US Retail Flourishes Amid Tariff Challenges

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Welcome to the Supernatural Stocks Podcast on Moneyweb, presented by The Finance Ghost – your go-to source for local and global insights for investors and traders each week.

This year, tariffs are making headlines, prompting discussions about their effects on US consumers and retailers, especially about cost absorption. Despite market uncertainties, US retailers have shown unexpected strength in their stock prices this year.

Admittedly, certain consumer sectors, like the quick-service restaurant industry, have faced challenges. Nevertheless, the retail sector has made a strong recovery since the flash crash in April tied to tariff negotiations.

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While major players like Walmart and Home Depot often capture the attention they deserve for their valuable insights, it’s crucial to keep in mind a fundamental market principle: regardless of your opinions, there’s likely an ETF that aligns with them.

In the retail arena, the SPDR S&P Retail ETF, trading as $XRT, has experienced a 4.8% increase year-to-date.

Notably, this index is equal-weighted, which means the leading holdings include Ollie’s Bargain Outlet Holdings, Bath & Body Works, and grocery giant Kroger—a name familiar to many.

Other significant players in the top ten list include Dick’s Sporting Goods, Dollar Tree, and Abercrombie & Fitch, with neither Walmart nor Costco featured, making this ETF a reflection of the broader US retail landscape, beyond those megastores.

Even though its year-to-date growth of 4.8% falls short of Walmart’s 8.4%, it still outperforms Home Depot’s 2.2%.

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It’s intriguing how the market largely overlooks tariff issues—not just for major players, but for the entire retail sector.

If you had invested during the ETF flash crash in April, you would now find yourself up by around 33% – a compelling reminder that buying during dips can be a wise strategy.

Beyond general market trends, what insights can we draw from recent updates from US retailers?

Consumers are leaning towards online shopping

The rapid growth of eCommerce is noteworthy. This bolsters my perspective on my Prosus investment (something I’ve discussed in previous Supernatural Stocks episodes), as I firmly believe that global eCommerce will continue to expand quickly. Recent performance data from US retail leaders certainly supports my optimism.

Walmart reported a 25% spike in eCommerce sales last quarter. In context, total group sales grew by 5.6%, indicating that eCommerce is outpacing in-store sales significantly. Similarly, Home Depot’s latest results show a 12% increase in online sales compared to a total sales rise of 4.9%.

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While it’s true that eCommerce starts from a smaller base compared to in-store sales, consumer intent is evident. The surge in online sales for both Walmart and Home Depot largely stems from enhanced delivery speeds.

No surprise here—improving the consumer shopping experience inevitably shifts behavior. If online shopping is more convenient, consumers are likely to engage more!

What implications does this have for financial performance? Analysts continue to discuss whether the growth of eCommerce is beneficial or detrimental to profit margins for these large retailers. Shopping online often lacks the intuitive prompts of physical stores, where layout can encourage additional purchases—think of those tempting candy aisles near checkout. Moreover, consumers come to expect not just prompt delivery but often free or significantly reduced shipping on qualifying purchases.

Profitability in eCommerce

This shift transfers the logistics responsibility from consumers (who would travel to stores) to the retailers for last-mile delivery, presenting a key challenge in eCommerce profitability.

From a profitability viewpoint, smaller-scale eCommerce segments typically do not match the profitability of in-store sales; they are often unprofitable, as experience suggests. Yet, as historical trends indicate, profitability tends to increase significantly as scale rises.

This advantage is echoed by Walmart’s management in their recent earnings report, highlighting that the eCommerce ecosystem encompasses far more than mere sales profits.

What does this mean? A prime illustration is the 46% surge in advertising revenue for Walmart last quarter. When consumers search for products on Walmart’s platforms, it generates natural demand for suppliers to enhance their exposure.

This parallels the model seen with Google, which earns advertising revenue alongside its search services, though Walmart appears to be well-positioned with respect to evolving consumer behaviors spurred by eCommerce.

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Additionally, eCommerce provides an abundance of data, allowing retailers to gain insights into customer behavior and offer personalized discounts at checkout—something that flourishes in digital spaces compared to physical stores.

Moreover, profitability in eCommerce is improved by innovations in fulfillment. Retailers like Walmart have started utilizing their store locations for order fulfillment, creating a more efficient strategy for processing individual orders. Walmart has reported nearly a 50% increase in store fulfillment—a critical contributor to profitability.

Overall, Walmart is performing well, even raising its guidance for the full year.

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If you’re doubtful about whether eCommerce grants a competitive edge, I recommend reconsidering investments in high-multiple stocks like Walmart, as eCommerce is evidently where much attention is focused.

Despite resilience, caution regarding US consumer behavior is justified

Looking at insights from Home Depot, we gain valuable perspectives on how US consumers allocate discretionary spending. Home Depot has underperformed compared to Walmart and the noted retail ETF, indicating potential hurdles.

In their latest quarterly figures, 12 out of 16 merchandising departments reported positive comparable sales growth—an encouraging sign, but are there emerging trends?

Management observed an uptick in small home improvement tasks, while larger discretionary projects are lagging. This hints at both consumer confidence and affordability, significantly impacted by interest rates and borrowing costs.

What’s next?

In spite of attempts to initiate interest rate reductions, the Federal Reserve remains resolute. Uncertainty around relief for consumers persists.

For Home Depot, this reflects a waiting game, but might yield greater gains (in comparison to competitors) once relief is achieved.

For Walmart, the current scenario implies that profitability hinges on exceptional execution, competitive pricing, and effective scale—areas where they excel, thus explaining why the market holds their shares in high regard.

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