By Nicholas P. Brown and Juveria Tabassum
Aug 18 (Reuters) - As Walmart's same-store sales growth has leveled off and a cautious annual outlook dented its stock, investors are increasingly looking to the retailer's advertising business to support profits.
Walmart Connect has helped the company maintain margins, helping offset the cost of keeping prices low and delivery speeds high as shoppers strained by bigger gasoline bills seek cheaper groceries and essentials, prompting Walmart to lower prices on some
7,000 items.
Same-store growth in the U.S. slowed to 4.1% in the quarter ended April 30, from roughly 4.5% in each of the previous five quarters. Walmart shares are up 2.6% this year at $114.33, lagging the S&P 500's 13% gain.
Walmart Connect, though, surged 44% in the quarter, its quickest pace since the company started reporting the figure in the first quarter of 2023. The business has benefited from growth in Walmart's membership program, which provides the customer data that powers its advertising platform.
Launched in 2019 and rebranded as Walmart Connect in 2021, Walmart's retail media business uses its shopper data to help brands target consumers across the company's website, app and stores, while showing whether ads translate into purchases.
Analysts expect Walmart to post a similar rate of growth for Connect when it reports earnings on Thursday for the quarter ended July 31, even as same-store sales growth is projected to slip 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.
In fact, a pullback in the business would be a problem for Walmart's stock price, said Morningstar analyst Brett Husslein, who in May raised his fair value estimate for Walmart to $70 per share from $62 on the back of strong advertising growth.
'AKIN TO AMAZON'
While Walmart Connect accounts for just a fraction of Walmart's $713 billion in annual sales, its ample margins contribute a third of operating income. Analysts estimate around 70% gross margins for Walmart Connect.
Walmart's membership program, launched in 2020, has expanded that data advantage and strengthened customer loyalty, Husslein said. "They're building it up to the point where it starts to look a bit more akin to Amazon," he said.
Connect remains much smaller than Amazon's advertising business, but it is gaining share. Walmart Connect impressions rose 17% in the second quarter, compared with 9% for Amazon, according to market intelligence firm Sensor Tower.
Walmart declined to comment in the midst of its quiet period before quarterly results on Thursday.
GROWTH TO UNLOCK
Walmart has framed AI as the next growth phase for Walmart Connect, as more and more consumers use AI chatbots to search for deals. The retailer has begun testing ads in its AI shopping assistant Sparky and is rolling out AI tools to help advertisers create, manage and measure campaigns. Sparky's active users more than doubled in the quarter ending April 30, Walmart said in May.
Nearly a third of consumer searches now originate 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 along in turning its proprietary chatbot, now called Alexa for Shopping, into a new advertising channel, but Walmart's 2024 acquisition of smart-TV maker Vizio has allowed it to expand Connect beyond its website and stores into streaming television.
"The idea of [consumer] data as currency is proliferating throughout this whole sector," Logan Capital's Henry said. "Walmart is setting the tone."
(Reporting by Juveria Tabassum in Bengaluru and Nick Brown in New York; Editing by Sayantani Ghosh and Devika Syamnath)
