Walmart is increasingly relying on its advertising business to support profits as growth in same-store sales moderates and a cautious annual outlook weighs on its stock.
Walmart Connect, the retailer's advertising business, grew 44% in the quarter ended April 30, its fastest pace since the company began reporting the metric in the first quarter of 2023. The business has helped Walmart protect margins as it keeps prices low and delivery speeds high, while higher fuel costs push consumers towards cheaper groceries and essentials.
Walmart has also lowered prices on around 7,000 items.
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US same-store sales growth slowed to 4.1% in the quarter ended April 30, from about 4.5% in each of the previous five quarters. Walmart shares have risen 2.6% this year to $114.33, compared with a 13% gain for the S&P 500.
Analysts expect Walmart Connect to maintain a similar growth rate when the company reports earnings on Thursday for the quarter ended July 31. Same-store sales growth, meanwhile, is expected to fall below 4% for the first time since early 2024, according to LSEG data.
"The sky's the limit" for how lucrative Walmart Connect can become, said Sarah Henry, managing partner at Walmart shareholder Logan Capital Management.
Morningstar analyst Brett Husslein, who raised his fair value estimate for Walmart to $70 per share from $62 in May on the back of strong advertising growth, said a slowdown in the advertising business could hurt Walmart's stock.
A business with high margins
Walmart Connect accounts for only a small portion of Walmart's $713 billion in annual sales, but its high margins make it an important contributor to profits. Analysts estimate the business has gross margins of around 70% and contributes about a third of Walmart's operating income.
Launched in 2019 and rebranded as Walmart Connect in 2021, the retail media business uses shopper data to help brands target consumers across Walmart's website, app and stores. It also provides advertisers with data on whether their ads lead to purchases.
Walmart's membership programme, launched in 2020, has strengthened customer loyalty while expanding the data available to its advertising business, Husslein said.
"They're building it up to the point where it starts to look a bit more akin to Amazon," he said.
Walmart Connect remains much smaller than Amazon's advertising business but is gaining ground. Walmart Connect impressions increased 17% in the second quarter, compared with 9% growth for Amazon, according to market intelligence firm Sensor Tower.
Walmart declined to comment during its quiet period ahead of Thursday's earnings.
AI could open another growth avenue
Walmart sees artificial intelligence as the next potential growth driver for Walmart Connect as consumers increasingly turn to AI chatbots to search for products and deals.
The retailer has started testing advertisements in its AI shopping assistant Sparky and is rolling out AI tools that allow advertisers to create, manage and measure campaigns. Walmart said Sparky's active users more than doubled in the quarter ended April 30.
Nearly a third of consumer searches now originate on AI models, according to digital commerce consultancy Flywheel.
Ads are a "natural evolution" for chatbot apps, said Amie Owen, chief client officer at Flywheel.
Amazon is further ahead in turning its proprietary chatbot, now called Alexa for Shopping, into an advertising channel. Walmart, however, has another avenue to expand its advertising reach after acquiring smart-TV maker Vizio in 2024, allowing Walmart Connect to move beyond its website and stores into streaming television.
"The idea of data as currency is proliferating throughout this whole sector," Henry said. "Walmart is setting the tone."
(With inputs from Reuters)
