Walmart’s Quiet Margin Revolution: How Ads, AI and Automation Are Rewiring the Retail Giant

A business model bending in Walmart’s favour

Walmart ended its year not with a bang but with a set of numbers that quietly reframe what the company has become. The Bentonville retailer is edging further away from the image of a low‑margin, high‑volume grocer and closer to a hybrid platform business, where software, data and digital services do much of the heavy financial lifting.

For the full year, revenue in constant currency rose about 5%, tipping above the $700bn mark for the first time and adding $35bn of sales. That would be notable in itself, but the more important story lies further down the income statement. Adjusted operating income grew 5.4%, and in the fourth quarter it advanced 10.5%, outstripping sales growth in every segment. This was the third consecutive year in which profits rose faster than sales – even as Walmart digested higher claims expenses and a choppy tariff environment.

CFO John David Rainey’s central message was starkly simple: the business model is now designed to deliver incremental profits even in “highly dynamic” conditions. Around a high‑velocity core of bricks‑and‑mortar retail, the company has layered three reinforcing engines: eCommerce, high‑margin “alternative” profit pools such as advertising and membership, and a sprawling programme of automation and AI‑enabled productivity.

In Q4, consolidated revenue grew nearly 5% in constant currency, with Walmart U.S. comps up 4.6%. eCommerce, however, was the real accelerant: online sales climbed 24% globally and 27% in the U.S., as the group exploited its lattice of stores, clubs, distribution centres and fulfilment centres as a single, increasingly automated network.

Digital channels, physical assets

The long‑promised omnichannel model is now visible in the numbers. eCommerce sales exceeded $150bn for the year, up nearly 25%, and accounted for 23% of Q4 sales – 550 basis points higher than two years ago. The digital business, Rainey said, has been profitable in all four quarters in the U.S., with double‑digit incremental margins, and Walmart is “far past” breakeven internally.

What underpins that profitability is density. In the U.S., roughly 60% of stores receive at least some freight from automated distribution centres, and about half of eCommerce fulfilment volume is now automated. Stores are increasingly treated as digital fulfilment nodes: 35% of store‑fulfilled U.S. orders in the quarter were delivered in under three hours, and same‑day or faster fulfilment is spreading to international markets, from China’s Sam’s clubs to Flipkart’s 15‑minute deliveries across 30 Indian cities.

Inventory discipline is the crucial corollary. Group inventory rose 2.6% in constant currency – roughly half the rate of sales growth – as Walmart leaned more heavily on its third‑party marketplace to balance owned and non‑owned assortment, trim markdowns and free working capital. CEO John Furner noted that in some seasonal categories the company might, in retrospect, have bought too cautiously, a luxury problem in a sector accustomed to clearing excess stock at painful discounts.

The automation story is not just about conveyor belts being ripped out of old distribution centres. On the shop floor, more than 1m U.S. associates carry handheld devices, and computer vision is being used to map stock location and availability with far more granularity. The aim is a single end‑to‑end system where AI pinpoints inventory, associates execute quickly, and the physical network responds with ever lower marginal costs.

The rise of “agentic” commerce

If the supply chain is being rewired with automation, the front‑end is being reshaped by AI. Walmart devoted unusual emphasis in the initial presentation to “agentic commerce” – shopping mediated not by static search boxes but by AI agents that infer intent and assemble baskets.

Sparky, Walmart’s own AI shopping assistant, is the test case. Launched in the U.S. and now embedded widely in the app, it pushes the group decisively from traditional search to intent‑driven discovery. Roughly half of app users have interacted with Sparky, and those who do place orders with an average value about 35% higher than non‑Sparky users.

The logic is straightforward. Customers no longer ask for a list of items; they describe an occasion or a need – a child’s birthday party, a camping trip, a week’s worth of meals – and Sparky curates a basket, drawing on Walmart’s forward‑deployed inventory and 1.5m U.S. associates to translate digital intent into physical execution via pickup, delivery or in‑store fulfilment. As capabilities such as deeper contextual understanding, personalisation and voice expand, management expects adoption and monetisation to follow.

What makes this potentially transformative is the tight coupling between Sparky and Walmart’s emerging advertising infrastructure. In the quarter, global advertising revenue rose 37%, with Walmart Connect in the U.S. up 41%. For the year, advertising climbed 46% to $6.4bn, and membership fees exceeded $4.3bn. Together, advertising and membership contributed nearly one‑third of Q4 operating income – a structurally different profit profile from a pure retail spread business.

As AI agents like Sparky become the interface, Walmart will have far richer real‑time data on intent and conversion. The company has pulled marketplace, advertising, VIZIO’s media business, data services and Walmart+ under a new enterprise‑level leader, Seth Dallaire, to pursue what Furner calls a “build one, scale globally” approach. In effect, the company is trying to turn its retail footprint and data exhaust into a vertically integrated media and membership ecosystem.

Consumers stretched and stratified

Behind the technology narrative sits a familiar, if uncomfortable, macro reality. Across Walmart’s U.S. customer base, spending is “resilient” but stratified. The strongest share gains once again came from households earning over $100,000, a cohort that continues to trade into Walmart on value and convenience. At the lower end, households below $50,000 are still managing “paycheck to paycheck,” with clear signs of stress.

Even this more pressured group, Furner noted, is now placing almost as much emphasis on convenience as on price. That dynamic plays to Walmart’s omni proposition: a customer can roll back their grocery basket in‑store but pay up for fast delivery when weather or work demands, without leaving the ecosystem. During recent U.S. ice storms, demand for delivery services spiked well above prior‑year levels.

Inflation, meanwhile, is easing but not absent. In the latest quarter, like‑for‑like inflation was a little over 1%, with food running slightly below that and general merchandise somewhat above. For the coming year, Walmart is planning around similar price dynamics but expects a specific drag from U.S. drug pricing reforms. Maximum fair pricing legislation for branded pharmaceuticals is forecast to be roughly a 100‑basis‑point headwind to FY27 sales, with 30 basis points already felt in Q4.

Walmart is responding by leaning harder into its traditional weapon: price. In Walmart U.S. there were 6,200 “rollbacks” in the quarter – about 23% more than a year ago – as the company attempted to mitigate food inflation and, crucially, free up customers’ wallets for general merchandise. The strategy appears to be gaining traction: general merchandise grew globally and rose low single digits in Walmart U.S., with fashion delivering several quarters of mid‑single‑digit growth.

Fashion is an instructive case. It is less about urgent convenience, more about breadth and curation – the sort of category historically dominated by pure‑play online players. For Walmart to be gaining share and sustaining growth here suggests the combination of value pricing, improved assortment and a slicker digital experience is beginning to resonate with higher‑income shoppers.

Balance sheet firepower and capital discipline

Beneath the operational changes, Walmart’s balance sheet is doing its own quiet work. Operating cash flow reached $42bn in the year, and free cash flow rose 18%, giving the company ample room to fund heavy investment while returning capital. The board has authorised a new $30bn share repurchase programme, the largest in the company’s history.

Capital expenditure is expected to run at about 3.5% of sales in FY27, a level Rainey described as the “peak” of annual spending on supply chain automation and store remodels. Walmart opened 12 new U.S. stores and remodelled 674 in the past 12 months, and early returns are running ahead of plan. Investments in AI are embedded in that capex envelope, and the company emphasised its partnership‑driven approach: let tech companies innovate on algorithms, while Walmart focuses on translating those tools into retail experiences and productivity gains.

Crucially, the company insists that every dollar of capital must compete on return. The tilt towards platform businesses – advertising, marketplace, fulfilment services, membership – lowers the marginal cost of growth once the infrastructure is in place. That is why Rainey argues that growth is now coming at “a much lower marginal cost than historically”, and why he expects continued gross margin expansion, SG&A leverage and improved eCommerce economics in the year ahead.

For FY27, Walmart is guiding to constant‑currency sales growth of 3.5–4.5% and operating income growth of 6–8%, with EPS of $2.75–2.85. Management characterises the outlook as deliberately cautious, given a still “somewhat unstable” backdrop, but points to a pattern: over the past three years, initial guidance has been raised and ultimately exceeded, often by several hundred basis points on operating income.

Sector context: from store chain to platform

In one sense, Walmart’s quarter reads like a mirror image of broader retail trends. Where many peers have struggled to extract profit from online operations, Walmart’s digital business is now structurally profitable and scaling. Where others face rising labour and logistics costs, Walmart is beginning to harvest tangible productivity gains from years of capex. And where many retailers still rely on product margin alone, Walmart is methodically building a set of auxiliary profit pools that already account for a third of operating income.

Yet the company remains tied, more than most, to the health of the consumer and the state of the economy. Rainey pointed to signs of a “hiring recession”, subdued sentiment and rising student loan delinquencies as reasons for caution. Lower‑income customers, in particular, remain fragile. Legislative moves, such as drug pricing caps, can punch meaningful holes in top‑line growth.

The question for investors is whether Walmart’s new economics – a mix of thickening margins, capital‑light digital businesses, and a deepening moat around convenience and price – are sufficient to offset those macro swings. The company plainly believes they are. Furner described a future that is “fast, convenient and personalised”, and challenged teams to move “even faster” as AI opportunities broaden.

For now, the numbers back him up. Walmart is still the archetypal mass retailer, but under the surface, its balance sheet and profit engine are mutating towards something more akin to a diversified platform. For a company of its size, that is a remarkable pivot – and one that could make its earnings profile less cyclical and more resilient than many investors have grown used to.