Good morning,
and thank you for joining us to review Walmart's third quarter fiscal 2018 results. This is Steve Schmidt. Vice president of investor relations at Walmart Stores, Inc. The date of this call is November 16 2017. On today's call, you will hear from Doug McMillan, president and CEO, and Brett Biggs, CFO.
This call contains statements that Walmart believes are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended and that are intended to enjoy the protection of the safe harbor for forward looking information provided by the act. A cautionary statement regarding forward looking statements
is at
the end of this call. As a reminder, our earnings materials include the press release, transcripts, and accompanying slide presentation, which are intended to be used together. All of this information, along with our recently published fiscal 2019 earnings release dates, store counts, square footage, earnings infographic, and other materials are available on the investors portion of our corporate website, stock.walmart.com. For our US comp sales reporting in fiscal 2018, we utilize a 52 week calendar. Our q 3 reporting period ran from Saturday July 29 2017 through Friday, October 27 2017.
Before we get started, I'd like to remind you that we will report our 4th quarter earnings on Tuesday, February 2018.
Now I'd like to turn the call over to Walmart's CEO, Edmund Millen. Thanks, Steve, and good morning, everyone. We're pleased with the strong results in the third quarter across each of our business segments. We're providing customers with fast and easy ways to save money and time, and they're responding. The highlights for the quarter from my perspective are the Walmart US comp sales of 2.7% were strong Walmart US E Commerce sales were up 50%.
Adjusted EPS exceeded our guidance range. Sam's Club comps were strong at 2.8%. As an international 10 of 11 markets posted positive comp sales, So overall, we're moving in the right direction. The productivity loop is starting to turn, and I'm encouraged by our results. I'll discuss more details from our third quarter in a minute, but I'd like to start by thanking everyone who came to Bentonville for our investment community meeting in October.
We hope that you gained a clear perspective of our strategy to make every day easier for busy families. We have a plan that plays to our unique strengths. Racking faster and being disciplined about cost and capital. Curiosity, creativity, decisiveness, and speed are priorities. There's a lot of innovation today in the business, and we enjoyed sharing some of the initiatives with you.
We've expanded online grocery pickup, launched mobile express returns, and we're testing automated pickup towers and same day grocery delivery. We're also learning how to automate some routine functions in our stores like scanning for shelf level out of stock and modular accuracy. We're leveraging our unique assets and financial strength to better serve customers and accelerate growth. When we were together last month, we outlined 4 priorities. Make every day easier for busy families, change how we work, deliver results, and operate with discipline, and be the most trusted retailer.
By executing on all these strategic priorities, we're confident that our customers and shareholders will benefit. The importance of that 4th priority deemed the most trusted retailer was certainly amplified over the past 3 months. We saw significant destruction through hurricanes and wildfires in the US and the earthquake in Mexico. I'm so proud of the commitment our associates show to the communities we serve. During these difficult times, our customers needed us more than ever, and associates responded to each crisis in remarkable fashion.
We're proud that as a company we committed over $38,000,000 to disaster relief this year, and that our customers have donated over $43,000,000, bringing the total to more than 80,000,000 to date. As you know, Puerto Rico experienced widespread devastation and with the ongoing recovery, we'll continue to partner with government tools, relief organizations, and others there on the island to support the rebuilding efforts. We'd also encourage each of you to get involved with financial supporting the Puerto Rico recovery efforts at give dotmiamifoundation.org/ Walmart. Now let's move back to our 3rd quarter results and briefly discuss each area of the business. Brett will provide more details on the financials shortly.
Let me start with Walmart US. We had a strong quarter with comp sales growth of 2.7% and comp traffic growth of 1.5%. While we recognize that there are some incremental hurricane related sales in these numbers, our core business is performing well. Grip Ford and the team continued to improve our US stores. Across almost all categories, we're seeing growth.
The food business in particular has accelerated and delivered the strongest quarterly comp sales performance in almost 6 years with our fresh meat, bakery, and produce teams leading the way. Expense leverage has also been a priority, and we're pleased that the segment leveraged expenses in the 3rd quarter. It's important to note that we've accomplished this while maintaining high end stock and service levels for customers. Our associates are using technology and apps for inventory management and price changes that help make their jobs easier and increase productivity in the stores. Store Leverage is helping to allow our strategic investments in e Commerce to continue.
It's also exciting to see how we're removing friction from the customer experience with express pharmacy and easier money services process and by expanded pickup options with our automated towers and online grocery. We now have online grocery in more than 1100 stores and are looking forward to expanding this popular offering to another 1000 locations next year. Walmart US ecommerce sales were 50% this quarter with the majority of the increase through walmart.com. Existing customers have become advocates for popular initiatives like online grocery, and free 2 day shipping. And as a result, new customers, suppliers, and partnerships are coming to Walmart.
The expanded assortment on walmart.com has also contributed to growth Over the past year, we've tripping the number of items on walmart.com to reach more than 70,000,000 SKUs today. As you heard last month, Mark's team is making progress on hiring additional category specialists focused on improving the customer experience and our positioning with the top 1,000,000 ecommerce sites. The recent agreement with Gordon Taylor is a great example of how we will be creating specialty experiences complement what we offer and serve customers with the brands they want. We're making deep progress attracting premium brands to the site such as KitchenAid and Bose. We're continuing to expand our tests of same day delivery and next day delivery, including our test with August home, and the use of crowdsourced partners for grocery and our own associates.
The acquisition of parcel brings us the ability to deliver items in your other major metropolitan areas on the same or next day. Thank you. .Com. We continue to position the business to focus on higher income or good customers. We launched the uniquely Jay private brand and also began selling ModCloth items on Jeff this quarter.
In addition, we've started to attract more premium brands to the site than we expect this to continue. Staying in the US, let's talk about Sam's Club. Fancorp delivered comp sales growth without fuel of 2.8% in the quarter. We're especially pleased with the improvement in member traffic which was up 3.6%, including some hurricane related benefits. We're focusing the business to accelerate growth and narrowing the target number and taking steps to become more special to that member.
As John Furner outlined last month, the target member is a larger family with higher income probably in the suburbs. They own their own home and a car too. They may own a small restaurant or buy for their office as well. By narrowing the focus on this member, we believe we can earn a greater share of their wallet. We're already making good progress in areas where we wanna win.
Including fresh food and with our member's smart private brand. In addition, John and the team are using technology to make Sam's a better place to shop and work, I'm encouraged by what we're seeing at Sam's Club. Outside the US, the Walmart International team continued to deliver strong top line results with 10 of 11 markets posting positive comp sales. The Wilmex performed well again this quarter with comp sales growth of 7%. Last month, I visited stores in Mexico and was energized about how the team is improving each of our formats.
Our stores and clubs are fun to shop. The team is also on their way towards a digital transformation. They're changing how they work, and that will bear fruit in the future. In Mexico, we're providing convenience through initiatives like online grocery, and we recently launched e commerce marketplace, which expanded as a general merchandise assortment by about 20%. In Canada, customers are responding to the investments we've made in price and this is contributing to market share gains in key traffic driving categories.
We continue to expand the number of locations where we offer online grocery feedback during the quarter and also launched an ecommerce marketplace, which doubled our online assortment and continues our focus on key categories like home and apparel. In China, we saw solid net sales growth of 4%. The team continues to do a nice job of improving key categories like fresh and consumables. We also further expanded a number of Walmart stores in China that offer grocery delivery in less than 1 hour through the JD Daja delivery platform to nearly a 140 stores. In the UK, as we delivered positive comp sales again this quarter, The improvements in store experience and price investments are increasing store basket sizes.
We're excited to have Roger Burnley lead as the end of the future as CEO starting next year. Over the past year, Rogers has been our COO and Deputy CEO, and he has a long and distinguished retail career. I'd like to thank Sean Clark, the tremendous work that he's done over the past year to stabilize the business and position it for growth. Sean has done a lot for our company living in 5 countries over his 21 year career with Walmart. Thank you, Sean.
So overall, the international segment continues to execute the strategy and deliver solid results. In conclusion, I'm pleased with our 3rd quarter results, but I'm more excited about our strategic positioning as we enter the fourth quarter this year. We're stronger as a company. We have momentum, and we have more opportunities to leverage our unique assets to serve customers in ways that are easy, fast, friendly, and fun. Thanks for your interest in Walmart, and on behalf of all of us here, have an enjoyable holiday season.
Now I'll hand it over to Brett.
Good morning, everyone. I wanna begin by thanking everyone who attended an investor meeting last month in Northwest Arkansas or listened via webcast. We really enjoyed hosting the meeting as it gave us the opportunity to highlight our plan to win with customers and shareholders. Underlying this plan is our financial framework, which highlights focusing on delivering strong efficient growth, being disciplined on how we operate and allocating capital strategically. We expect top line growth going forward to be led more by comp sales and ecommerce with less emphasis on new units in the US.
With good sales momentum and cost transformation is gaining traction. This gives us confidence in our ability to operate with discipline and leverage expenses. In terms of capital allocation, we're prioritizing ecommerce, technology, supply chain, and store remodels over new stores and clubs. Which we believe will contribute to long term value creation for shareholders. We're excited about the future of Walmart.
Before I move on, let me highlight 3 items that negatively impacted GAAP EPS in the quarter. First, there was a 29¢ charge to the premiums paid for bond standard, which allowed us to retire higher rate debt, reducing interest expense in future periods. Additionally, discussions with the government agencies in the FCPA matter have progressed to the point that the company recorded an accrual of $283,000,000 or 9¢ per share. In Walmart International, decision to exit certain properties in one of our markets led to an impairment charge of 4¢ per share. Now let's turn to our 3rd quarter results.
Consolidated net sales increased 3.8% in constant currency, driven by comp sales growth across the company. And adjusted EPS was $1, which is above the high end of our guidance range. I'm especially pleased with our progress on expenses. Excluding the charge for the FCPA accrual, we leverage the expenses of the company in the quarter. The leverage in adjusted EPS is even more encouraging given the hurricane related costs in the quarter.
Overall, our results were strong. However, the results were positively impacted by currency translation in the quarter. Sales and operating income benefited by approximately $450,000,000 $60,000,000, respectively. Gross profit margin declined 29 basis points during the quarter. Price investments in certain markets and the mix effects of our growing ecommerce business are the primary contributors to the decline.
Although the impact from hurricanes in the US was a significant contributor as well. The presentation accompanying this transcript includes more details on gross margins for each segment. Cash flow from operations and free cash flow for the 1st 9 months were solid at $17,100,000,000 $10,200,000,000, respectively. Compared with last year, the decrease in free cash flow is due to timing of payments and increase in incentive payments as well as lapping last year's improvements in working capital management. In terms of capital allocation, we completed remodels of 332 stores globally.
And in the US, we fully expanded our online grocery service, to include more than 1100 locations. In addition to investing in the business, we returned $3,700,000,000 to shareholders through dividends and share repurchases. On the trailing 12 months ended October 31 2017, consolidated return investments, we 30 basis points due primarily to reduced operating income. Let's move on to ecommerce. As a reminder, ecommerce results include all web initiated transactions, including those through wampers.com, such as shift to home, Ship the store, pick up today, and online grocery, as well as transactions through jet.com, and the other sites in our family of brands.
Walmart USC Commerce continued its strong performance with net sales growth of 50%. We began to lap the acquisition of Jet dotcom mid quarter, which impacted our overall growth. Walmart.com, including online grocery, once again, led the way and was responsible for the majority of the growth in the period. Throughout this year, we talked a lot about the speed, which we're moving, and we continued that progress in the third quarter. For example, we launched new partnerships with Google and August home.
These are capital light initiatives that expand convenience for customers by enabling hands free voice shopping, and unattended delivery in the home. We also acquired Parcel, a technology based same day last mile delivery company, focusing customers in New York City. Let's move on to operating segment details. Walmart US had a strong quarter with comp sales growth of 2.7% led by a traffic increase of 1.3%. While difficult to quantify precisely, we estimate hurricane related impacts benefited comps by 30 to 50 basis points.
On 2 year stack basis, comp sales were up 3.9% and comp traffic increased 2.2%. This is the strongest quarterly into your stat hunt performance in more than 8 years. The food business continued to accelerate with sales, transit and unit growth across categories. In fact, food categories delivered the strongest quarterly comp sales performance in almost 6 years. Market inflation was around or slightly less than what we saw in the second quarter.
All formats are positive comps and ecommerce contributed approximately 80 basis points to the segment. Gross margin rate declined 36 basis points in the quarter. The margin rate decreased in part due to the continued execution of our price investment strategy and the mix effects from our growing ecommerce business. In addition, we estimate that hurricane related impacts are about 1 third of the overall decline. Up earning expenses as a percentage of net sales decreased ten basis points with scores leveraging at a higher level than that.
The team has made great progress while maintaining high customer service levels as associates are more efficient with improved technology training and processes. The combination of strong sales and greater operating discipline led to operating income increasing 0.8% in the quarter. Recent hurricanes benefited top line results, but negatively impacted gross margins and SG and A. We estimate the net result was a negative impact to segment income of approximately a $150,000,000. Our stores continue to do an excellent job of managing inventory while maintaining high end stock levels.
Inventory comp stores was down 55% in the quarter. Overall, we're pleased with the execution and momentum. The fourth quarter is underway and we're offering easy access to great products, excellent value, adding into this holiday season, both in our stores and online. The 14 week period ending January 26 2018, we expect comp sales increased between 1.52% on a more difficult comparison. Now let's move on to Walmart International.
We continue to experience broad based momentum across the business and deliver strong top line results. During the quarter, 10 of 11 markets delivered positive comp sales. We're focused on driving growth across our markets through a fresh offering private brands and online grocery expansion. Net sales on a constant currency basis increased 2.5%. On a reported basis, net sales increased 4.1% includes a benefit of approximately $450,000,000 from currency.
Additionally, it's important to note the impacts from the divestitures of your created a headwind to sales of nearly $560,000,000 when compared to last year. While our solid sales performance was fairly broad based, we are
particularly pleased with the results
in Mexico and China as well as with the improved results in the UK. Operating income declined 22% in constant and 7.8 percent or a $105,000,000 on a reported basis. The decline is attributable to 2 items. And impairment charge are approximately $150,000,000 with our decision to exit certain properties in one of our markets. And lastly, last year's gain of 80 $6,000,000 from the sale of several shopping malls in Chile.
Without these items, operating income would have increased year on year. Let's now turn to highlights from key markets. The results discussed below are on a constant currency basis. Let's begin with the Walmex where sales momentum continue as all countries and regions. Net sales increased 9.2%, excluding suburbia, and comp sales increased 7%.
And Mexico comp sales increased 14.5 percent on a 2 year stock basis. All divisions outpaced and tested service and our strongest performance came from food in Staples. In Canada, net sales increased 1.9% and prompt sales increased 1%. We further improved our price position, which contributed to market share gains and key traffic driving categories for just eighty consumables. The team reduced overall inventory levels even as sales increased.
Turning to the UK, net sales increased 3.6% and comp sales increased 1.1% if customers are responding to investments in the value proposition. In store service metrics have improved, and our performance has strengthened across private brands and online grocery strengths. While the business has improved, we still have more work to do. In China, net sales increased 4%. And comp sales increased 2.5%, which is the best result in about 4 years.
Results for the quarter were primarily driven by strong seasonal categories during the Mid Autumn Festival as well as strength across key categories such as fresh and consumables. From an e commerce standpoint, we continue to grow our partnership with JD dotcom. During the quarter, we launched the Walmart JD Omni Channel Shopping Festival, expanding our 1 hour grocery delivery service to additional locations, and focus on initiatives related to inventory management and logistics efficiencies. Overall, it was another solid quarter for Walmart International. Moving
on to
Sam's Club. Comp sales without fuel increased 2.8% strong traffic growth of 3.6%. We estimate that hurricane related impacts benefit costs by approximately 70 to 90 basis points, that negatively impacted gross margins and SG and A. We estimate the net result was a negative impact to segment income of approximately $20,000,000. The focus at Sam's is on people, product, and digital.
From a product standpoint, we're making good progress in fresh and with our private label brand members mark. During the quarter, 1st categories, including meat, produce and bakery all performed well. This is an important traffic driver for our clubs, and I'm pleased with the results we're delivering. Member's mark as a trusted and growing brand, and we recently increased its penetration across multiple categories. More than ever, we're leveraging this brand to highlight value and items done exclusively at Sam's Club.
Efforts to simplify the business are paying off and we're becoming more productive. The team leveraged expenses in the period and operating income excluding sales increased 4.2%. This was a really solid quarter for Sam's Club. For the 13 week period ending January 26 2018, we expect comp sales to increase between 1 a half 2%. Let me close today with guidance.
We have good momentum in the business, and we are executing within our financial framework. We expect a solid performance for the important holiday season, and we are raising expectations for full year adjusted EPS to range of $4.38 to $4.46. This compares to previous adjusted EPS guidance of $4.30 to $4.40 for the full year. In closing, I wanna say thank you to all of our associates for the work you do every day and serving our customers and communities around the world.
This call includes certain forward looking statements intended enjoy the state harbor protections of the Private Securities Litigation Reform Act of 1995 as amended. Such forward looking statements relate management's guidance and forecasts as to an expectations for Walmart's earnings per share and adjusted earnings per share for the fiscal year ending January 31, 2018. Comparable store and club sales for the Walmart US and Sam's Club segments Extension fuel for the 13 week period ended January 26 2018. Comp sales and ecommerce leading to future top line growth and the contribution of our financial framework to long term value creation assumptions on which any guidance or forecast or dates are considered forward looking statements. Walmart's actual results may differ materially from the guidance provided or the goals, expectations, or forecasts discussed in such forward looking statements as a result of changes in facts, assumptions not being realized or other risks, uncertainties, and factors, including economic, geopolitical, capital markets, and business conditions, trends, and events around the world, and in the markets in which Walmart operates, currency exchange rate fluctuations, changes in market interest rates and commodity prices, unemployment levels, competitive pressures, inflation or deflation, generally, and in particular product categories, consumer confidence disposable income, credit availability, spending levels, shopping patterns, debt levels, and demand for certain merchandise.
Consumer enrollment and health and drug insurance programs and touch programs reimbursement rates, the amount of Walmart's net sales denominated in the US dollar and various foreign currencies. And financial performance of Walmart and each of its segments. The impact of acquisitions, divestitures, store closures, and other strategic decisions. Walmart's usage successfully integrates acquired businesses including in the e commerce space. Walmart's effective tax rate and the factors affecting Walmart affect the tax rate, including assessments of certain tax contingencies, valuation allowances, changes in law, administrative audit outcomes, impacted discrete items in the mix of earnings between the US and Walmart's international operations.
Customer traffic and efforts in Walmart's stores and clubs and on its e commerce websites. The mix of merchandise, Walmart sells, the cost of goods it sells, and the shrinkage it experiences the amount of Walmart's total sales and operating expenses in various markets in which it separates. Transportation, energy,
and
utility costs and the selling prices of gasoline and diesel fuel. Supply chain disruptions and disruptions and seasonal buying patterns. Consumer acceptance of and response to Walmart stores, clubs, ecommerce websites, mobile apps, initiatives, programs, and merchandise offerings, Cyber security events affecting Walmart and related costs. Developments in outcomes up and cost incurred in legal or regulatory proceedings to which Walmart is a party, casualty and accident related costs and insurance costs, The turnover in Walmart's workforce and labor costs, including health care and other benefit costs, changes in accounting estimates or judgments, changes in existing tax, labor, and other laws and regulations and changes in tax rates, trade agreements, trade restrictions, and tariff rates. The level of public assistance payments, potential disasters, public health emergencies, civil disturbances, and terrorist attacks, and Walmart's expenditures for FCPA and other compliance related costs, including the adequacy of our 3rd quarter accrual for the FCPA matter.
Such risks, uncertainties, and factors also include the risks related to Walmart's strategy operations and performance in the financial legal tax, regulatory compliance, reputational, and other risks discussed in Walmart's most recent annual report on Form 10 k and subsequent quarterly reports on Form 10 q. And current reports on form 8 k filed with the SEC. You should consider the forward looking statements in this call in conjunction with such reports Walmart urges you to consider all of the risks, uncertainties, and factors identified above or discussed in such reports carefully in evaluating forward looking statements in this call. Walmart cannot assure you that the results reflected or implied by any forward looking statement will be realized or even if substantially realized that those results will have forecasted or expected consequences and effects for or on Walmart's operations or financial performance. The forward looking statements made in this call or as of the date of this call, Walmart undertakes no obligation update these forward looking statements to reflect subsequent events or circumstances.