70) (85) (107) (33) (85) (126) (153) (160)
Net income—Continuing 3,362 3,256 3,908 3,813 3,653 4,439 3,176 3,443 4,115 4,109 3,826 5,123
EPScontinuing operations $1.13 13.6% $1.13 (0.4%) $1.37 21.6% $1.29 19.0% $1.27 (2.3%) $1.56 22.4% $1.08 $1.20 7.2% $1.44 20.0% $1.41 6.3% $1.34 (5.0%) $1.80 34.2%
Guidance $1.03 NA .90-.98 $1.24-1.34
Diluted shares outs. (M il.) 2,967 (2.6%) 2,886 (2.7%) 2,849 (1.3%) 2,960 (2.0%) 2,869 (3.1%) 2,848 (0.7%) 2,941 2,861 (2.7%) 2,848 (0.5%) 2,914 (5.3%) 2,855 (2.5%) 2,848 (0.2%)
Buybac k M odel (shares) 20 6 14 23
OCF 3,563 7,017 7,622 11,939 3,563
% of Rev 2.90% 5.25% 5.85% 8.67%
Cap Ex -2,205 -1,752 -2,666 -1,817
Cash Flow Inv esting -1,135 -1,696 -2,689 -1,938
Cash Flow Financ ing -846 565 -4,685 -8,379
Cash 9,292 14,985 9,320 16,954