Investor Updates

Home Depot Update

Recently people have been worried about a recession, high mortgage rates and inflation affecting consumer spending and hurting Home Depot – which boomed during Covid. The concerns about the retailing industry were made worse recently when Walmart and Target both disappointed investors with forecasts and poor results.

This is not a Home Depot problem and we still love the company.

Here is why.

1.   Walmart and Target are not like Home Depot at all. Unlike Home Depot, Walmart and Target have been poor innovators and, over the last 10 years, have been poor performers and do not even have similar business lines or customer preferences! Ask Amazon where all its customers have come from…

2 Home Depot exceeded and raised its forecasts for the next year and beyond.

3.  For more than 10 years home construction has lagged demographic needs. The pipeline of demand is huge! Two thirds of millennials plan to buy a home in the next 2 years and they all have jobs. The number one reason why? Improving financial situations. Rising wages are not all bad! So much for the recession fears for the young at heart; they have a future to build. 

4. The company sees the need for above-trend construction to continue for 7-10 years.

5.  Young millennials, unable to afford new homes, are buying old fixer-uppers and doing the renos themselves or hiring contractors. Home Depot is the best at satisfying their needs and giving them delivery and tips on how to do the work. No one does this better than Home Depot.

Presently doom and gloom is casting a pall over the amazing long-term trends which should support continued out-performance by the second largest retailer in the world. Home Depot has gained that status by being a leading innovator and delivering a compelling product to its customers; employing and paying its well-trained people well, and in the process rewarding long-term investors with continued excellent prospects.        

Amazon Update

Recent headlines have some fretting about the company downsizing its warehouses’ space. The implication being that business is falling and the prospects are poor for the company.

This is wrong and shallow reporting.

Amazon maybe putting about 10 million square feet of warehouse space up for sublease for the NEXT few years.

“10 million square feet seems like a lot, John! What the heck! No wonder the stock is down! What were they thinking?? Is this the end of the road for the great expansion? Does this mean they stock is doomed? Should I sell?”

This is typical pile-on reporting in a traffic accident prone stack market. It makes for good headlines but its just not important.

No and here is why:

  1. Large companies rearrange their space requirements all the time. When you are big — and Amazon is the biggest and has been growing like stink (approx 26% the past 2 years) — you need to build ahead to meet future demand. There is a shortage of space because Amazon bought most of it!
  2. All this fear of inflation because sales of everything is booming- yep business is booming and warehouse space is at a premium and Amazon has lots of it. Maybe more that they need right now but their plans are to need it soon.
  3. Even if Amazon subleases 30 million square feet of its space it added about 180 million square feet in the last 2 years! So, they have some spare capacity for a bit of time. Its not like they didn’t fill up most of the doubling of capacity they built.
  4. Vacancy rates in the US market for warehouse space is less than 4%. Amazon just might make money on its spare space.
  5. In any event given the growth path for the company we see little reason to worry about less than 10% of its space being in excess of its current needs.

Successful companies are that because they have a plan for the future and out-maneuver the competition. Amazon is one of the smartest, best-managed and well-positioned companies for the future in the world. Don’t worry about Amazon.

McDonald’s Update

McDonald’s exit from Russia cost it about 9% of its revenues and about 3% of its profits so it’s no big deal.

The mega chain will maintain its trademarks in Russia leaving room for re-entry at some point, but will immediately remove the McDonald’s name, logo, branding and menu from its units in Russia in a process the company referred to as “de-Arching.”

The company expects to open 1,300 NET new stores this year far exceeding the number to be closed in Russia and these stores are certain to be more profitable than those operated in Russia.

In fact, the company reported profits recently which far exceeded most estimates in spite of the difficulties of the war, and proved its inflation-resistant attributes with the company reporting sales increasing 20% year over year and their margins to be consistent with historical results.

While this is a setback for the company it proves once again the company acts fast when confronted with challenges and cares deeply about its brand. The McDonald’s brand is one of the most valuable in the world. That’s what you, as an owner care most deeply about.

What is important to note is that, while it cares deeply about its values and is exiting Russia because “ownership of the business in Russia is no longer tenable, nor is it consistent with McDonald’s values,” the company also announced in a press release, that the company continues to demonstrate good corporate governance. For example the buyer of the business has agreed to retain McDonald’s employees for at least two years and will also cover existing liabilities to landlords, utilities and suppliers.

Our commitment to our thesis that McDonald’s is a unique and dominant international brand, serving billions of meals every year with a commitment to quality, service and good business practices keep it a strong component of your portfolio.