As Walmart’s same-store sales growth stabilizes and cautious annual outlook impacts its stock price, investors are increasingly looking to the retail giant’s advertising business to support its profits.
In the quarter ending on April 30, Walmart’s same-store sales growth in the United States slowed to 4.1%, down from the previous five quarters’ growth rate of about 4.5%. Walmart’s stock price has risen 2.6% this year to $114.33, lagging behind the S&P 500 index’s 13% increase.
With rising gasoline costs, shoppers are seeking more affordable groceries and essentials, prompting Walmart to lower prices on around 7,000 items.
However, Walmart Connect has helped the company maintain its profit margins, offsetting costs associated with maintaining low prices and fast delivery.
Walmart Connect surged 44% in the current quarter, marking the fastest growth since the company began reporting the data in the first quarter of 2023. The business benefits from the growth of Walmart’s membership program, which provides customer data to support its advertising platform.
Walmart’s retail media business was launched in 2019 and rebranded as Walmart Connect in 2021. It leverages shopper data to help brands target consumers with precision on Walmart’s website, apps, and stores, while determining if advertisements lead to actual purchases.
Analysts expect Walmart’s Connect business growth rate to remain steady in the quarter ending on July 31 when the company announces its earnings on Thursday, August 20. However, according to data from the London Stock Exchange Group (LSEG), Walmart’s same-store sales growth rate is expected to fall below 4% for the first time since early 2024.
Sarah Henry, a partner at Walmart shareholder Logan Capital Management, stated that the profit potential of Walmart Connect is “limitless.”
Morningstar analyst Brett Husslein previously noted that the decline in business could impact Walmart’s stock price. However, based on Walmart’s strong advertising growth, he raised Walmart’s fair value from $62 per share to $70 in May.
While Walmart Connect’s sales represent only a small portion of Walmart’s $713 billion in annual revenue, it contributes a third of the operating income due to its substantial profit margins, estimated at around 70% by analysts.
Husslein noted that Walmart’s membership program launched in 2020 not only expanded its data advantage but also enhanced customer loyalty, “bringing it closer to Amazon.”
Although Walmart Connect’s scale still lags behind Amazon’s advertising business, its market share continues to grow. Data from market research firm Sensor Tower shows that Walmart Connect’s second-quarter ad exposure increased by 17%, while Amazon’s grew by only 9% during the same period.
As more consumers use AI chatbots to search for deals, Walmart sees artificial intelligence as the next growth stage for Walmart Connect. The retail giant has already begun testing ads on its AI shopping assistant Sparky and is rolling out AI tools to help advertisers create, manage, and measure ad campaigns. Walmart reported that active users of Sparky more than doubled in the quarter ending on April 30.
According to data from digital commerce consulting firm Flywheel, nearly one-third of consumers currently search from AI models. Flywheel’s Chief Client Officer Amie Owen stated that advertising is the “natural evolution” of chatbot applications.
While Amazon has been expanding its proprietary chatbot Alexa for Shopping into a new advertising channel, Walmart’s acquisition of smart TV maker Vizio in 2024 expanded its Connect services from websites and stores to the streaming TV sector.
Henry of Logan Capital commented, “The concept of viewing (consumer) data as currency is rapidly spreading throughout the industry, and Walmart is leading the charge.”
(Reference: Report by Reuters)