By Nandan Mandayam and Siddharth Cavale

BENGALURU/NEW YORK (Reuters) - With 10 weeks to go before the kickoff of the critical holiday shopping season, retail executives are preoccupied with how much and what merchandise to stock to meet demand from choosy shoppers who may be financially strapped.

The merchandise mix Walmart will carry rests not purely on retail executives' judgment but rather on software it developed around 2019. Its machine-learning algorithm relies on weather patterns and each store's past sales data to predict inventory needs of its more than 4,700 U.S. locations, a Walmart tech executive told Reuters.

The software is just one example of the novel ways retailers are trying to keep their inventories under control. Excess stock dragged profits last year for Walmart, Target, Kohl's, Macy's and Gap.

Holiday sales in the United States are estimated to grow at their slowest pace in five years. Shoppers face higher interest rates and student loan payments restarting on Oct. 1, making retailers' bets on inventories "very important," D.A. Davidson analyst Michael Baker said.

Just one year ago, when inflation soared and supply chain clogs eased, Walmart had over $60 billion in inventory, far exceeding shopper demand. That led to a 25% drop in quarterly profits, after it sharply discounted clothing and general merchandise, eroding its profit margins.

The Bentonville, Arkansas-based retailer's use of algorithms to forecast demand and its use of robotics helped it make the "adjustments that we needed to make when things changed dramatically on us last year," Walmart CEO Doug McMillon said on Tuesday at an investor conference.

Inventories are now "in good shape" he said, and "I think (the) holiday (season) is going to be pretty good."

Overall Walmart's goal is to manage its stores so that its operating profits increase at a faster rate than its sales, its executives said.

To be sure, rival Amazon has long led the way in e-commerce technology, said Thomas Hayes, chairman at New York-based equity manager Great Hill Capital, which owns Amazon shares but not Walmart shares. For example, Amazon captured nearly a third of the $1.1 trillion in online purchases in 2022 compared to Walmart's 6%, according to data research firm Euromonitor.

Walmart executives say it is aided by its large tech team in India, spanning three cities and employing 11,500. Its Bengaluru office, its biggest tech hub, employs 8,000, versus U.S. rivals Target's roughly 4,000 workers and Lowe's 4,300 in the same city.