e-commerce profitability (and the BNPL-elle of the ball)
SMB profitability (and the small business reshoring renaissance)
hospitality unprofitability
homebuilder (and lot-seller) profitability
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Random Walk has been thinking about profitability.
Profitability is important because:
asset-prices (and equities, especially) are increasingly priced to profitability growth;
with slowing population growth and wage growth, there are fewer tailwinds to simply increase topline with more and/or wealthier shoppers, which leaves profitability as the remaining lever;
relatedly, a substantial reason that AI is the deus ex machina solution to all our problems, is the promise of doing more with less;
finally, one obvious tradeoff of even successful ‘reshoring’ is that it works—by increasing domestic stuff-making—but spawns a generation of less-profitable businesses (given higher input and labor costs), at least in the near(er) term.
Anyways, just some charts generally on the subject of profitability.
ICYMI
e-commerce profitability
That people will increasingly shop online has been one of Random Walk’s longest running themes. It’s a function of
technological changes (better apps and plumbing across the entire ecosystem)
socio-cultural changes (more alone time); and
economic ones (good place to find cheap stuff, especially for previously less-online shoppers who happened to experience the strongest wage tailwinds).
E-commerce has indeed cooked:
The online share has regained its pandemic peak (even if it appears to be slowing a bit).
In what ought to have been the least surprising, but still apparently surprising, earnings report, Random Walk’s favorite BNPL-co, Affirm AFRM 0.00%↑, absolutely crushed it again:
Massive (42% yoy GMV growth) with basically every category of good experiencing yoy lift.
Affirm continues to be Random Walk’s best-performing name, by far.
Anyways, victory laps around Affirm are not really the point I wanted to make because this is a post about profitability.
You’d think that with tariffs inbound (and the de minimis exception outbound) that ecommerce profits would contract.
That might still be the case, but in all events, I found this pretty surprising:
Margins for both public and private etailers actually improved in Q1 ‘25.1
I like this chart for other reasons, insofar as it demonstrates the big margin expansion that happened during the ‘reap what cost-cutting hath sewn’ period of 2024. When everyone was expecting doom, firms got lean, but since nothing bad happened, they became a good deal more profitable, as a result. That tailwind has begun to taper, as the low-hanging fruit of cuts have mostly been picked.
But, again, Random Walk being early, different and right about the consumer economy is not the point. That profits went up—despite tariff and wage growth headwinds—is the point.
For what it’s worth, however, expectations are that the good times will not continue to roll:
EBITDA forecasts are negative for 2026 for every category of etailer.
Sales growth is pretty stable, but profits are expected to contract. Make of that what you will.
SMB profitability
What about small businesses?
Well, by one measure of profitability, in this case, the ratio of account inflows to outlfows, profitability for small businesses has been decelerating since Nov. 2024:
The profitability ratio is still 0.5% higher than last year, but growth has been sliding to closer to 0% for the last ~9 months.
So, small firms are still growing profits, but the growth rate is going the wrong way—not unlike the story with ecommerce above.
Part of why that’s interesting is that even though SMB profitability is declining, company formation—especially of the “high propensity” kind (i.e. the people-hiring sort)—has recently increased:
High propensity business formation has been gradually increasing since ~Q3 ‘24.
While lots of businesses got started during the pandemic, the serially upward trend has been limited to lower-propensity firms, while high-propensity firms saw a one-time step-up (and stopped there).
That appears to have changed, at least over the last few quarters, as high propensity business formation increased, after staying relatively flat for ~2+ years. So, SMBs of the hiring sort are getting started, just as SMB profits appear to decelerate.
Why would that be interesting (other than just being somewhat counter-intuitive)? Well, and I admit this is pretty speculative, manufacturing businesses tend to be smaller businesses. So, it stands to reason that in a successful version of the reshoring story, an uptick in smaller, less-profitable businesses is exactly what you’d expect to see.2
As it happens, the smallest of businesses are apparently doing the most of the net-new hiring:
Payroll expenses have grown the most for the smallest firms (with revenues less than $500k).
And, it’s construction and manufacturing leading the way on hiring expenses:
Hiring payments from construction and manufacturing firms increased ~33% yoy, according to BofA’s data.
To review, less SMB profitability growth, an uptick in high-propensity SMBs, and an uptick in both smallest business hiring, and Construction/Manufacturing payroll expenses. Does that mean reshoring is working, in the sense of a proliferation of smaller, less-profitable labor-intensive manufacturing etc. firms?
Idk, but could be, maybe? Idk. I thought it was a fun exercise in stumbling across data to confirm my priors.
Hospitality profitability
The flipside of buying cheap tchotchkes on the internet has been the increasing decline of high touch services.
As labor costs go up, service bang-for-the-buck goes down. Consumers respond accordingly, by taking their business elsewhere.
As it happens, hospitality profitability has been flat-to-down since 2022, and is still below pre-pandemic levels (at least, according to this estimate):
Hospitality profitability was on the road to recovery until 2022 when it flattened out, and then by 2023, it started a slow decline.
Higher labor costs and a declining value proposition will certainly do that to you.
Builder profitability
As long-time Random Walk readers know, there is definitely no housing shortage.
The decline in home values has materialized most noticeably in the more liquid parts of the market, i.e. the builder market. Builders (unlike homeowners) price-to-market, and when supply begins to outpace supply, builders do wild n’ crazy things like, ‘cut prices’ and ‘offer discounts.’
Those price cuts and discounts, eventually show up in margins:
All the largest publicly traded builders have experienced margin compression yoy.
Builders have build smaller, cheaper homes, but eventually, falling topline prices will compress margins, and so they have. Builders will be fine, though, because their margins were pretty solid to begin with.
When builders make less money though, they of course pass that cost on to their suppliers—in this case, land-sellers.
Finished lot values are also expected to come down:
Finished lots are up ~5% yoy, but survey says that the market is cooling, and prices are expected to fall.
It’s the first time since 2022 that a majority of the survey believes the finished lot market is something less than “hot.”
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
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The other surprising thing about this chart is that profitability was a good deal higher before the pandemic. That’s not what I would have expected, although maybe the smaller universe of companies made that possible?
Conversely, the collapse of small businesses as a share of the hiring (or really, the rise of large businesses, as the hirers of choice), has been a feature of the globalized economy:
Small(er) businesses have been steadily declining share of employers since the 90s (and overall contributions to net-new hiring were negative in Q1 ‘25).