Yahoo Finance Walmart is winning over investors, but its growth story relies on three key e-commerce initiatives
Walmart (WMT) is winning over Wall Street, but the shopping giant will need results from its e-commerce business to maintain its position as a retail darling.
"E-commerce sales surpassed $100 billion dollars globally" last year, CEO Doug McMillon said at the company's annual associates meeting last week.
"We're now in a position to grow sales because we can serve customers and members how they want to be served, to grow profit faster than sales, while delivering low prices and investing in you at the same time," he added.
The company plans to use artificial intelligence, advertising, and its giant collection of stores to turn its long-running e-commerce business profitable in the next year or two, its executives told Yahoo Finance.
Walmart shares are up 26% this year, roughly double that of the S&P 500's (^GSPC) gain. The stock, trading near record highs, strikes "a strong balance of defense and offense on both the top and bottom lines" in a softening consumer backdrop, JPMorgan analyst Christopher Horvers said in a client note.
With a looming election and reduced expectations of Fed rate cuts, Walmart's consistent performance may become increasingly appealing amid the volatility. In recent years, the retailer has benefitted from shoppers looking for cheaper groceries, which make up 60% of its US sales.
But the e-commerce landscape is not getting any easier, with Amazon (AMZN) still leading the race and rivals like Target (TGT) ramping up their efforts.
After explosive growth during pandemic shutdowns and a subsequent slowdown, Walmart is making gains again online. Last quarter, the company's US e-commerce sales jumped 22%, led by store-fulfilled pickup and delivery and its online marketplace.
Catching up on AI
Amazon's secret sauce has long been its extensive investments in AI and machine learning, allowing it to make accurate product recommendations and gain insights into shoppers' patterns.
Its ability to predict demand — say, Seattle customers like to buy umbrellas in March — allows it to dispatch inventory to the right warehouses, enabling its vaunted two-day delivery system.
Walmart CTO Suresh Kumar said the company is also investing in generative AI and machine learning. Earlier this year, it announced plans to use GenAI to add personalized search, a popular feature on Amazon.
For example, if you search for "birthday party," a slew of items like candles, decorations, and cards show up.
Joe Feldman of Telsey Advisory Group says Walmart has taken a leap forward in terms of applying data to its operations and harnessing valuable insights.
It's using data to optimize its supply chain operations, creating efficient routes for transportation and distribution and making sure it delivers the right products on time, per Feldman.
Kumar, a former Amazon executive, said "Walmart is in the best position" when it comes to training models due to the vast amount of data it collects online and in-store.
Leveraging its legacy business
"What we've learned in the US and in other markets that we operate in is that omni actually is the preferred offer for customers. They like being able to go to a physical [store] and interact with people, and they want the convenience of e-commerce," CEO McMillon told Yahoo Finance.
Around 90% of Americans live within 10 miles of one of Walmart's 4,700 stores, a leg up compared to Target (1,963 stores) and Costco (605). Its extensive footprint allows it to offer speedy delivery directly from the stores.
For items in stock, shoppers can get express one-hour delivery for $10, while three-hour delivery will cost $5.
Over the past year, Walmart delivered 4.4 billion items with same-day or next-day delivery, 20% of which were delivered in less than three hours, according to its US CEO John Furner.
Expanding its Walmart+ membership will be key to serving consumers' preference to shop both online and in-store, per Kumar.
The membership model, which launched in 2020, includes benefits like free same-day grocery delivery from store ($35 order minimum), free shipping on general merchandise from Walmart, and savings on fuel.
Having a physical network that enables fast delivery can be particularly advantageous for the online grocery business, Horvers pointed out.
Feldman said Walmart+ has "relatively low penetration" so far, but the adoption rate has "increased significantly in the past year."
While it remains to be seen how the members behave differently, paid members typically shop more, like at Costco and Walmart's Sam's Club (where the US e-commerce business is profitable).
But the company's biggest obstacle in e-commerce remains overall awareness. "It's getting people to not think of Amazon first. It's getting people to think Walmart first," said Feldman.
Expanding its fledgling advertising segment
Last quarter, sales from its US retail media business, Walmart Connect, jumped 26%.
Its biggest product is paid search, which allows companies to pay for sponsored ads placed above the search results, according to Walmart Connect's SVP of sales Ryan Mayward.
The platform also offers other ads (think banners in product pages), offsite ads (like on TikTok and Disney+), and in-store ads, which got a boost as part of the company's $9 billion store makeovers.
It has improved client access, building a self-service model that allows advertisers to check the marketing performance themselves instead of relying on reports from Walmart.
Mayward touted Walmart's scale as an edge for attracting third-party sellers to its online marketplace. Then, as more customers shop on its marketplace, it becomes more important for sellers to use advertising to stand out from the competition.
In February, Walmart announced plans to acquire connected TV maker Vizio for $2.3 billion, or $11.50 per share. The move is expected to accelerate growth for its ad business.
"[Advertising] is a fast-growing high-margin part of our business," Walmart CFO John David Rainey told Yahoo Finance following the announcement. "And what this deal with Vizio does — it’s very complementary to what we’re doing organically."
But the company has a long way to go to compete with Amazon, which brought in $47 billion in advertising revenue in 2023, compared to Walmart's $3.4 billion.
"I expect Walmart’s ad business to continue growing from here, but I don’t expect it to rival the size of Amazon’s ad business anytime soon," Morningstar analyst Noah Rohr told Yahoo Finance.
He added that while Walmart's e-commerce business still lags far behind Amazon's, "Walmart is better positioned here than most competing brick-and-mortar retailers."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
