Is AI the Answer to Big-Box Retail’s Woes?

Motley Fool Hidden Gems Investing - The Motley Fool

This episode of Motley Fool Hidden Gems Investing explores the current state of big-box retail following recent earnings reports from Walmart, Lowe's, Target, and TJX. While most

Key takeaways

• Walmart's operating income grew in the double digits despite single-digit revenue decline, driven by digital services like Walmart Plus, advertising, and data monetization via Vizio.
• Tariff refunds boosted bottom-line results across retailers but did not translate into price cuts; instead, companies used them to offset rising costs like diesel fuel increases.

Main topics

• Big-box retailer earnings performance
• Impact of tariff refunds on financial results

Notable quotes

"Walmart is the most important of all of these retailers, in my opinion. It gives a read on low to middle income households."

Conclusion

While big-box retailers face headwinds from inflation, fuel costs, and shifting consumer behavior, digital innovation—especially in AI-driven commerce—is emerging as a

Transcript preview

Speaker 5 (0:03) The woes of retail earnings continue. Motley Fool Hidden Gems Investing starts now. Speaker 5 (0:13) Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, John Quast and Matt Frankel. So today on the docket, we're going to talk about drone delivery, which is becoming a big topic in the DoorDash and the Ubers of the world, and there's been a lot of deals going on in that market lately. And we're also going to hit some reader questions at the end of our show. But as we're getting started, we're still in earnings season, and a lot of the big box retailers have been reporting this week. We've had a sprinkling of them so far. Home Depot was on Tuesday. We discussed that. And the Wednesday crew talked about Target's earnings yesterday. But we got a little bit more of the story with Walmart, Lowe's, and TJX Company is the parent company of TJ Maxx. They all reported earlier today or after the close yesterday. Guys, a lot of stuff to cover here. But Matt, what were some of the numbers that you saw? And what were some of the reactions that you thought of when you looked at these numbers? Speaker 3 (1:09) Well, I mean, the big thing is that the headline numbers are deceiving. Tariff refunds, pretty much every retailer got them. And it made the bottom line numbers look a little better than they should have. And the market knows that. The market's not rewarding it by any means, but we'll get to that. There was a common theme of general strength for the second quarter. Speaker 4 (1:27) Home Depot, for example, reported its strongest comp sales numbers since the third quarter of 2022. Speaker 3 (1:33) Target, which is in the process of a turnaround, reported comp sales in the 3.8 % ballpark. A nice improvement. TJX, they beat and raised 4 % comp growth. And it's worth mentioning that, you know, inflation is running around 3%. So this was actual real growth ahead of the inflation rate. So that's nice to see. Walmart was the disappointment and kind of an outlier here. Comps were 2.6%. They fell a little short of expectations. I'm not even sure they beat inflation. as did their third quarter guidance. That was a disappointment. And this was somewhat of a surprise to me. I mean, I expected Walmart to be a little more resilient in times of uncertain consumer spending. I mean, in 2008, Walmart was the best performing stock in the S &P, and it was because people needed to cut back and things were expensive. Walmart is the most important of all of these retailers, in my opinion. It gives a read on low to middle income households. And that's really my biggest worry in the economy right now. It's not how the people at the top are doing. It's how the people in the middle are doing. And Walmart is really a good indicator there. Speaker 5 (2:39) So, John, this is actually kind of brings up an interesting point here, though, because revenue numbers were a little slow at Walmart. But one thing that has been pretty common at Walmart over the past several quarters or even last couple of years is that earnings. have been very much outpacing revenue growth. What's been going on here? Because when I think about Walmart, I don't think of a retailer that's like pushing price to increase margins. Speaker 4 (3:08) Yeah, let me start with that revenue number that Matt was talking about, because it was kind of the more disappointing number among the retail players. It is interesting that all these retailers talking about the tariff refund. So, of course, you know, all these tariffs that were levied upon them, those have been annulled. The government had to give them back. And companies like Lowe's, for example, mentioning that its competitors, in light of receiving that check, kind of leaning into lower prices, whereas Lowe's saying, hey, we're just going to actually maintain those prices. Walmart is kind of on that. spectrum of, hey, let's use this tariff to be more competitive on price yet again. And that is really Walmart's MO. We are the low price leader. So not using those tariffs and kind of just dropping it down to cover other expenses saying, hey, we're actually going to use this to compete on price. So maybe that's contributing to the little bit of a lackluster revenue number if other competitors are kind of saying, hey, we're not going to lower prices. We're going to keep them where they are. Now, to your question about the profitability, this is actually pretty important here in why Walmart has been a good performing stock, in my opinion, over the last few years. Operating income growing faster than revenue. So revenue down in the single digits, operating income growth in the double digits. That is a little bit unusual to see, and it's a big deal when you're talking about a company of this magnitude. When you're talking about a company with hundreds of billions of dollars in revenue, even just... a single percentage difference in that profitability, I mean, that makes a big deal on the bottom line. So Walmart has been increasingly offering digital products. It's been selling digital things. It's a digital business. So you look at advertising. I mean, it has a wonderful first party data set of consumer behavior and data. This is something that it can use in advertising, and that's a high margin business. Of course, it acquired Vizio so that it can have this connected TV platform as well and integrate that into the ecosystem. Also, Walmart Plus. I mean, e-commerce and Walmart Plus, these are digital offerings as well that do help that profitability. And Walmart's been executing this playbook really, really well over the last several years. Speaker 5 (5:27) It's obviously working because, like you said, the profitability of Walmart's doing incredibly well. But to Matt's point where Walmart's a little bit slower, one of the things that we could possibly attribute this to, and to Matt's point, is the lower to middle income bracket tends to be the Walmart shopper. We have seen a pretty large increase in fuel prices. Now, we're not going to say that this took up everybody's discretionary spending, but it does tend to be a very large... price signal for what people are willing to do. You know, gas prices start to go up. Maybe people, you know, maybe to make a fewer discretionary spend items just simply because like seeing that as like a signal of, oh, maybe things are going to get a little bit more challenging. Is that showing up in the numbers here? Speaker 4 (6:13) Well, it's at least showing up in management commentary for sure, because, you know, the kind of the thing was our... are you going to pass through this tariff refund onto the consumer, onto your customers? And several of these companies kind of saying no, not directly because actually our costs have risen pretty substantially. So we're going to take that tariff refund to offset the higher costs that we're experiencing. And in that way, it's going to benefit our customers. But I kind of thought that that was a little bit of. Speaker 4 (6:44) let's just say creative language, but I did look it up. According to AAA, gas prices up 31 % in the last year, but diesel prices, and this is, let's say, material to these retailers, diesel prices up 50 % over the last year. So there is a real cost increase here to the retailers. I get why they're saying, hey, we're actually going to use this tariff to offset some of those higher costs. So it is real. And then the other