Walmart investors are increasingly focusing on the retailer’s advertising business as growth in same-store sales levels off. The company is scheduled to report its latest quarterly earnings on Thursday, with analysts expecting same-store sales growth to slip below 4% for the first time since early 2024. In contrast, the advertising unit, known as Walmart Connect, grew by 44% in the quarter that ended April 30.
Walmart Connect was launched in 2019 and rebranded in 2021 as a retail media business. It utilizes shopper data from its website, app, and physical stores to help brands target consumers. The business has expanded alongside Walmart’s membership program, which launched in 2020 and provides the underlying data for the advertising platform.
Recent financial data shows that same-store growth in the U.S. slowed to 4.1% in the quarter ending April 30, down from approximately 4.5% in previous periods. While Walmart Connect represents a small portion of the company’s $713 billion in annual sales, analysts estimate it carries gross margins of approximately 70% and contributes one-third of the company's operating income. To further growth, Walmart has begun testing ads in its artificial intelligence shopping assistant, Sparky, and is utilizing its 2024 acquisition of smart-TV maker Vizio to expand ads into streaming television.
The scale of this business is significant relative to Walmart's profit structure. Although it is a fraction of the $713 billion total annual revenue, it now accounts for one-third of the company's operating income. For investors, the performance of Walmart Connect has a direct impact on stock valuation; for example, Morningstar analyst Brett Husslein raised his fair value estimate for Walmart stock from $62 to $70 per share specifically due to strong advertising growth. Walmart shares have risen 2.6% this year to $114.33, though they trail the S&P 500's 13% gain.
The expansion of Walmart Connect into streaming via Vizio and AI chatbots like Sparky indicates a change in how consumers interact with advertisements during their daily shopping routines. Sparky's active users more than doubled in the quarter ending April 30, meaning more customers are encountering AI-driven ads. This strategy moves Walmart closer to the business model of Amazon, its primary competitor. What happens next depends on the Thursday earnings report for the quarter ended July 31, which will reveal if the advertising unit maintained its 40%-plus growth rate as retail sales growth slowed.