Walmart ad business supports margins as retail sales growth slows

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Walmart ad business supports margins

Highlights

Walmart's U.S. same-store sales growth slowed to 4.1% for the April quarter, with analysts forecasting below 4% for July, while Walmart Connect advertising revenue surged 44%.
Walmart Connect, representing about a third of operating income with estimated 70% gross margins, becomes critical for profitability as retail sales momentum wanes.
Walmart's membership data and AI-powered tools drove a 17% rise in Q2 ad impressions and, along with the Vizio acquisition, expand Walmart Connect's reach into streaming TV and new media channels.

Advertising growth offsets softer retail momentum

As reported by Reuters, Walmart's U.S. same-store sales growth slows to 4.1% in the quarter ended April 30, from about 4.5% in each of the previous five quarters, while analysts expect growth to slip below 4% in the quarter ended July 31, according to LSEG data. Even so, Walmart Connect surges 44% in the April quarter, its fastest growth since the company began disclosing the metric in the first quarter of 2023.

Launched in 2019 and rebranded in 2021, Walmart Connect uses shopper data from the retailer's website, app and stores to help brands target consumers and measure whether ads lead to purchases. While the unit represents only a small share of Walmart's $713 billion in annual sales, analysts estimate gross margins of around 70%, and the business contributes about a third of operating income.

Analysts and investors say that profitability is becoming increasingly important for the stock as broader retail momentum moderates. Logan Capital Management managing partner Sarah Henry says Walmart Connect's earnings potential remains substantial, while Morningstar analyst Brett Husslein says a slowdown in the unit would weigh on Walmart shares.

Membership data and AI expand Walmart's media reach

Walmart's membership program, launched in 2020, is strengthening the data advantage that underpins its advertising platform and deepening customer loyalty, Husslein says. That has helped Walmart Connect gain ground against larger rivals, with Sensor Tower data showing ad impressions rising 17% in the second quarter, compared with 9% for Amazon.

Walmart is also positioning artificial intelligence as the next phase of growth for the business. The retailer is testing ads inside its AI shopping assistant Sparky and rolling out AI tools that help advertisers create, manage and measure campaigns, while active users of Sparky more than double in the quarter ended April 30, Walmart says in May.

The company is still smaller than Amazon in advertising, but its 2024 acquisition of smart-TV maker Vizio expands Walmart Connect beyond e-commerce and physical stores into streaming television. Flywheel says nearly a third of consumer searches now originate on AI models, suggesting new scope for ad spending as retailers turn customer data into a broader media asset.

Our earlier article on the AI-led moves in U.S. stock index futures highlighted how strong expectations around Anthropic, alongside momentum in chipmakers and other AI infrastructure plays, helped set a constructive tone for tech. We also noted that the macro backdrop was complicated by weaker U.S. retail sales and a changing rate outlook, keeping investors focused on how consumer demand and earnings updates could shift sentiment.

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