Retailers turn to an unlikely source to boost profits. Walmart shows how powerful this lever could be. - CNBC

A headline-grabbing deal between Walmart and Vizio has sharpened investor attention on a valuable new revenue stream that could help pad profits for retailers. Late last month, Walmart announced it would buy the TV maker in a deal valued at more than $2 billion. To the untrained eye, it would appear the retail titan was gobbling up a maker of a product it offers to customers. But the deal actually centered around Walmart's ambitions in advertising outside of its store and website. And the announcement comes at a key time for the broader space: Retail media is set to capture more than one-fifth of all digital advertising spending this year, up from around 15% five years ago, according to Insider Intelligence. "To the everyday consumer, this just seems like a retailer buying a supplier of a category that they sell," said Jefferies analyst Corey Tarlowe. "But it's not that way." There are three main routes through which retailers like Walmart benefit from advertising, Tarlowe said. There's promotions for products in-store. Then, there's ad space on a company's website or sponsored listings. The third, which is considered more nascent, is connected TV and other digital advertising not on the company website. As one example, retailers can display advertising on TVs via operating platforms they also own. These retailers can utilize the data they collect on consumers' in-store and online purchasing habits. That makes their ad offerings more targeted — and, thus, desired by companies trying to promote their products to the right base. Off-site advertising like TV operating platforms is more challenging to execute than on, say, Walmart.com or in the big-box retailer's stores, said Morgan Stanley analyst Matt Cost. But it has larger revenue potential for retailers given the huge addition of space for advertisers to now purchase through them. Advertising through retailers may gain favor as privacy becomes more paramount, Cost said. In this environment, successful retailers can fetch a premium for their ability to leverage what they already know about their customers over a long period, at a time when it's becoming more difficult for others to collect that data, he said. This is the latest shift in a long history of retailers attempting to follower consumer eyeballs, said Morgan Stanley analyst Simeon Gutman. The focus in retail advertising once transitioned from in-store to retailer websites with the e-commerce boom, Gutman said. Now, it's again on the move — this time to a new frontier of digital real estate beyond exclusively a retailer's site. "Retail margins have been challenged over the last decade due to the shift online," Gutman said. "Retailers, therefore, need to find other ways to drive their profitability. Advertising is a natural replacement, or opportunity, to take advantage of their own business shifts that have moved online." Walmart: The pack leader With the deal, Walmart appears ahead of the retail pack, Gutman said. Its leadership makes sense given the Arkansas-based firm's size and scale, he noted. Walmart is essentially the only retailer talking about this form of advertising in a material way, Gutman said. Walmart Connect's ad sales grew 28% in 2023 to $3.4 billion. While that equates to less than 1% of Walmart's revenue, the profit margin makes these sales more lucrative. Others like Ulta and Albertsons are trying to enter the space, but most have yet to show any serious impact to financials, he explained. Before the acquisition, Walmart had the Onn private label of TVs with an outside operating system, meaning the company would have to send advertisers interested in connected opportunities to the platform owner, Jefferies' Tarlowe said. With Vizio's SmartCast software, Walmart could essentially sell the platform's ad space in house after an agreement with competitor Roku ends. To be sure, Walmart has a history of throwing ideas against the wall — think its Store No. 8 innovation incubator and its Scan & Go Cashierless Checkout, as two examples — and then moving on. But Gutman said this plan has promise because it's considered logical and has been "blessed" by the market. Connected TV is also just one part of a broader tide-change that's bolstering optimism on the stock, analysts told CNBC Pro. "These are not thesis-changers or needle-movers in and of themselves, but they're supplements to a narrative that is very important," Gutman said. The Morgan Stanley analyst said the deal signals progress in Walmart's search for alternative profit pools that have faster growth and higher margins than traditional retail. Meanwhile, Tarlowe said Walmart was always a stock to like because it's gaining market share. At the same time, the company boasts a growing e-commerce and online grocery business, he said. He pointed to Walmart+, its subscription business, as another higher-margin revenue stream. And the retailer's efforts to reduce operating costs through technology like artificial intelligence is another plus, he said, adding that even though it had to shell out for Vizio, Walmart is still expected to beat Wall Street expectations and raise its forecast every time it reports earnings this year. WMT .SPX,XRT 1Y mountain Walmart vs. the S & P 500 and the SPDR S & P Retail ETF, 1-year Walmart has outperformed the broad S & P 500 and SPDR S & P Retail ETF (XRT) in 2024, adding more than 12%. That marks a turn after underperforming both in 2023, when the stock rose just over 11%. Wall Street sees more room to run, with the average price target of analysts polled by FactSet signaling upside of more than 10%. About 85% of analysts have buy ratings on the stock, per FactSet. Other retail ideas Beyond Walmart, analysts said retailers need size and scale to perform well within off-site advertising. In other words, investors should look for retailers with a large enough consumer base to attract advertisers. Costco and Target are big enough and have the necessary amount of data to venture into this realm of advertising successfully, Tarlowe said. He also noted that both cater to a higher-end consumer base. The pair has diverged this year. Costco has jumped around 15% as an outperformer this year, while Target has lagged the broader market with a gain below 7%. Despite that performance, the better investing opportunity may be in the underperformer. Analysts polled by FactSet expect Target shares to rise more than 5% over the next 12 months, as of Monday's close, while anticipating Costco to pull back by more than 6%. Elsewhere, Tarlowe said Dollar General is one retailer that serves a particular niche well and can benefit from that in the retail advertising landscape. Dollar General has added more than 8% so far this year, making up some ground after diving more than 44% in 2023. But the Street predicts that rebound will be short lived. The majority of analysts have a hold rating, with an average price target forecasting shares will slip almost 6%, per FactSet. DG TGT,COST 5Y mountain Dollar General, Target and Costco over the past 5 years Ad tech stocks to watch On the advertiser side, Cost said there's two public companies that provide the "pipes" for retailers needing this technology: Criteo and Trade Desk . Cost said these companies can be a middleman for retailers looking to enter off-website advertising but simply don't have the technology to do so. He said they likely wouldn't be acquired given their breadth of customers. Criteo's ADR has soared more than 30% in 2024. Still, the stock trades under where it finished 2021, underscoring the strength of the sell-off seen in 2022 and 2023. More than half of analysts have a buy rating on the stock, according to FactSet. The typical price target reflects the potential for 9% upside. TTD CRTO mountain 2020-01-01 Trade Desk vs, Criteo, since 2020 Trade Desk, meanwhile, has added over 15% this year. But like Criteo, shares are still cheaper than where they ended 2021. More than three out of every four analysts surveyed by FactSet have buy ratings on Trade Desk. The average analyst expects a rally of more than 20% over the next year. Don't miss these stories from CNBC PRO: Instead of chasing Nvidia, investor buys these misunderstood, cheap growth stocks for big returns Why Warren Buffett thinks the power of compound interest is the key to his success Forget cash — it's time to move into fixed income, Franklin Templeton strategist says Dan Niles reveals why he prefers the 'Fantastic Four' and when the 'AI bubble' might pop Investors should tread carefully in March after bitcoin's explosive rally to $60,000

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Retailers turn to an unlikely source to boost profits. Walmart shows how powerful this lever could be. - CNBC

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