Walmart is gaining investors, but its growth story rests on three key e-commerce initiatives

Walmart (WMT) is beating Wall Street, but the shopping giant will need the performance of its e-commerce business to maintain its position as a retail darling.

“Global e-commerce sales exceeded $100 billion last year,” CEO Doug McMillon said at the company’s annual associate meeting last week.

“We are now able to increase sales because we can serve customers and members the way they want to be served to increase profits faster than sales, while ensuring low prices and investing in you at the same time,” he added.

The company plans to use artificial intelligence, advertising and its vast collection of stores to boost its long-standing e-commerce business to profitability over the next one or two years, its executives told Yahoo Finance.

Walmart shares are up 26% this year, about double the gain of the S&P 500 Index (^GSPC). The stock, which is trading near record highs, offers a “strong balance of defense and offense on both the upside and downside” amid a weakening consumer environment, JPMorgan analyst Christopher Horvers said in a client note.

With the election approaching and reduced expectations for Fed rate cuts, Walmart’s consistent performance may become increasingly attractive in the face of volatility. In recent years, the retailer has benefited from shoppers looking for cheaper groceries, which accounts for 60% of its U.S. sales.

However, the e-commerce landscape isn’t getting any easier, with Amazon ( AMZN ) still leading the race and rivals like Target ( TGT ) increasing their efforts.

After surging during pandemic shutdowns and subsequent slowdown, Walmart is once again turning a profit online. Last quarter, the company’s U.S. e-commerce sales grew 22%, driven primarily by in-store pickup and delivery and its online marketplace.

Catching up on AI

Amazon’s secret has long been its extensive investment in artificial intelligence and machine learning, which allows it to make accurate product recommendations and gain insight into shopper behavior patterns.

Its ability to predict demand—say, Seattle customers like to buy umbrellas in March—allows it to ship inventory to the appropriate warehouses, enabling its famed two-day delivery system.

Walmart CTO Suresh Kumar said the company is also investing in generative artificial intelligence 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,” you’ll see tons of items like candles, decorations, and cards.

Joe Feldman of Telsey Advisory Group says Walmart has taken a step forward when it comes to leveraging data in its operations and tapping into valuable insights.

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It uses data to optimize supply chain operations, create efficient transportation and distribution routes, and make sure it delivers the right products on time, Feldman says.

Kumar, a former Amazon executive, said that “Walmart is in the best position” when it comes to training models because of the vast amount of data it collects online and in stores.

Leveraging existing activities

“We have learned in the United States and other markets where we operate that omni is actually the preferred offering for customers. They like the ability to go to a physical store (store) and interact with people, and they want the convenience of e-commerce,” CEO McMillon told Yahoo Finance.

About 90% of Americans live within 10 miles of one of Walmart’s 4,700 stores, an advantage compared to Target (1,963 stores) and Costco (605). Wide range allows us to offer fast delivery directly from stores.

For in-stock items, buyers can get express delivery within one hour for $10 and express delivery within three hours for $5.

According to its U.S. CEO, John Furner, Walmart delivered 4.4 billion items for same-day or next-day delivery over the past year, 20% of them in less than three hours.

According to Kumar, expanding Walmart+ membership will be key to meeting consumer shopping preferences both online and in-store.

The membership model, which launched in 2020, includes benefits such as free same-day grocery delivery from the store ($35 minimum order), free shipping on general merchandise from Walmart and fuel savings.

Horvers noted that having a physical network that allows for fast delivery can be especially beneficial for an online grocery business.

Feldman said Walmart+ has “relatively low penetration” so far, but its adoption rate has “increased significantly over the last year.”

Time will tell how members will behave differently, paid members tend to shop more like at Costco and Sam’s Club at Walmart (where the US e-commerce business is profitable).

However, the company’s biggest obstacle to e-commerce remains general awareness. “It keeps people from thinking about Amazon first. That’s what makes people think of Walmart first,” Feldman said.

Growing the fledgling advertising segment

Last quarter, sales of Walmart Connect, a US retail media company, increased by 26%.

According to Ryan Mayward, vice president of sales for Walmart Connect, the company’s biggest product is paid search, which allows companies to pay for sponsored ads placed above search results.

The platform also offers other advertising (e.g. banners on product pages), off-site advertising (e.g. on TikTok and Disney+) and in-store advertising, which has grown in popularity as part of the $9 billion store redesign.

It improved access to customers by building a self-service model that allows advertisers to check the effectiveness of their marketing activities themselves, instead of relying on reports from Walmart.

Mayward touted Walmart’s scale as an advantage in attracting third-party sellers to its online marketplace. Then, as more and more customers shop in this marketplace, it becomes increasingly 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. This move is expected to accelerate the growth of its advertising business.

“(Advertising) is a fast-growing, high-margin part of our business,” Walmart CFO John David Rainey told Yahoo Finance after the announcement. “And what this deal with Vizio does is very complementary to what we do organically.”

But the company has a long way to go to compete with Amazon, which brought in $47 billion in ad revenue in 2023 compared to Walmart’s $3.4 billion.

“I expect Walmart’s advertising business to continue to grow, but I don’t expect it to match the size of Amazon’s advertising business any time soon,” Morningstar analyst Noah Rohr told Yahoo Finance.

He added that while Walmart’s e-commerce business still lags far behind Amazon, “Walmart is better positioned here than most competing retailers.”

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @Brooke DiPalma or email her at [email protected].

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