On this episode ofMarket Foolery, Chris Hill and Bill Barker dig into Home Depot's (NYSE: HD) upbeat quarterly report as the company continues to deliver impressive growth without expanding its network of stores. Meanwhile, Ford (NYSE: F)is planning steep job cuts, and massive technological disruption looms over the auto industry.
A full transcript follows the video.
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This video was recorded on May 16, 2017.
Chris Hill: It'sTuesday, May 16th. Welcome to Market Foolery.I'm Chris Hill. Joining me in studio today,from Motley Fool Funds, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: We're justchugging along through the month of May. We have Memorial Day just around the corner. But we'restill getting it done withearnings.
Barker: Are youlooking forward to Memorial Day? It's like two weeks away.
Hill: Whodoesn't like Memorial Day weekend? Come on. It'sone more excuse to grill. We're going to dip intowhat's happening in the automotive industry, which is not great, and onlinepublishing, but we have to start withHome Depot, which is the No. 1 home improvement chain in America,and they proved why once again with their first quarter report. Theirprofits were higher than expected, their same store sales were up 5.5%. Theiraverage ticket order was up. Are theybulletproof right now? Is there anything that this company is -- if you're a bear, if god forbid, you'reone of those poor souls out there who says, "I thinkI'm going to short Home Depot," doyou have anything you can point to? Because this is one of those quarters thatmakes you understand why the stock is hitting an all-time high today.
Barker: Yeah,I don't know what you have if you're a bear and youwant to find fault here. The valuation isn't that high, and housing hasa lot of room to go, probably,unless you have specific numbers thatyou're relying on that no one else is seeing,I don't know what you're seeing. Thecompany is doing a very good job of simplygrowing what it has. It's not reallygrowing stores at all. It has about the same number of stores, depots, I suppose, rather than stores, open that it had five or six years ago. So its guidance for comps and total sales growth are the same, right now around the 5% area. Then, it's buying back some shares,and it's improvingmargins, and it's all wound up with a low-teens to mid-teens growth rate.
Hill:Youmentioned the share count, it's come downpretty substantially.I think it's almost been cut in half over the last 13 years or so. There's about 1.3 billion sharesoutstanding right now, in 2004, the stat I saw this morning, it was up around 2.7 billion. So it's reallyimpressive that they are, on the one hand,methodically bringing down the share count, but they are also bringing that same day in and day outoperational excellence to their storesthemselves. And as you said, they're not growing their store count, whichmakes me think that this is an incrediblydisciplined management team.
Barker: Right,the capital allocation equation here is, let's keep what we have, I'm sure they'reclosing down the store or two here or there,opening up one here or there. But they aren't in the "let's build another 100 storesacross the country this year" model that a lot of other places are, whether it's McDonald'sor AutoZoneorplenty of other things. And they are really about the only game in retail right now that's working,Home Depot and Lowe's. So,it is the housing market. Let's not givemanagement all the credit. We'll give them plenty of credit, but housing is a goodplace to be, and it is not getting disrupted on the retail side the way everything else is, including automotive parts. Automotive parts is a little bit better than clothing and books,things that have really been disrupted and are never coming back. But when you'regoing out on Sunday and fixing up your home, and you'regoing up to Home Depot or Lowe's,a local place, whatever --
Hill: Ace Hardware.
Barker: You're not waiting for Amazonfor 48 hours to get you the stuff,because you're getting it right now. Actually, a lot of, 40% I think, of Home Depot's sales are to the professional contractor. That's also not being disrupted.
Hill: Yeah. AndI think there's also something to the customer experience,in the same way that online shopping,regardless of what the online shopping destination is, they'rehopefully providing greater convenience, I think that is, for a lot of people,part of the experience with Home Depot and Lowe's. Theyactually like it,it's an excuse to get out of the house, Iactually want to go and compare the paint samples, that sort of thing, andkill a little time doing things that way.
Barker: I think it is, you're doing something. It feels like --
Hill: Itfeels good.
Barker: It feels like, I'm on a mission,I'm going to make my house better,I'm not just buying stuff. Maybe this is revealing something about me, but it's not that, you buy stuffand then it sits around the house. At Home Depot, you're buying something and then you're implementing it.
Hill: Putting it to use.
Barker: Andthen you're going to claim, later in the day, "I did a lot of stuff today,so I deserve some credit. I went to the store, andnot only did I buy something, butI actually put those light bulbs in."
Hill: Speaking of light bulbs, whatpercentage of trips to any sort of home improvement store --
Hill: Wait for it. Wouldyou say involve youbringing something to the store that you need to replace? That,you haven't written something down, youhaven't memorized it, butyou're actually bringing in the light bulb, you'rebringing in the screw, andyou walk in and you're basically looking for an employee, saying, "Seethis thing I'm holding in my hand? Wherecan I find another one just like this?" What percentage?
Barker: Of me, or everybody?
Barker: Close to 0%.
Hill: Oh,for me, it's at least,somewhere in the neighborhood of 50%.
Barker: No,I'm in the category of stereotypical men who go in and I'mnot asking for directions on anything, itdoes not matter how long it takes me. Itdoesn't matter how many times I'm asked, "Can I help you?" No,I'm just looking, I'll find the specific screw thatI'm looking for. I'm not saying that's a good thing. For you, it's much higher than zero?
Hill: It'smuch higher than zero. But that's also part of the Home Depot store, that'spart of the turnaround for them, after Nardelli left,part of what management decided to do was, "Let'sactually be helpful, let's train staff, let's,maybe not overstaff, but let'smake sure our stores are properly staffed, so that whenpeople come in, we have people who can help them,who can find exactly what they're looking for,and then they're going to come back." AndI think that's a big part of the turnaround for Home Depot.
Barker: It is working, for them to be gettingpretty consistent 5% comp improvements year to year, I think the two year stack, the comp from a year ago plus the comp this year, it's more like 12% to 13% forHome Depot. That's really impressive,in a time of very little inflation to be getting 12% more sales out ofthe same square footageover the last two years,adjusting for inflation, you'retalking about 8% or something like that. They have got everything going very well right now, and the bear case isdependent on the housing market currently being overheated, whichit does not yet appear to be.
Hill: Let's move on to theautomotive industry. There are multiple reportsout this morning thatFord Motorisplanning to cut around 10% of its jobs around the world. Ford Motorshas around 200,000 employees. As of this taping, Fordhas not confirmed this report. But for the sake of this conversation, let's justassume these reports are accurate, and they are, in fact,looking to cut about 20,000 people from their workforce. When you look at their profit margins, when you look at the stock hovering around a five-year low,it kind of makes sense that they would take this approach.
Barker: It does,they have to find savings somewhere, andemployees are, more or less,always the most expensive part of your business. Thestories that are coming out, which,as you pointed out, are not yet confirmed, point to Fordlooking to buy out employees rather thanhaving layoffs, and reduce their costs over the long-term that way, byreducing pension obligations inparticular, which is always an issue. So I think it isnot going to be good times over the next decade or two for automotive workers,as much as this Administration would like to claimthat it's going to be different.
Hill: Yeah. You forwarded a report to me from I think your colleague NateWeisshaardown in Fool Funds about arecent conference having to do with, among other things,autonomousdriving. Andone of the takeaways in this report appears to be that the timeframe forautonomous driving, when are self-driving cars coming,when is autonomous driving going to be much more mainstream? And the timeframe for the folks writing this report was, "We went into this thing thinking 2025 to 2030. That's roughly when we were thinkingautonomous driving would come. And now that we've gone to this well-attendedconference and listen to all of these presentations, ourconclusion is it's going to be sooner than that,we think it's going to be 2020 to 2025." And,I think to your point about tough times for auto makers, I think there are a bunch of factors that go into this,certainly pension obligations is one of them. But I think the technology part of this is a bigdisruptor in the automotive industry.
And I haveno idea where it's going, but it really does seem like ...I don't want to compareautomotive companies to retailers,but I think in the same way that, I think Ron Grossmade the point last week on Motley Fool Money that,when you look at the retail industry, the general retailers, the fact is,some of them just aren't going to make it. And that is,unfortunately for the people who work there, how capitalism works. AndI think you could probably say the same thing about the automotive companies. Not in the next couple years, but certainly 10 to 20 years down the line,some of them just aren't going to make it.
Barker: Let's givecredit to the authors of this report that we're going to riff off of. ReThink Xis the entity that produced this, andthe specific authors are James Arbib and Tony Seba. This was a very recent report. The authors'analysis is that this isgoing to be a much bigger disruption, really, even than retail. You sayyou don't want to compare it to retail. If youread this report and buy into it, orjust entertain what might be, it's bigger than the change that hasoccurred yet to retail. Amazon came around 20 years ago. Retail is suffering right now,but it still looks a lot like our retail experience 20 years ago. Maybe you're buying 5%, maybe 95%,of your stuff from Amazon. But as much as malls are in decline,they're pretty much all still there. This isprojecting that once autonomous vehicles are approved, the adoption is going to be rapid,because you're going to be able to save somewhere up to 90% of your driving costs. The report projects that 95% of miles by 2030, not that long from now, will be done by autonomous vehicles. Notnecessarily 95% of the vehicles,but the actual miles covered, because the cars are thesefleets of cars out there,and you will no longer need to own a car. You'renot using your car close to 100% of the day. But with fleets of autonomous vehicles, they will be, once theelectrical equation is improved, this is going to disrupt the oil industry and everything that services the oil industry,and oil prices are going to plummet, and the insurance rates are going to go down, and the cost of cars is going to go down. It'spretty comprehensivewhat the changes could be. And this is two peoples'opinion about how it's going to go. But we have seen some things disruptedfar more than we ever expected them to be.
Hill: Andto take the insurance piece of that,at the recentBerkshire Hathawaymeeting, Buffett talked about self-driving cars. Buffett, there areplenty of things he will tell you he doesn't know a lot about, but he knows the insurance business, and he's looking out at self-driving cars and seeing, "Oh, yeah, that'stotally going to hammer Geico, andany other business that looks like Geico."
Barker: Yeah. Ifnobody in the family needs to be insured, and no cars need to be insured,that is going to decimate Geico. Andthe number of accidents and repairs, if the technology is brought to where people hope it will be, it's going to change a lot of things, or potentially could. So Ford, right now, is facingdeclining auto sales. I think the last four months have seen declining auto sales,not just for Ford but industrywide. That is the first time that has been the case since 2009. Now,invoking 2009, first time blah blah since 2009, mightmake it seem like, ooh,there's panic that we shouldconsider, and I'm not claiming that. Actually, the profitability ispretty good right now, because people are, again, buying heavier and bigger cars and trucks, SUVs, given the price of oil and gas. So it is not terrible times. But if you're looking out over the factors, and Ford is certainly concentrating on what the future will be for its industry, how itparticipates in whatever the future ends up being, it looks likeyou don't need as many employees.
Hill: Tronc is back in the news, theonline publishing company with one of the worst names in the public markets, theparent companyof the Chicago Tribune. Tronc has signed a non-binding financial agreement to buy,I think I'm pronouncing this correctly, Wrapports Holdings, which is the parent companyof the Chicago Sun-Times. So, theparent of the Chicago Tribune is looking to buy theparents of the Chicago Sun-Times, whichbegs the question,why in God's name would they do that? It's not like Tronc hasbig piles of money sitting around.
Barker: Economies of scale.
Hill: Really? That's why? And they're so sure of this move that they took the bold step of signing a non-binding financial agreement? This juststrikes me as,among other things, sad. Like,look, you want to go out and buy your rival newspaper? Go for it.
Barker: I really feel like Troncdid something personally to you, yourenmity toward them.
Hill: A lot of it has to do with the name.
Barker: Most of it. Almost all.
Hill: Almostall of it has to do with the name.
Barker: Some 90% has to do with the name, because theircrimes against you other than adopting the name Tronc arepretty limited, aren't they?
Hill: They'rebasically non-existent.
Barker: TheChicago Bulls have taken out your Celtics a couple times over the years.
Hill: Not this year. Honestly,here's what bothers me: as someone who has spent his adult life in various realms of the media world --
Barker: You'resort of an expert on the media.
Hill: I wouldn't say I'm an expert, but --
Barker: Listeners out there,by the way, this is the way to alwaysput somebody on the defensive. When you're looking for advice, just go like, "You'resort of an expert on ... " And thenimmediately, people -- non-Donald Trump people -- disclaim their expertise on almost all topics thatyou would approach them about, claiming they're an expert.
Hill: Goingback to Memorial Day weekend, which is coming up, this isabsolutely a great move to pull at abarbecue or a party at some point, when you'restanding with a group of people. Just like, "Jim. You'rekind of an expert on biochemistry. Let me ask you a question." And then just watch Jim's face.
Barker: Even if it's their job. But you are sort of an expert on the media.
Hill: Uh, I wouldn't --
Barker: See? There you go. "Uh ... "
Hill: Expert,I wouldn't go that far.
Barker: It'syour full-time employment.
Hill: Well that, yeah. But asI think we both know, just because you're fully employed in one job doesn't make you anexpert on that job.
Barker: That'swhat I'm saying.
Hill: Butin the case of Tronc,I guess I'm just bothered,among other things, beyond the name, I'mbothered because I am generally a fan of media. I appreciate when media is well done andwell executed and well managed. That'swhy it's great to see entities likeTheNew York Timesand The Washington Post pull off -- at least,they appear to be in the process of successful pulling off -- thetransition from the printed newspaperbusiness to the digital business. The fact that Tronc is going about things in such a ham-handed way, I think, offends mysensibilities. And again, have some guts. You want to buy your rival newspaper? Do that. But don't come to me with this weak, "Well,we're going to sign this piece of paper, but we can get out of this, right? It's non-binding? Great, we'll do that."
Barker: Alright.I only brought it up today because I knewyou would like to vent. I don't have any realinsights on what they're up to today. InPhiladelphia, we had the experience of the two major papers being all under one roof. So it's not that unusualto me. We'll see whether it works. It may be the case that there just isn't room for two local papers ineven a market as big as Chicago. New York still does it. We'llsee for how long. But New York is kind of an entity unto itself. The normalrules of economics don't always apply there. What'sthe No. 2 paper in LA?I'm afraid I don't know it.
Hill: I believe it's theLA Daily News, but I was about to mention LA. InNew York City, you have the New York Times,theNew York Post, andNewsday. The LA Times isso much bigger andmore relevant than the Daily News --sorry for anyone listening who may have someconnection to the LA Daily News. But, you can live in New York City, and there arelegitimate reasons to subscribe to all three of those newspapers. And I think, just from a smile standpoint, it'sgoing to be a sad day if the New York Post ever goes under. What's on thecover and the back cover of the New York Post? I always want to know that.
Barker: There'sa lot of gold on those covers.
Hill: There's always gold.
Barker: There was a good one today.
Hill: Was there?
Barker: Yeah.It was Leaker-In-Chief, wasn't it?
Hill: Yes, or maybe that was yesterday. Also, the back page at the Post, foranyone who's a sports fan, that's always a good one to check out. Before we wrap up,we were talking on yesterday's show aboutthe Oreos contestthat's being run byMondelez. Sneakpreview of coming attractions, foranyone who listens to Motley Fool Answers, which is one of our weekly podcasts here at the Fool, hosted by Alison Southwick and Robert Brokamp, next week's episode, I may be making a cameo, because Alison Southwickasked me about doing, possibly, a blindtaste test around Oreos. We'll see. I make no promises, butright now, that's a potential sneakpreview of coming attractions.
Speaking of Fool podcasts,today is David Gardner's birthday, co-founderhere at The Motley Fool with his brother Tom, and host of Rule Breaker Investing. I would just say, forDavid's birthday, you should be subscribing to Rule Breaker Investing. One click of the button onApplepodcasts orStitcher or wherever you listen to podcasts,one touch of a button and you could subscribe and getinsights and observations on investingevery week from David Gardner. So check that out. Are you going to enter the Oreoscontest?Are you going to come up with one, or maybe consult with your children and submit somethingon behalf of the Barker family? Anyone can do it onInstagram orTwitter, just using the #myoreocreation.
Barker: The winner iswhoever comes up with the most absurd idea, is that correct?
Hill: I don't know how they're picking the winner. Ifthey follow the playbook thatFrito-Lay did with the potato chips, they willcome up with a few finalists, produce those flavors, and then let people vote.I don't know that they're going to do that, butthat seemed to work out pretty well forPepsiFrito-Lay. So,maybe they're just going to, on their own, decide, "Wewant to try that flavor."
Barker: Whatare you promoting?
Hill: Hamand potatoes.
Barker: Hamand potatoes.
Hill: Yep. Savory. Going full-blown savory.
Barker: I'm going with Thanksgiving dinner Oreos.
Hill: Nice. Is it going to be, like inWilly Wonka, is it going to change flavor? Or is it, this little bite over here isturkey, this little bite is stuffing, anda little cranberry on the side?
Barker: I'm just an idea guy,I don't want to have to implement. Theidea speaks for itself.
Hill: There you go. No. 1best selling cookie in America is Oreos. No. 2 alsoproduced byNabisco,part of theMondelezfamily, isChips Ahoy. And yet it seems like theChips Ahoy people are pretty restrained. They just go about their business, they'renot going hog wildthrowing out flavorswilly nilly. It seems like the Oreos people are drunk with power, whichleads to this question --do you think the Chips Ahoy divisionresents the Oreo division? Is thereinternal strife atMondelez?
Barker: I don't know, but maybe we could agitate here. Maybewe could instigate some fight between them. I mean, the story out there is that the Oreos guys look down on the Chips Ahoy guys and consider them the B team. That's what you hear.
Hill: Look,if you had a winning streak the way Oreos has had forGod knows how many years, of course at some point you're going to say, "Oh,Chips Ahoy, that's adorable, that you're the second best-sellingcookie in America."
Barker: Yeah,Chips Ahoy has just been playing defense for a long time now,according to the Oreos guys.
Hill: Yeah, youtalk to the Oreos people, and that's what they'll tell you. We'll see. You can go to foolfunds.com andsubscribe to Declarations, it'sthe free monthlynewsletter from Bill Barker and his colleagues at Motley Fool Funds. Anychance that the Oreos contest is going to make its way into the next issue of Declarations? Can you work on that? Can you say, "By the way, here's the Fool Funds submission," you can,obviously, have your own submission?
Barker: Yeah,we can do whatever we like down there.[laughs] We could try, I guess.
Hill: BryanHinmon is likeCaptain Jack Sparrow, he's running his own empire down there.
Barker: The Oreos guys coming up to the Chips Ahoy guys, "You'rekind of an expert on boring cookies." Andthe Chips Ahoy guys start cursing,fist fights break outa lot of the time, from what you hear.
Hill: I mean, some people are saying that.
Barker: That's right.
Hill: Thanks for being here!
Barker: Thank you!
Hill: Asalways, people on the program may have interests in the stocks theytalk about, and The Motley Fool may have formal recommendationsfor or against, sodon't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'llsee you tomorrow!
Bill Barker owns shares of Apple and Home Depot. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, Berkshire Hathaway (B shares), Ford, PepsiCo, and Twitter. The Motley Fool recommends AutoZone, Home Depot, Lowe's, and The New York Times. The Motley Fool has a disclosure policy.