What We Learned This Week

Walmart Looking More Like Amazon: Walmart reported strong quarterly results last week, with both sales and earnings surpassing expectations. The company also provided some positive insights into consumer behavior, noting no significant change or deterioration in overall demand patterns. Consumers remain value-oriented, focusing more on essential items rather than discretionary ones, but this trend is consistent with recent quarters.

However, one of the more intriguing aspects of Walmart's report is its advertising business, which, though easy to overlook due to its relative size, is becoming increasingly important. Generating around $4 billion in revenue—modest compared to the nearly $170 billion Walmart earned overall in the quarter—the advertising segment is a high-margin powerhouse. While Walmart’s merchandising margins hover around 4%, advertising margins are estimated to be between 70-80%, meaning this small slice of revenue could contribute nearly half of the company’s operating profit. Additionally, this segment is growing at roughly 30% annually, far outpacing other areas.

This is not entirely new; Amazon's rapid rise has been driven in large part by its advertising business, which remains a key component of its profitability. Given Walmart's substantial investment in its online presence—now drawing more traffic than nearly anyone except Amazon—it was only a matter of time before they tapped into this high-margin opportunity. While Walmart’s share of the digital ad market is currently around 7%, compared to Amazon’s 70%, the company’s expansion and growth in this area is certainly worth watching.

Off-Price Still Working: TJX, the parent company of TJ Maxx, Marshalls, and HomeGoods, continues to be exceptionally well-positioned in the current market. The company reported strong results in what has been a relatively challenging retail environment, particularly on the discretionary side. What sets TJX apart is its alignment with current consumer behavior: shoppers are still spending, but persistent inflation and a slowing economy have made them more selective, prioritizing quality and value. TJX’s strategy is perfectly suited to this trend, as its business model revolves around offering customers a constantly changing assortment of branded goods at attractive prices by capitalizing on supply chain inefficiencies and other opportunities in the full-price market.

This outperformance isn’t new, and that’s what makes TJX particularly interesting. Over the past several years, the company has refined its strategy and solidified its place in the market, creating a business that seems to thrive in all economic conditions. When demand is strong, TJX becomes a trendy destination with its rotating merchandise and treasure hunt-like shopping experience. In slower times, the exceptional value on branded goods appeals even more to cost-conscious consumers.

The company’s Achilles’ heel, however, is supply. Since much of its inventory comes from overflow stock from other retailers and suppliers, TJX is somewhat dependent on broader market supply and demand dynamics. While the company has made strides in developing exclusive merchandise lines, the real draw for consumers remains the chance to find a great deal on a brand-name luxury item. Despite this potential challenge, TJX has proven to be a well-managed company that has navigated tough supply chain and retail environments with great success. We are fans.

Hybrids Gaining Momentum: In what seems like another setback for the electric vehicle (EV) industry, Ford has announced a delay in the production of its next-generation electric pickup at its Tennessee plant, originally slated to begin next year. The company also canceled plans for a fully electric three-row SUV, choosing instead to focus on hybrids. Ford management cited evolving consumer demand as the reason for this strategic shift and took a $400 million non-cash write-down on assets related to the change.

This move is yet another indication of automakers rethinking their once all-in approach to EVs. As the initial hype driven by early adopters fades, it’s becoming clear that broader consumer appetite for EVs isn’t materializing as expected. EVs remain expensive and often lack the practical benefits of gas-powered vehicles. Additionally, the significant depreciation of EVs in the second-hand market is further discouraging consumers from buying new ones. It’s increasingly evident that EVs were pushed onto the market by aggressive government policies without sufficient consumer demand or readiness.

However, this shift in demand has rekindled interest in hybrid vehicles, which are showing promising signs of user benefits and adoption. Moreover, hybrids offer a more profitable transition for automakers compared to EVs. Ford’s pivot, along with the industry’s evolving stance, seems to be a prudent move.