Artesian-Arts

Why Is Home Depot Stock Down?

In this episode of MarketFoolery, host Chris Hill chats with analyst Jason Moser about the latest news stories and earnings reports from Wall Street. They look at the general retail landscape through the lens of earnings, and how DIY and pro segments are helping home improvement sales. They also discuss the boost in auto repair, what it means for future new car sales, and much more.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Aug. 18, 2020.

Chris Hill: It’s Tuesday, Aug. 18th. Welcome to MarketFoolery. I’m Chris Hill, with me today, the one and only, Jason Moser. Good to see you, sir.

Jason Moser: Happy Tuesday!

Hill: Happy Tuesday, indeed. We are going to look at automotive and home improvement, and we’re going to do it through the lens of earnings, but we’re going to start with general retail and that means Walmart (NYSE:WMT).

And let me start with this, Jason. Early in the pandemic, the first show that I binge-watched with my family was Parks and Recreation. My favorite character on the show is Ron Swanson. And in the universe of Parks and Rec, Ron Swanson’s favorite retail location is a store called Food and Stuff.¬†And as he says on the show, it’s where I buy all of my food and most of my stuff. And I say all that, because if Walmart’s first-quarter report was about food — and it was — this second-quarter report that we got this morning seems to be about stuff. Walmart sold a lot of stuff, so much stuff that their [laughs] e-commerce sales nearly doubled.

Moser: Yeah. Well, I stand by the scenario I kicked you guys earlier in the Slack channel. I mean, this is for any Family Guy fans out there, this is basically like the Ollie Weather Report. Like, how’s the weather out there, Ollie? It’s raining. Thanks, Ollie. Well, how was Walmart’s quarter, Ollie? They sold more stuff. Thanks, Ollie. [laughs] Because it is basically that simple: They sold more stuff.

But when you dig into the numbers, I think it really does show you a business that is continuing to perform very well in what is, obviously, a very difficult economic climate. Top line grew 5.6%. I wouldn’t say that was a knock-it-out-of-the-park quarter compared to some of the other retail concepts out there. But when you look at U.S. comps, U.S. comps up 9.3%, that’s on top of 10% a quarter ago. And if you remember that 10% that they chalked up a quarter ago, that marked their best quarter one comp in nine years. So, yeah, while retailers out there are having a difficult time, but Walmart seems to be coping very well. A lot of that, as you mentioned, has to do with their investments in their e-commerce business. I mean, 97% on top of 74% just a quarter ago. And that 74% a quarter ago, if you compare that to a year ago, it was just 37%. So, this all just shows you that the investments they’re making in this business are really working out for them right now in a difficult time, and I suspect that they’ll come out of this situation owning a little bit more market share than they did going into it.

Hill: Doug McMillon, the CEO, talked about their supply chain, how it’s improving; I think that’s good news in general, whether you’re a Walmart shareholder or not, you want to hear about the supply chain getting better. They’re not out of the woods, they’re still doing everything they can to make sure that the groceries are stocked, some of the sporting equipment as well. Didn’t really give us a whole lot on Walmart+, which is their membership service they are working on. I don’t begrudge him that; I mean, if I were a Walmart shareholder, [laughs] I would want him to continue to keep his cards close to the vest like he’s doing, but it’s going to be interesting to see what form and shape that takes, how they roll that out. But if they get that right, you know, that’s one more lever they can pull.

Moser: Yeah, no question about it. I mean, in regard to supply chain, I’m glad you brought that up, because that’s something they certainly pointed out last quarter, calling their supply chain among the most capable in the world. But even in this environment they’ve stretched it, if you look at inventory levels this past quarter, total U.S. inventory levels were actually down 4.6%, which is just, you know, that’s something to note, because while the supply chain volatility is starting to settle down, I mean, over the quarter and over the first half of the year, they’ve seen some shortages in certain things and some stuff, right? [laughs] That they’re selling an awful lot of stuff. But they are managing that supply chain really, really well.

And certainly, a theme of the call earlier today was membership. I mean, that word “member” or “membership” was mentioned an awful lot on that call. And, yeah, I mean they’re playing their cards close to the vest right now on what that potential membership model looks like for Walmart+; I mean, keep a little mystery out there, right? Anytime you throw a “+” [laughs] on the end of the name, as we’re seeing Disney really pulled that off pretty well. So, you know, hey, listen, this Walmart+, let’s have a little mystery out there about what kind of value it will bring. But I mean, they’ve got some blueprints to go by with businesses that have been very successful with these membership models. So, I suspect they’re being mysterious, they’re playing those cards close to the vest for a reason. I mean, I think that when they’re ready, they’ll announce it. I don’t think they’re going into this half-hearted, I think this is going to be a key strategy to the business going forward, so I suspect they really want to make sure they get it right.

Hill: Last thing before we move on. You look at the stock, it’s down a little bit today, you know, it’s up somewhere in the neighborhood of 15% year to date. It seems like not an overly expensive stock.

Moser: No. But I mean, it never is really. I mean, when you look at something like a Walmart and you try to get an idea of expensive versus cheap, I mean, we’re living in this world now of businesses that make no money and trade for 30X to 40X sales and that’s, kind of, become the new normal, which makes a Walmart trading at 20X earnings seem almost absurd. But you own a stock like Walmart really more for the, I think the slow-and-steady income growth there, right? I mean, there are going to be some capital gains that come with a stock like this, but clearly, when you look at how the market values something like a Walmart versus an Amazon, you start to understand the discrepancies there. And so, if you own a Walmart, it’s going to be for a little bit of a different reason than a lot of those growth stocks that are out there today.

Hill: Second-quarter profits for Home Depot (NYSE:HD) rose 25%. This was, in some ways, a surprisingly good quarter in terms of both profit and revenue for Home Depot, although they did acknowledge, and this is kind of what we heard three months ago out of Home Depot, they talked about the costs. Their costs are going up for all of the right reasons, whether it’s safety measures in their stores and warehouses or employee pay.

Moser: Yeah, well, you know, I think that when you look at both Walmart and Home Depot, the one constant that you take away from reading through those releases and the calls is, the priority on their associates first and foremost. I mean, obviously, you’re looking out for all stakeholders, and the business doesn’t really exist if you don’t have customers, but it definitely doesn’t exist if you don’t have associates to help you run that business. And so, much like Walmart, Home Depot, big focus on making sure that they’re taking care of their own, investing in the stores, investing in safety, investing in their associates, understanding that they already have just such a phenomenal competitive position, they know they can afford to do that, they know that the market is going to accept that. I mean, it’s a reasonable thing to be doing.

We talk about, through this entire pandemic, the opportunity for a lot of these strong businesses to come out of this situation even stronger. I present to you exhibit A in Home Depot, because this was a really impressive quarter. Sales closing in on $40 billion, up 23.4%, comp sales up 23.4%. U.S. comps up 25%. Earnings for the second quarter up close to 27%. They just are doing so many things right, and they are benefiting from the situation. You know, there’s just no other way to put it. I mean, when you have everything shut down and people have a little time on their hands, they start doing stuff like home renovations and repairs and whatnot, you focus on those projects that you didn’t have time for before, and Home Depot is one of the leaders in the space when it comes to this with, both, a very strong do-it-yourself presence and the pro side of the business as well. So, they’re helping out homeowners like us, and they’re helping out contractors that are able to get back to work. And you put those things together, transactions, tickets, both up double-digits in the quarter. This is just a business that’s really doing a lot of things right.

Hill: Well, and if you look at the stock today. I mean, anyone who hears what you’re saying about Home Depot’s quarter, how impressive it was, you look at the stock trading down a little bit today, you may look at that and say, well, wait a minute, what’s going on here? Craig Menear, the CEO, made some comments that I think were smart of him to make, and I think he’s doing what a lot of CEOs are doing, which is to essentially say, hey, don’t read too much into this. Like, you know, you read between the lines of what Menear said. And my takeaway is, yeah, there’s still a tremendous amount [laughs] of uncertainty. Whether it’s supply chain issues, whether it’s just what is happening with a vaccine in terms of what is happening with testing, like, there are so many X factors, some of which are brand-new. You know, supply chain issues aren’t new. Global pandemic, yeah, that’s a new wrinkle that all CEOs have to deal with. So, I think Menear is smart to just say, yep, this is a great quarter, let’s not try to, you know…and he’s pointing at the Wall Street analysts, just saying, let’s not extrapolate this for the next two quarters.

Moser: Yeah. I mean, there’s a level of humility that’s coming in with a lot of these CEOs, a lot of these leadership teams this quarter, where the businesses are fundamentally strong going into something like this, they’re able to cope with the given situation, and do OK in what is a difficult time. And they certainly understand that, hey, there’s still a lot of uncertainty out there, we don’t know how sustainable this is. I mean, certainly, it seems very reasonable to assume that the cost of doing business for a lot of these companies is going to go up permanently going forward. I mean, there are going to be new safety measures, new policies and procedures put into place for the way these retail concepts operate, they’re going to have to make more investments, obviously, in omnichannel and fulfillment. And so that’s something that will play out on those expenses over the coming, really not just quarters, the coming years. And you got to figure that over the course of that time, they’re going to witness some headwinds and consumer behavior, whatnot.

So, things look good today; given what we know, it also seems like we’d probably run into a situation here, a few quarters down the road, where they maybe don’t look so great. But yeah, I think that still, the way we invest here at the Fool, you know, we’re talking about a three- to five-year time horizon, if not longer. The longer you own companies like this, the more sense it makes, right? These investments that they’re making today are the right ones, even if they play out on the bottom line in the near term; in the longer term, I think it’s just going to help them strengthen their competitive positions — and a good thing for investors, of course.

Hill: And I don’t know about you, but I’ve been to Home Depot a few times over the last couple of months, and it doesn’t matter whether I’m going during the day, at night, weekend, weekday, it doesn’t matter, the parking lot is always full. Like, it’s just always full.

Moser: It’s like a Costco or an airport; or it’s like a Costco and an airport hooked up. I mean, it is just never not busy. And I’m with you, I mean, I’ve gone to Home Depot, and number of times since this [laughs] pandemic started, and it is never not busy, and I just think, you know what, I get it, I mean, I do get it, it’s a great situation to be in. I mean, whether you’re a homeowner or renter, you’ve got stuff you’ve got to get done. And you know, these are the times where people start to get a little bit of an itch to become a little bit more creative, learn something new, and that really plays into favor for companies like a Home Depot.

Hill: I bet the airlines, and anyone who owns an airline stock, wishes that the airports were as busy as Home Depot. [laughs]

Moser: Man! You want to talk about a juxtaposition, when I flew down to Atlanta, I guess it was about a month ago now, I mean that was a different situation. Man! I went into Dallas airport; I have never seen Dallas airport look more like a ghost town. I mean, everything closed, not very many people. I mean, obviously, we understand why that’s the case, but yeah, two very different scenes.

Hill: Let’s move on to Advance Auto Parts (NYSE:AAP). Second-quarter profits and revenue came in higher than expected. And another great comp number, Jason, same-store sales for Advance Auto Parts up 7.5%.

Moser: Yeah. And you know, we were talking about Advance, I think, toward the end of last year. And you know, this stock, I mean, the business and the stock itself, it’s been, sort of, this long-drawn-out decline, going into the bear market back in March. Stock really got hammered for that short period. And since then, it’s essentially doubled. So, it’s recovered more or less, all of what it’s lost, but I think the business is still more or less where it was going into the end of last year. I mean, it’s just a very mediocre situation. Flat sales, flat comps, no real catalyst.

Fast-forward to today, there was a catalyst. And management certainly called that out. They said on the call, without question they benefited from a surge in the industry demand fueled by government stimulus, unemployment benefits, the impact that COVID had on consumer behavior. So, this was a quarter that — you know, there were tailwinds for this business, much like Home Depot. I mean, folks getting out there and doing what they need to do to their car, trying to extend the life of that, maybe learning a little something new. So, it worked out well for them. But I think the big question that remains is, is this type of performance sustainable? And I’m a little bit less glass-half-full, when it comes to that.

Hill: Do you think it tells us anything about the automotive market? Because, and maybe this is a misread on my part, but anytime I see good numbers, whether it’s AutoZone, Advance Auto Parts, O’Reilly, that sort of thing, one of my first thoughts is, uh, this probably isn’t going to be good for car sales; you know, for new car sales. If people are just looking to get more out of, more years out of the vehicles that they have, and there’s less wear and tear on them, because in general, people have been driving a lot less over the last six months. I wonder if it bodes ill.

Moser: I think it could in the near term. Now, I will say, I’d liken what’s going on in automobiles right now, it’s a nice little microcosm of this greater rollout to 5G. And, yeah, I mean I know, 5G is mostly phones and whatnot, but ultimately what 5G is doing, it’s connecting everything, right? I mean, you’re talking about the Internet of Things and connecting all of these devices, whether it’s phones, watches, cars, cities, buildings. And so, automakers around the world are really investing a lot in bringing these automobiles to the next level from a tech perspective.

And so, what we’ve seen over the past several years in regard to phones, for example is, shipments for smartphones, really, globally speaking, have been flat to actually declining as 4G is more or less becoming the standard, everybody has got it. Now, we know 5G is coming out, so people are kind of holding off and they’re going to wait and they’re going to start buying new phones when the tech gets better.

I think that in time, it’ll probably take a little bit longer, but not much longer, I think that we will see these cars really up their game from a tech perspective. And that will help, I think, those new car sales. But by the same token, you’re right, cars last longer today than ever before, and we have a lot of ways that we can get out there and take care of them. And when I say a lot of ways, and we were talking at Advance Auto here, they deal with some very competitive companies in the space. I mean, you’re talking about Advance versus AutoZone versus O’Reilly. And if you look over the last five years these, three companies, side by side by side, I mean, Advance is just the clear laggard, O’Reilly shares up 84%, AutoZone up 64%, Advance I think is, with today’s pop, maybe breaking about even over that stretch.

So, it’s a difficult time for Advance in this market. And I feel like, as tech gets better, if that plays out well for new cars, that’s, I think, going to play out probably a little bit worse for a company like Advance, that’s really already in third place as far as its competitive landscape.

Hill: Jason Moser, appreciate you being here. Thanks.

Moser: Hey, always happy to do it. Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear.

That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I’m Chris Hill, thanks for listening, we’ll see you tomorrow.

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