Walmart Inc. said Thursday that its advertising business, Walmart Connect, has soared 130% over the past year, reaching $2.1 billion.
Chief Executive Doug McMillon noted that advertising is a “high margin” business that will continue to grow alongside the retail giant’s Marketplace arm to eventually “become a top 10 ad business in the mid-term.”
“Connecting B2B opportunities, like advertising, enables us to grow earnings and make key investments at the same time,” he said on the earnings call, according to a FactSet transcript.
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The ad business is already making a positive mark on results.
“Consolidated gross margin rate increased five basis points, with Walmart U.S. gross margin rate increasing by a healthy 54 basis points, reflecting primarily price management resulting from cost increases in mix, along with benefits from a growing advertising business, partially offset by higher supply chain costs,” said Chief Financial Officer Brett Biggs on the call.
Supply chain costs were over $400 million more than the company expected.
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CFRA’s Arun Sundaram says investors are “underappreciating Walmart’s evolving business model,” which includes advertising.
“We’ve got a business that’s becoming increasingly digital,” said McMillon.
“The e-commerce business, first-party, third-party is growing. It gives us opportunity to grow advertising income. It’s grown at a fast rate, and it’s growing across markets.”
CFRA rates Walmart stock buy with a 12-month target of $165, down from $169.
Prior to the earnings announcement, KeyBanc Capital Markets noted a high number of job posting and promotions in the Walmart advertising business.
Walmart joins a growing list of retailers that have jumped into the ad business, including Best Buy Co Inc.
and Amazon.com Inc.
which has seen its ad business grow to $31 billion.
Cowen thinks there’s even more advancement ahead as the business continues to evolve.
“We are encouraged by Walmart filing trademark applications for digital currencies, virtual merchandise, [and] e-wallets as Cowen believes that augmented reality NFTs, [and] the gamification of retail will be important phases of next-generation retail,” analysts led by Oliver Chen wrote.
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“Over time, Walmart should have the foresight and tech talent to drive new immersive experiences, which can simplify shopping and play a role in the hybrid consumer journey.”
Walmart is introducing technology as shoppers become more hi-tech.
“We do think that social commerce around the world and what happens with wearables and AR and mixed reality will be part of our future,” said McMillon.
Walmart reported fourth-quarter earnings that beat expectations and raised its dividend.
Walmart stock was up 3.5% on Thursday, and has fallen 6% over the past year. The Dow Jones Industrial Average
has gained 8.5% over the past 12 months.