A Great Quarter for Home Depot, an "Eh" Day for Its Shareholders

In this segment of the MarketFoolery podcast, host Mac Greer is joined by Motley Fool Director of Small-Cap Strategy Bill Mann and Matt Argersinger of Million Dollar Portfolio to discuss the latest Home Depot (HD -0.37%) earnings report, which, as usual for the home-improvement retailer, was excellent.

Few retailers can match its numbers, and even the fall's hurricanes were good for it. Yet its stock slipped. The real question for the future: What will the retail apocalypse do to the chain and to the industry in general? And where is the opportunity for investors?

A full transcript follows the video.

This video was recorded on Nov. 14, 2017.

Mac Greer: Let's begin with Home Depot. Better than expected earnings. Matt, we have same-store sales that are way up, crushing expectations. And the numbers seem to be helped by the bad weather. But, you look at the stock today, not doing a lot.

Matt Argersinger: Yeah. I'm not surprised. You have to remember, Home Depot was up more than 20% this year. It's had a great year. And you said, the same store sales, up almost 8%. There might be a handful of retailers in the country that are putting up that kind of number. You mentioned the hurricanes. According to Home Depot $282 million in additional revenue from hurricanes. So, obviously, very few retailers can benefit from hurricanes the way Home Depot has. 14th straight quarter that Home Depot has surpassed expectations. In this retail environment we're in where it seems like nothing is working, nothing really isn't working as well as Home Depot.

Bill Mann: What you're saying is that people are terrible at expectations.

Argersinger: That's part of it, yes.

Mann: Like 14 straight quarters of complete futility.

Argersinger: You're either really underpromising, or something's happening there, you're right.

Mann: Yeah. It's definitely been a good quarter. We're going to talk about this in a bit. In an environment where people think that Amazon (AMZN -2.32%) is going to crush everything, Home Depot is fine. And there are lots of businesses that are like that, but Home Depot, I think, has the secret sauce.

Greer: Bill, let's talk about that. You were just mentioning, I know we passed around a Bloomberg story, the title, a great, ominous headline, America's Retail Apocalypse Is Really Just Beginning.

Mann: That's brutal.

Greer: It is brutal. And when we've talked about problems facing retailers, we have talked a lot about Amazon and the effect that Amazon is having. But it's much bigger than Amazon, right?

Mann: Yeah. Amazon, I don't have the statistic off the top of my head, but Amazon is still something on the order of 2% of all retail sales in the U.S., which is, let's just say, phenomenal, because you're talking about 2% of a really, really big number. But it's not just Amazon. The thing that you have to realize -- I was recently in Silicon Valley, and I was looking at all of the different amazing businesses, and I realized that Silicon Valley came from the death of the military industry in that same area. There was a renewal. And I think we're going through the same thing in retail. There are lots of areas where the big department stores, which used to be enormously relevant, you just don't need them anymore. But that's where the space is pointed to. The big malls, it's just not the type of things that are needed anymore, and it's not where the trends are or are going. But you have that, and you also have these stores, a lot of which have been taken out by private equity, absolutely larded with debt. So, I'm not sure that the retail apocalypse is driven by Amazon. Obviously, that's part of it, and it's very specifically hurting some segments, but it's not everything.

Argersinger: Yeah. Bill mentioned it, Amazon is part of the story here. E-commerce in general is part of the story. But it really is a balance sheet story more than anything else. The amount of debt that's going to come due over the next several years as pointed out by this Bloomberg report is staggering. Tens of billions of dollars' worth of debt from companies --

Mann: Yeah, this year was nothing compared to what's coming in 2018.

Argersinger: Yeah, it's a sliver. Especially if you look out to 2019 and beyond. It's staggering. And I think, one thing that the Bloomberg study didn't point out, Credit Suisse came out with a report early this year looking at the sheer square footage of retail space that we have here in the United States. Bill was getting at it --

Mann: Eventually. [laughs]

Argersinger: The number here is amazing. We have 2,000 square meters for every 1,000 people in the U.S. 2,000 square meters of space --

Greer: Don't use the metric system. Come on!

Mann: [laughs] I was about to say ...

Argersinger: They did it in meters! I can't help it.

Greer: Credit Suisse. What are you, Canadian? [laughs]

Argersinger: What's the number in Germany? For example, in Germany, obviously a very advanced country --

Mann: It's also meters.

Argersinger: 181. So, we have 2,000 here. In Germany, it's 181. In China, it's 39. So, that number alone says, to Bill's point, there's just too much retail. We have too much space that we don't need anymore. So, I think those three things, Amazon, balance sheet, too much square footage --

Mann: And it's shifting. A really interesting conversation that I had with Kent Taylor, who's the CEO of Texas Roadhouse (NASDAQ: TXRH), Texas Roadhouse loves putting their restaurants on mall properties, in the middle of the parking lot. And he said, yeah, there are a lot of malls that are out there that are going away, but a lot of them are shifting. There's a fantastic new development in the western part of this metropolitan area called the Mosaic District, and they have taken office space, they've taken residential, and they've got retail, and it's all mixed together. So, there, you have a very vital retail environment, and it's just because it's shifted to how people are shopping now.

Greer: The Target there has an escalator that will bring your cart up and down. It's like voodoo magic. I would go there just for the escalator at Target. Is that wrong?

Mann: No. My son, the first time we went, we tried to follow the escalator up that glider thing. I was like, "Son, you might not survive this experience."

Greer: [laughs] So, let's underline it for investors. Bill, I know you're a big fan of asking the question, when you read the newspaper, what does this mean for investors? Where's the opportunity for investors? So, given this whole shift with retail, the Amazon effect, too many stores, too much real estate, too much debt -- as an investor, what do you do with all that?

Mann: It's a great question, and I haven't really cracked the code yet. But I think some of the answer is going to actually be some of the real estate development companies. We're talking about Jones Lang LaSalle,which primarily deals in office space. But a lot of office space now is being integrated into, this is where the growth is. So, I think those types of consultancies are probably areas of opportunity. And then, also, the Amazon apocalypse is a pretty known story. I think companies like Home Depot really do actually offer a little bit of opportunity.

Argersinger: There's when company that comes to mind, and I think it's a recommendation in at least one of our services, it's called STAG Industries, it's a REIT. Their specialty is really looking at --

Mann: Why isn't it pronounced "right?" I mean, we're German, right?

Argersinger: [laughs] But, they specialize in warehouses, distribution facilities, light industrial stuff, stuff that's trending that way with the e-commerce world that we're getting into. They own a lot of those properties. And that's an interesting way of playing this potential.

Greer: STAG Industries?

Argersinger: Yeah.