AI-Driven Retail Transformation: Uncovering Undervalued Opportunities in General Merchandise Retail

The retail sector is undergoing a seismic shift, driven by artificial intelligence (AI) technologies that are redefining operational efficiency, margin expansion, and customer engagement. For investors, this transformation presents a unique opportunity to identify undervalued stocks in general merchandise retail—companies that are leveraging AI to scale operations, reduce waste, and unlock profitability. Walmart, Target, Zara, and Alibaba stand out as exemplars of this trend, each demonstrating distinct yet impactful AI strategies that align with long-term value creation.

The AI Imperative in Retail

AI is no longer a speculative overlay but a foundational pillar of modern retail. From predictive analytics to autonomous decision-making, AI is enabling retailers to optimize supply chains, personalize customer experiences, and reduce costs. The global AI retail market is projected to reach $13.07 billion in 2025, with agentic AI systems—capable of autonomous task execution—expected to grow at a 41.71% CAGR through 2034. These technologies are not merely incremental improvements; they are structural shifts that redefine competitive advantage.

Walmart: Operational Rigor and AI-Driven Dominance

Walmart's AI initiatives exemplify operational rigor. The company's agentic AI agents, such as Marty and Sparky, have boosted contract success rates by 68%, directly contributing to a 26.18% year-over-year increase in earnings per share (EPS) in 2025. Autonomous inventory robots have reduced inaccuracies by 10%, while generative AI-powered search engines have driven a 22% e-commerce growth in Q1 2025. Walmart's Route Optimization SaaS system, which autonomously reroutes overstocked goods, has saved $55 million annually in Mexico City and cut CO₂ emissions by 94 million pounds.

Walmart's $500 million investment in AI and robotics in 2025 underscores its commitment to scalable margin expansion. With a forward P/E ratio of 13.7X and a robust balance sheet, the stock appears undervalued relative to its AI-driven growth trajectory.

Target: Strategic Adaptability in a Shifting Landscape

Target's AI-driven personalization engine, which analyzes over 100 data points per customer, has increased customer lifetime value by 18% and reduced clearance sales by 12%. Despite a 0.9% year-over-year sales decline in 2024, the company's decade-long cloud migration and AI experimentation position it for long-term efficiency gains. Target's inventory turnover ratio improved by 15% since 2023, reflecting tighter demand forecasting and inventory optimization.

While its stock price has dropped 22% year-to-date, Target's forward P/E of 13.7X suggests undervaluation. The company's focus on omnichannel integration and cloud-based AI tools could drive margin expansion as consumer trends evolve.

Zara: Speed, Sustainability, and AI-Enabled Agility

Zara's “Just-Intelligent” supply chain has slashed product turnaround times to one week, reducing overstock by 20% and fabric waste by 15% in pilot categories. Dynamic pricing algorithms and predictive discounting have expanded operating margins by 400 basis points in key categories. AI-powered virtual try-ons and fit prediction engines have cut size-related returns by double digits, saving millions in logistics costs.

As part of Inditex, Zara benefits from a scalable AI-optimized supply chain. Its alignment with sustainability trends—such as a 21% reduction in food waste intensity—positions it to capitalize on growing consumer demand for ethical fashion.

Alibaba: Undervalued Potential in AI-Driven E-Commerce

Alibaba, the world's largest e-commerce platform, is another compelling case. Its AI integration in content recommendations, advertising efficiency, and cloud services has driven growth in its International Digital Commerce Group. Despite a 22% undervaluation relative to Morningstar's fair value estimate of $156 per share, Alibaba's $35.3 billion share-repurchase program and strong cash reserves (CNY 829 billion) signal management confidence.

AliCloud's investment mode and international expansion present long-term growth opportunities. While short-term challenges persist—such as competition from Pinduoduo and Douyin—Alibaba's AI-driven cloud and enterprise solutions could unlock profitability as adoption accelerates.

Investment Thesis: AI as a Structural Catalyst

The key takeaway for investors is that AI is a scalable, transformative force in retail. Walmart, Target, and Zara demonstrate how AI can directly enhance margins through cost reduction and operational efficiency. Alibaba, despite its undervaluation, offers exposure to AI-driven e-commerce and cloud computing. These companies are not merely adapting to change; they are redefining it.

For investors seeking undervalued opportunities, the focus should be on companies with:
1. Proven AI ROI: Tangible metrics like margin expansion, cost savings, and revenue growth.
2. Scalable Infrastructure: Robust balance sheets and strategic AI investments.
3. Sustainability Alignment: ESG-driven initiatives that enhance long-term resilience.

As AI adoption accelerates, the next wave of retail innovation will likely be led by those who integrate it into their core operations. The time to act is now—before the market fully recognizes the value of AI-driven retail.