Walmart (NYSE:WMT) is increasingly relying on its fast-growing advertising operation to support profitability as same-store sales growth moderates and its cautious annual outlook weighs on investor sentiment.
Walmart Connect has become an important source of higher-margin revenue for the retailer, helping offset the costs associated with keeping prices competitive and maintaining rapid delivery services. Consumers facing higher gasoline bills have become increasingly focused on cheaper groceries and everyday essentials, prompting Walmart to reduce prices across roughly 7,000 products.
U.S. same-store sales growth slowed to 4.1% in the quarter ended April 30, compared with approximately 4.5% in each of the preceding five quarters. Walmart shares have gained 2.6% this year to $114.33, significantly trailing the S&P 500’s 13% advance.
Walmart Connect Growth Accelerates
While the core retail business has lost some momentum, Walmart Connect recorded a 44% increase during the quarter, its fastest growth rate since Walmart began separately reporting the figure in the first quarter of 2023.
The advertising platform has benefited from expansion of Walmart’s membership programme, which provides valuable customer information that can be used to improve advertising targeting.
Originally launched in 2019 and renamed Walmart Connect in 2021, the retail media operation allows brands to reach shoppers across Walmart’s website, mobile app and physical stores. Its access to transaction data also enables advertisers to measure whether campaigns ultimately generate purchases.
Analysts expect Walmart Connect to report a similarly strong growth rate when Walmart publishes results on Thursday for the quarter ended July 31. By contrast, U.S. same-store sales growth 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 said a slowdown in the advertising business could consequently become a concern for Walmart’s share price. In May, Husslein increased his fair value estimate for Walmart to $70 per share from $62, citing strong advertising growth.
Advertising Delivers Outsized Contribution to Profit
Walmart Connect remains small relative to Walmart’s approximately $713 billion in annual sales, but its high margins mean the business makes a disproportionately large contribution to profitability.
The advertising operation contributes around one-third of Walmart’s operating income, while analysts estimate Walmart Connect generates gross margins of approximately 70%.
Walmart’s membership programme, introduced in 2020, has strengthened the retailer’s data advantage while also helping build greater customer loyalty, according to Husslein.
“They’re building it up to the point where it starts to look a bit more akin to Amazon,” he said.
Although Walmart Connect remains considerably smaller than Amazon’s advertising operation, it has been gaining ground. Walmart Connect impressions increased 17% during the second quarter, compared with growth of 9% at Amazon, according to market intelligence company Sensor Tower.
Walmart declined to comment while observing its quiet period ahead of Thursday’s quarterly earnings announcement.
AI Opens Another Growth Opportunity for Walmart Connect
Walmart sees artificial intelligence as a potential next stage of expansion for its advertising business as consumers increasingly use AI-powered tools and chatbots to search for products and deals.
The retailer has started testing advertisements within Sparky, its AI shopping assistant, while introducing additional AI tools designed to help advertisers create, manage and measure campaigns.
Walmart said in May that the number of active Sparky users more than doubled during the quarter ended April 30.
Almost one-third of consumer searches now begin on AI models, according to data from digital commerce consultancy Flywheel.
Ads are a “natural evolution” for chatbot apps, said Flywheel Chief Client Officer Amie Owen.
Amazon is further ahead in developing its proprietary chatbot, now known as Alexa for Shopping, into an advertising channel. However, Walmart’s acquisition of smart-TV manufacturer Vizio in 2024 has given the retailer another avenue for expanding Connect beyond its website, app and physical stores into streaming television.
Customer Data Becomes Increasingly Valuable to Walmart
The combination of Walmart’s enormous retail footprint, membership programme, digital platforms and connected television presence is giving the company access to an increasingly broad pool of consumer information.
That data can strengthen advertising targeting and measurement while allowing Walmart to generate additional revenue from customer relationships already established through its retail operations.
“The idea of [consumer] data as currency is proliferating throughout this whole sector,” Logan Capital’s Henry said. “Walmart is setting the tone.”
As growth in Walmart’s traditional retail operations moderates, investors are therefore paying closer attention to whether Walmart Connect can sustain its rapid expansion and continue providing a high-margin earnings stream capable of supporting the broader business.
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