Walmart heads into its latest earnings report on Thursday with a familiar story: retail sales growth is slowing, but the company's advertising business is picking up the slack. Analysts expect same-store sales growth to dip below 4%, a step down from the pandemic-era surges and even the recent quarters where shoppers stocked up on groceries and essentials. The spotlight, however, is shifting to Walmart Connect, the retailer's advertising unit, which is emerging as a higher-margin profit engine.
What is Walmart Connect?
Walmart Connect is Walmart's advertising platform, where brands pay to promote their products on Walmart's website, app, and in-store digital screens. Think of it as Walmart's answer to Amazon's advertising business. It allows suppliers to bid for placement in search results, sponsored product slots, and other digital real estate within Walmart's ecosystem.
For years, Walmart's core retail business has operated on razor-thin margins. Selling groceries and general merchandise is a volume game, and the company has invested heavily in e-commerce, supply chain, and store upgrades. Advertising, by contrast, is a high-margin business. Once the platform is built, the cost of showing an ad is minimal, and the revenue flows almost directly to the bottom line. That's why investors are paying close attention to Walmart Connect's growth.
Why the ad business matters now
With same-store sales growth expected to cool, Walmart needs other levers to keep profits moving. Advertising is one of the most attractive levers because it doesn't require building new stores or hiring thousands of workers. It also benefits from the massive foot traffic and online traffic Walmart already generates. Every time a shopper searches for "coffee" or "laundry detergent," there's an opportunity for a brand to pay for visibility.
Walmart Connect has been growing at a double-digit clip in recent quarters, and the company has been expanding its advertising offerings, including more video ads and partnerships with streaming platforms. The unit is still small compared to Walmart's overall revenue, but its profit contribution is outsized. In retail, a 10% growth in advertising revenue can have a bigger impact on earnings than a 10% growth in store sales.
The broader retail environment has been mixed. Home Depot recently beat sales estimates as small repairs offset a housing slump, but other retailers have warned about cautious consumers. Soft retail sales data have also weighed on markets, and global growth concerns are adding to the uncertainty. In this environment, Walmart's ability to squeeze more profit from its existing customer base is a key story.
What to watch on Thursday
Investors will be looking for several things when Walmart reports. First, the exact same-store sales figure for the quarter. A dip below 4% would confirm the slowdown, but the market may shrug if the company beats on earnings per share. Second, guidance for the rest of the year. Walmart has been cautious about consumer spending, and any commentary on how shoppers are behaving will be closely parsed.
Third, and perhaps most importantly, the growth rate of Walmart Connect. If the ad business continues to grow at a strong pace, it could offset some of the margin pressure from retail. The company has been investing in its advertising technology and sales team, and the results so far have been encouraging.
Walmart is not alone in this strategy. Baidu's ad slump shows that even tech giants can struggle with advertising, but Walmart's advantage is its direct connection to shoppers and purchase data. Brands know that advertising on Walmart's platform can lead to actual sales, not just impressions.
What it means for investors
For everyday investors, the key takeaway is that Walmart is becoming more than just a retailer. The ad business is a higher-margin, faster-growing segment that can help the company maintain profitability even when retail sales growth slows. This is a common theme across retail: companies with large customer bases are trying to monetize their traffic through advertising and other services.
However, it's important to keep expectations in check. Walmart Connect is still a relatively small part of the overall business, and its growth, while strong, may not be enough to completely offset a significant slowdown in core retail. Investors should also consider the competitive landscape. Amazon remains the dominant player in retail media, and other retailers like Target and Kroger are also building their own ad platforms.
Thursday's earnings will give a clearer picture of how Walmart is balancing these dynamics. If the company can show that its ad business is growing while store sales cool, it could reassure investors that the profit engine is shifting. If not, the stock may face pressure.
As always, past performance is not a guarantee of future results, and investors should do their own research before making any decisions. But for those watching the retail sector, Walmart's earnings are a key event to understand the health of the consumer and the evolving business models of America's biggest retailers.
