Will US fixed mortgage rates lead to a renovation boom? – Lowes | Summer Series

Bryce: [00:00:16] Welcome to the Equity Mates Summer Series, proudly brought to you by CommSec, the home of investing. Over 12 episodes, we're deep diving into some of the most exciting, interesting and well known companies from around the world. Each episode will be unpacking one company with one expert investor. We'll learn from their process and hear why they like the company. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:39] I'm excited, Bryce. This summer series has been epic. We have spoken to some great investors and unpacked some great companies, all with the aim of becoming better investors ourselves. We've been trying to understand how they analyse a company, their processes, how they think about building a thesis, and I think I've become a better investor through this series. Jury's out on if you've improved. 

Bryce: [00:01:01] Oh, right on leaps and bounds.

Alec: [00:01:03] That's actually the talk in the offices you might actually be worse. 

Bryce: [00:01:06] I've actually paid I reckon.

Alec: [00:01:08] Yeah, that's literally what people are saying. 

Bryce: [00:01:10] You've paid, I've just made too much money.

Alec: [00:01:15] In this commbank sponsors going ahead. Well, before Bryce says something that he will regret. Let's get on with it. Today we're diving into Lowe's. Not the Aussie work with. 

Bryce: [00:01:28] At Lows. 

Alec: [00:01:29] At Lows, but the American hardware giant. And we're speaking with Tracey Wahlberg, an investment analyst at Magellan, to help us unpack it. 

Bryce: [00:01:38] Now, the Equity Mates Summer Series is proudly supported by CommSec. A huge thank you for the support so far. They make it easy to tap into the world's leading share markets. We're covering plenty of global stocks in this series that are likely to get you excited. And CommSec has 13 international markets available from the US to Norway, Germany and Japan. Get the access that you need as a global investor and invest in shares on the US market from just $5 US brokerage. Download the CommSec app today or visit CommSec.com.au. CommSec T&Cs and other fees and charges apply. Investing in overseas markets exposes you to additional risk. 

Alec: [00:02:14] Now, before we get started, we need to remind you that while we are licensed, were not aware of your personal financial circumstances. Any information on this show is for education and entertainment purposes only. Any advice is general. Bryce, before we speak to Tracey, let's unpack the company ourselves. Today we're talking about Lowe's, the discount work with supply in Australia. 

Bryce: [00:02:35] At Lowes. No.

Alec: [00:02:36] No, no, we are speaking about a much bigger American cousin, to Australia as well.

Bryce: [00:02:43] Yes, a fortune 50 company. 

Alec: [00:02:45] I actually don't think they're related at all. And we should be clear. But we are talking about the $120 billion hardware giant in the US.

Bryce: [00:02:54] Yes, listed on the New York Stock Exchange. The ticker is L-O-W. It is the second largest home improvement retailer headquartered in North Carolina. Just over 2000 stores operating in the United States, Canada and Mexico, serving approximately 20 million customers. Awake almost the entire population of Australia tours going through their doors. 

Alec: [00:03:17] $97 billion in revenue last year, up from a bit over 96 billion the year before. 6.5 billion in profit, down from 8.5 billion the year before. But still, like it's a $100 billion a year sales business valued at $120 billion. It's like it's it's giant. Conceptually, it's not a difficult company to understand. It's like Bunnings. 

Bryce: [00:03:44] That is correct. 

Alec: [00:03:45] I mean, if you notice. And that makes it more difficult to understand.

Bryce: [00:03:48] Yeah, it's conceptually not difficult. But I think as we've learnt from many times on this show this year, having spoken to experts about big box retail and whatnot over in the States, there it is. These companies, incredibly tied to a lot of macroeconomic tailwinds or headwinds, whichever way you want to look at it, particularly as they play out in the States, slightly different to what's going on here in Australia as well. And that case is certainly the same for Lowe's. 

Alec: [00:04:15] Yeah. So let's talk about some of those, headwinds and tailwinds. I think the first one and the biggest one is the US housing market. And the quirk of the US housing market is that you can fix your mortgage. And so what's happened over the last 18 months is a lot of American homeowners got a fixed 30 year mortgage with a 1 or 2 in front of it, you know, a mortgage with 2%. And then all of a sudden there was a massive run up in interest rates, and all of a sudden, selling your house and moving would mean going from a 2% mortgage rate to a 7% mortgage rate. Similarly, refinancing your mortgage to unlock equity in your home would mean refinancing at a lot higher rate. So all of a sudden, a whole lot of Americans are stuck and stuck in a good way, stuck paying 2% interest on a mortgage.

Bryce: [00:05:10] Maybe I was thinking about it. Though, it's pretty. You're pretty handcuffed. 

Alec: [00:05:14] You're paying 2% interest on a mortgage. 

Bryce: [00:05:16] Yeah, but, like, you're not going to be at your house for 30 years right now.

Alec: [00:05:19] I might be if I pay 2%. 

Bryce: [00:05:20] I doubt it anyway. I think. 

Alec: [00:05:22] You're right. Like you have to stay in a place for longer because you need to build up more equity. Because if you want to move, you want to borrow less so you can afford a 7% rate payment. 

Bryce: [00:05:32] It's great if you're in a stage of life where it is your final home. 

Alec: [00:05:36] But I also think that, like, I don't just think the 2% was the anomaly, not the 7%. 

Bryce: [00:05:42] Yeah. 

Alec: [00:05:42] So, like, I don't feel too bad that the market's sort of gone back to normal. 

Bryce: [00:05:48] Yeah. Well I don't feel bad about that. 

Alec: [00:05:50] Well you just said you feel bad for them. 

Bryce: [00:05:51] No no I'm saying you said it's pretty good and I'm saying I don't like, I don't think it's as amazing and positive as people make it out to be like, all.

Alec: [00:06:02] Right, let me ask you this. If you could, if you were buying your house that you've bought, if you were buying it two years earlier, would you have gotten fixed or variable? So if you were buying in 2021 

Bryce: [00:06:15] To start like there would be a high likelihood you'd go fixed. But we don't have 30 year fixed in Australia. 

Alec: [00:06:21] Yeah, I'm but I'm saying what would you have done if you could. 

Bryce: [00:06:23] Two years ago. Yeah. Well I mean, highly likely it would have been fixed. 

Alec: [00:06:26] So it's a good thing that I have that choice to. 

Bryce: [00:06:29] Is it a choice though? 

Alec: [00:06:30] Yeah, I think it's a choice. 

Bryce: [00:06:31] But what I'm saying is it's a 30 year look. 

Alec: [00:06:35] I feel like you're not going to win an argument that a 2% 30 year fixed mortgage is a bad thing. It's a good thing. 

Bryce: [00:06:42] Yeah. What I'm saying is that unless it's going to become problematic at some point for them is my point anyway. 

Alec: [00:06:51] No one is here to listen to us argue mortgage rates. People are here to listen to Tracey talk about Lowes. So let's keep going. Regardless of whether it's a good or a bad thing. The fact of the matter is, it is a thing. And what it means is that a whole lot of American homeowners aren't going to be moving anytime soon, because they don't want to subject themselves to higher rates, even though it might be a good thing. So what they're going to do is they're going to renovate. They're going to if they're growing their family, if they need more space, they're going to add a room, they're going to add a floor. They're going to find ways to do more with the space that they have. And that in theory should be good for companies like Home Depot and Lowe's.

Bryce: [00:07:33] The headwinds with that though, inflationary pressures, cost of living. So it'd be interesting to get Tracey's view on how, I guess both the tailwind and a headwind come together and how that plays into the thesis for for Lowe's. 

Alec: [00:07:50] Should we ask Tracey her view on our argument? 

Bryce: [00:07:55] I'm sure she decided today.

Alec: [00:07:58] So I think that's probably, the key macro trend. And then there are a number of company specific trends. You know, we're here in Australia and we've got one dominant home improvement retailer, one of the best retailers in the world. 

Bryce: [00:08:12] Bunnings. 

Alec: [00:08:13] Bunnings. So yes, America has a couple of big players. Home depot is probably right up there in terms of like incredibly well run retailers. I think it's something really notable that the CEO of Floor and Decor is ex Home Depot. The new CEO, a couple of years old. The new CEO of Lowe's also ex Home Depot. You just sometimes say that with retail around. Yeah that like there's just like a lot of great retailers made in this one company and then they go out and do well in other companies. I think Walmart has had that Walmart in its previous iterations. 

Bryce: [00:08:53] They will move around. When where it calls and woollies, they'll flip flopping.

Alec: [00:08:57] All over the place. Yeah, yeah. They say that Coles circa 2016 to 2019 created some generational ladies. So yeah, I think that's interesting that Home Depot seems to be producing CEOs than some of its biggest competitors. But there is competition in this market, Lowe's and Home Depot being the biggest two. But the market after that is pretty fragmented. So I think there's a lot of small players in the US, which potentially means a lot of opportunity to, you know, either roll them up or out, compete with them on use your scale to get lower prices and the like. So that's what you want to see, I guess, as a retailer, because the name of the game in retail is three things expand your store footprint, have more stores, improve your sales per square foot, improve your same store comps, and then thirdly, improve your margins, in each store. And you do that with, you know, like more private label and stuff like that. If you do those three things well, as a retailer, you I'm mean, you're pretty good business.

Bryce: [00:10:02] I would say. Fourthly, Ren, before we bring Tracey in, look for strategic partnership opportunities, just like Lowe's did in partnering with Woolworths to launch the infamous master's brand. 

Alec: [00:10:13] I'm surprised. I'm surprised you bring that up. 

Bryce: [00:10:16] Well, it's just a fun fact. 

Alec: [00:10:18] So for people who aren't familiar, a black spot in Australian retail history is when supermarket giant Woolworths.

Bryce: [00:10:26] Leading supermarket giant. 

Alec: [00:10:29] Sure, decided that they would try and rattle Wesfarmers, who owned both Coles and Bunnings amongst others, and would compete with Bunnings. And so they partnered with Lowe's 50-50 joint venture and open masters home improvement in Australia. Big box hardware retailers like a direct Bunnings competitor. How much it lost. 

Bryce: [00:10:53] I'm honestly going to say less. I actually don't know. I joined Woollies when it closed. I'm going to say less than two. 

Alec: [00:11:00] Years, I think. Maybe a bit more, but yeah. Yeah. No. 

Bryce: [00:11:02] It Wasn't. No, it was in and out. 

Alec: [00:11:04] I lost a fair bit of money on it. And it was, it was not a good moment for Woollies. 

Bryce: [00:11:13] No. 

Alec: [00:11:14] Yeah. So, anyway, Lowe's probably doesn't form part of Tracey's investment thesis for Lowes.

Bryce: [00:11:20] No, seven year period. There you go. Yeah. So that whole thing, anyway, closed in, 11th of December, 2016. Before we bring in Tracey, if you've just joined us or feeling a little overwhelmed with where to start or confused about some of the investing lingo in today's episode, then CommSec stocked Content Hub could help stock up on tips and tools to help you find and research a stock and understand the stock market. Visit commsec.com.au for more, or check out a Get Started Investing podcast.

Alec: [00:11:49] All right, well, we'll be right back with Tracey after this short break. 

Bryce: [00:12:03] So we're here with Tracey Wahlberg. Tracey, welcome to Equity Mates.

Tracey: [00:12:06] Thanks for having me. It's great to be here. 

Bryce: [00:12:07] So to kick off, how would you describe Lowe's. 

Tracey: [00:12:11] Yeah. So it's the second largest US home improvement retailer. So let's put that into perspective. It has over 1700 stores in the US. And in 2023 they'll do about just less than 90 billion US in revenue. So it's a decent size, decent scale. They have about 18% market share of the home improvement retailing market. And collectively Home Depot and Lowe's share less than 50%. So that gives you an indication of how they sit in the market and also how fragmented that long tail is. 

Alec: [00:12:47] I'm excited for this conversation about Lowe's, because I think this year we've had an expert speak about Home Depot. Yeah. Is it depot a depot?

Tracey: [00:12:55] Depot. 

Alec: [00:12:56] Depot. There we go. 

Tracey: [00:12:56] The American

Alec: [00:12:58] And we've also had an expert come in and talk about floor and decor. 

Tracey: [00:13:02] Yeah Cool. Yeah. So good company. 

Alec: [00:13:03] We haven't spoken about Lowe's yet, so we're really covering the big box American retailers here. So when we're looking at a big retailer like Lowe's, what are the metrics that matter for us as investors? 

Tracey: [00:13:17] Yeah, it's a good question. So we first start with some comps. So that same store sales comps are comp sales. Not really tell us about the underlying growth rate in the business. We point to that as organic growth. Comp sales break down into average ticket and average transaction. So I like looking at these two components when I look at comp sales because a ticket tells us something about inflation, but it also tells us how well the retailer is doing to attach other products to the sale or grow basket size. So in Lowe's case, think of it like if someone's DIY in their laundry room and they go and they buy a washer dryer, if Lowe's is able to also sell them the tap wear or the sink, the cabinetry that's captured in the ticket. And it can work against the retailer as well. So ticket sizes can decline if someone needs to budget. And so it can also tell us about the health of the consumer. And then on the other side of transactions it gives us an indication of volume growth. So how well is the business doing actually getting the inventory out the door. And that also tells us about engagement, customer traffic and health of the consumer. Another revenue metric that I like looking at is sales per square foot. So this metric tells me about store productivity. And it's great to compare to peers, particularly when you have two big players in the US, Lowe's and Home Depot, against one another. So we can compare how well they've done in store productivity and how much they're able to sell per square foot. 

Alec: [00:14:48] Well, on that point, how do Lowe's and Home Depot compare on some of those metrics that you've just spoken about? 

Tracey: [00:14:54] Yeah. So it's an interesting question. So let's go back in time to answer that one in 2009. That's kind of let's call that just post or maybe depths of GFC. Right. They were quite close in the head of sales per square foot. Really only about a $50 differential in sales per square foot between the two of them. So Lowe's had about $250 per square foot back then. They've grown that to $450 per square foot today.So they've done a great job, but Home Depot has pulled ahead. And so Depot's over $600 per square foot. So quite a productive retailer. 

Alec: [00:15:31] What have they both done to grow it so much and what like yeah. What was. Yeah. 

Tracey: [00:15:36] Let's get into that today. So there's a lot of really great trends that underpin the home improvement retailing industry in the US. So let's first and foremost start at maybe how Home Depot did it to pull ahead a little bit. And what happened at Lowe's because Lowe's has really since 2018, it's become a bit of a transformational story on improved execution by management, improved merchandising and inventory. In fact, they did an investor day at the end of last year, and there's this awesome slide. Their head of merchandising put up and it was like what our stores used to look like and what our stores look like today. And it was like out of stocks, you know, and caps weren't placed correctly. You know, products that generally attached to other products were near by one another in the store. And so it was just they had kind of lost their way. But Lowe's in particular back then also focussed heavily on the DIY consumer. And so that's kind of your weekend warrior, as they call them, the people that go and might do up their house on their own, but then also people who are painting a room or, you know, fixing up decor. And that focus on the DIY brought them a lot of private label brands into the store because the DIY consumer was price conscious. Now compare that to Home Depot, they had a more brand heavy offering to really appeal to the professional trade, and so their revenue split is more 50-50 pro the. Why where Lowe's more a 25-75 pro DIY. So it's my belief that that focuses on the pro, the trade, as we would say in Australia, I'm not Australian, so I won't appropriate that term. But the focus on that higher value customer who comes in more frequently and shops more really did them well during that post GFC period. And then there were some other things that were happening post GFC that I think continue going forward, so we can get into that. 

Bryce: [00:17:34] So Tracey, let's move to the bull case then, because, you know, we've had from a retail background, we've had many people come on and pitch various retail businesses and often the story or the bull case just revolves around how well they can grow their footprint, store footprint and how they can do it, you know, cost effectively. So what makes up the bookcase for Lowe's and what is their competitive advantage? 

Tracey: [00:17:57] Yeah, all great questions. And I would say for a retailer that's broadly correct. It's execution and it's growing your network and maintaining scale advantage. But there's also another piece I think in retailing that we look for. And we're particularly interested in finding businesses that are customer obsessed. Retailers have to return value to the customer. And it's paramount once you get to scale that you continue to return that value. But for Lowe's in particular and depot, maybe we can start at the industry level metrics. In the upside case, there's a lot of kind of structural data points that are underpinning good base demand for this industry and in the US. So first and foremost the US is structurally short housing units. So dwellings and so that's not freestanding homes. It's apartments. It's everything. But it's not dissimilar to Sydney in that sense. Right. And so it's underpinned a rise in home prices that hasn't really seen much of a headwind. State base, there's different regional trends. But overall housing prices remain really high in the US and underpinned by a structural shortage, but also underpinned by the fact that mortgage rates have just made houses super unaffordable. So also not dissimilar to Sydney, but dissimilar, is the fact that Americans can take out a 30 year fixed rate mortgage. How jealous are we? 

Bryce: [00:19:22] All right. 

Tracey: [00:19:23] So existing home sales are the lowest they've been since the GFC. And that is a cyclical low. But what that's done is it's actually pulled out, a person who would normally start up their home for sale. Right. Because no one's motivated to sell their home. So you might be thinking, Tracey, then how we're supposed to be talking about the upside case here. So what's going on? Well, the age of housing stock is really old in the US, and it might not sound old to, to, Sydneysiders who live in kind of terraces that were built pre 1900 but the median age of houses in the US over 40 years. And let's go back to the kind of 1990s that was more like mid-twenties year old. And so your forced incidence of maintenance and repair is much higher now. So that underpins kind of base demand and the amount of money you have to spend when it's forced maintenance and repair is often higher as well. It's non-discretionary. You know, you need to fix your roof, you've got to replace the water heater, etc.. And then there's some other interesting demand drivers around like energy efficiency upgrades. So we know Americans have spent more on energy efficiency upgrades over the last two decades. There was a housing survey that was recently published that put out over $100 billion on energy efficiency upgrades spent in 2021. 

Alec: [00:20:46] Oh, wow. 

Tracey: [00:20:47] And that compares to less than 60 Billion in 2005. So there's growth right there. And it's under underwriting another healthy sign of demand I don't think that's set to slow given the Inflation Reduction Act has fiscally incentivised that to continue. And Lowe's is very focussed on that activity. And then also kind of related to climate change is the fact that natural disasters are continuing at an increasing pace. So the size of US billion dollar events. So that is a natural disaster that impacts infrastructure at a cost of $1 billion or more. The number of those has risen about five happened per annum in the early 2000s, and recently it's about 25. So there are these really nice structural trends that are underpinning demand for home improvement, retailing in the industry. And then with Lowe's in particular, they've started to focus more on that professional trade. And so they've brought back the brand's pros like they brought back in a more regional merchandising activity that is necessary when, let's think about it as like the plumber who goes to your house needs a part, pops out to a retailer to grab that part. Well, if the part that Lowe's sells in that metropolitan area isn't up to code for those homes in that area, right? The tradie can't buy it there, he or she, and so go somewhere else. But then you immediately lose trust with that person, right? So bringing them back in is a slow process. So they've been working on this strategy since Marvin Ellison came to the business in 2018. And they've done a pretty good job. They've grown Pro-am X from 19% to 25%. And so we really want to see that continue. So in conclusion, the upside case takes us to sales per square foot of over $500. So continues that trend of top line growth. And then they generate nice operating leverage on that. So operating profit margins would expand about 100 basis points to 14.5%. And then they can continue that growth past that. It kind of put that at maybe the next five years. They get there. And I think that's reasonable. And that really isn't in expectations at the moment. 

Alec: [00:23:10] Yeah I love that, you know, this massive retailer and there's like a very specific thesis that you have around the, you know, there's a lot of industry, the tailwinds going on. But for you, there's a specific business strategy that they're trying to execute. And if they can execute that, that will impact the one key metric you're looking at. And that will flow down to the bottom line. It's an important reminder that like when you have your thesis, the metrics that you have to watch and that become really important, sort of narrow. 

Tracey: [00:23:42] Yeah. That's right. 

Alec: [00:23:43] I guess the question that I have thinking about your thesis, though, is there are all these tailwinds for the home improvement industry more generally and improving the pro pro-am mix, I guess, improves revenue per square foot, better margins, better profit. You said Home Depot is also focussed on the pros and then maybe a little bit ahead of that journey, but it sounds like they're still focussed on that category. So why Lowe's over Home Depot? 

Tracey: [00:24:11] So coming back to that execution piece, I think that idiosyncratic kind of company specific risk is really attractive to us. The fact that first Marvin Ellison came from Home Depot, so he left depot understanding the pro strategy and had a journey in retailing and then came to Lowe's. But he brought with him people who were former depot executives back in their time. And they've also just laid down a lot of infrastructure and groundwork, upgrading their technology. And they made kind of a 30 year leap in their technology. So there's a lot of idiosyncratic elements that we like about Lowe's relative to Home Depot. But like, make no mistake, Home Depot has done an incredible job. They have very attractive returns, and they will participate in the same kind of industry structural tailwinds. The thing though, I would say is Home Depot has a pro strategy that while it's worked, it's mature. And so then Lowe's is able to, if executing well, grow to X the pro market. So that gives us exposure to a little bit more kind of shareholder value accretion if you will. The free cash flow growth rate should be a little bit higher at Lowe's if everything works out. And Home Depot are now going after a growth strategy that is with a more complex job and a more complex pro, so they have to invest behind this strategy. Undoubtedly, the return profile I would suggest looks good. Depot's very good at thinking through IRR. As before they allocate capital. So it's not growth for growth's sake necessarily. But it is a different occasion. It's a different customer and it's a different selling strategy. That selling strategy also comes at thinner margins because it's harder to differentiate yourself when you're selling, you know, large lots of timber and rock versus more branded goods and smaller parts. So I think for me it feels like we get a nice growth rate longer term with Lowe's valuation is also a very compelling relative. And so we have this really nice margin of safety that we feel we found in that business. 

Bryce: [00:26:22] So, Tracey, let's turn to the bear case. What are some of the metrics you'll be looking for, or some of the red flags that you'll be keeping an eye on? 

Tracey: [00:26:28] Yeah. So there's a bit of a bear narrative brewing in the market at the moment. And I think that's really what's giving us that nice opportunity to buy structural growth at a reasonable price. But okay, so let's break this into short term long term. We really focus on the long term. So I don't want to get too caught up in the short term. But in the short term certainly the DIY customer faces pressure. They have to throw away a lot of their savings that they accumulated from government handouts during the pandemic. Interest rates are really high. Credit's expensive, so they're not able to access really attractive kinds of home equity amounts that they've built up. In fact, Lowe's estimates the average Lowe's customer has about $350,000 of home equity. In aggregate, the US is sitting on their over $30 trillion in home equity. Right. But if mortgage rates are upwards of seven and a half, 8% like they were kind of peaked in October 2023, you aren't refinancing your mortgage to take advantage of that when your mortgage rate is sitting at three and a half, right? So that is certainly putting pressure on those bigger ticket discretionary items, things like changing all of the flooring in your home or doing the kitchen and the bathrooms at the same time. You're doing them in smaller job lots. So we're seeing this commentary not only come through on the DIY side, but also on the pro side. Pros backlogs while healthy, they're down year on year and they're filling with smaller projects. So duration becomes the biggest short term risk. How long does this last. And then how much of a headwind does that put on comp sales next year? Comp sales in 2023 will probably end around down 5% for Lowe's. So do they face another negative comp sales environment and then what's operating deleverage like at the profit line. So that's the short term. In the long term, the downside scenario for me would really be execution risk around growing sales per square foot. I need to see them execute on that better productivity plan that they have in place. And it's not just cost productivity. I don't want to see them strip out an enormous amount of costs. Often, you know, businesses will do that short term, but then they sacrifice the long term value creation opportunity. What I've liked about the current management is that they've really invested well in not only merchandising in that strategy, but also, as I mentioned before, the technology platforms and upgrading technology. But they've also taken the time to change the cultural perception of what it means to be a close associate in cell to your customer. So they're creating that front line culture that hopefully resonates with the customer and creates customer obsession that's starting to come through in customer service scores. And so we're seeing that trend positively if we should see that go backwards at all. I think that's your kind of initial red flag. The customer is your kind of canary in the coal mine. So watching that customer obsession metric is really important. 

Alec: [00:29:43] It's such a reminder just how important management, like management, is always important in any business. But like there's a particular type of person that you need to run a retail business like a real retailer, like someone who is obsessed with customers but obsessed with merchandising and will walk the shop floor and face up items and just like, has that crazy level of attention to detail. You mentioned that a lot of this turnaround happened when this ex Home Depot CEO Marvin. He came across. How much is the thesis tied to him and his team in particular. Like if he was to move on. Would you be rethinking this about this company in a different way? 

Tracey: [00:30:26] So the initial answer is yes. And so then I follow that up with it's not a key man risk in that sense, but it is an element of he has created the strategy with his team. They are executing on it. And we need that inertia and momentum to continue in order for them to really meet that long term target. It's highly disruptive as well for businesses to go through executive change on a frequent basis. And I would say from 2018 to today it would still be considered frequent to me. I want to see Marvin there for a long time. I want to see, you know, Bill bolts, who runs their merchandising strategy. I want to see him there for a long time as well, as long as everything's going well and they continue to get along with the other executives and they can create a happy ship culture, you know, stay there forever. If there's turnover and executive management, it's something that we don't take lightly. We really look into the reasons why. And yeah, that could be a signal that the wheels are falling off. 

Bryce: [00:31:29] So Tracey to close out we always like to look to the future beyond the five years. Let's look at the ten. What do you do if they are able to execute on their strategy and things pan out the way that they expect. What do you hope to see in ten years time? 

Tracey: [00:31:44] Yeah, certainly they could get to that over $600 per square foot level that Home Depot has already achieved. I think that's entirely within reach. So perhaps they could even exceed that. Their omnichannel strategy, I would hope, has crushed it at that point. And it's not 10% of sales. But, you know, maybe it's upwards of 30-40% of sales. They can't deliver everything, but they've certainly shown they can deliver a lot. And so if they can continue doing that, it just further improves productivity. I'd also love to see in ten years, you know, I don't want to talk about a competitor, but if you talk to, let's say, a Tractor Supply, I don't know if your listeners know this company, but Tractor Supply is a great retailer in the regional US. And, they have created a customer who is highly obsessed with their business and kind of just goes there and chills out and talks about chickens and chicken feed and horses and horse feed. Right. I'd love to see Lowe's in ten years, have this tradie professional or even semi DIY pro kind of mix customer who just hangs out in store and is so obsessed with what Lowe's retails and the innovation that they bring to the store and the way they kind of think at the forefront with their customer experience. I think that to me, plus a great membership model would just make this mode that's very difficult to compete with.

Alec: [00:33:13] Love that. Well, we've, we've done an episode on Tractor Supply this year as well Home Depot. So we'll include those three episodes in the show notes. So if people just want to go really deep on us big box retailers. Right. One thing that we haven't really touched on, but you said it at the start of the interview, so I figure it's worth just touching on it. As we close off, between Home Depot and Lowe's, they're a bit less than half the market. 

Tracey: [00:33:41] Yeah that's right. 

Alec: [00:33:43] And we've we've spoken about the thesis and we've spoken about the risk to the thesis, but we haven't spoken about any like consolidation of the small, hardware stores in the US. 

Tracey: [00:33:53] Yeah. So that remains an opportunity. The reason I haven't discussed it, it remains an opportunity that I think is kind of there for the taking, but it doesn't have to be central to make the thesis work. In other words, it's not necessarily what's in the price. Execution can be something that they can continue to do by growing share of the pro. And that's not necessarily away from their smaller competitors like Ace Hardware or Menards. But there is a long tail of independent retailers still in the home improvement industry that they can go after, and they should be able to their size and scale kind of allow for that competitive advantage. 

Alec: [00:34:33] Yeah, I think again, just a reminder that, you know, the thesis that you laid out is, specific and there's some specific metrics that you're watching, and it's a specific plan that the management team are trying to execute on. And, you know, it helps you sort of narrow the focus as an investor and, you know, have to be watching everything. And, you know, not everything has to go right, to be a great investment. 

Tracey: [00:34:55] Yeah. That's right. I think this is an industry where rising tides could lift a lot of boats. So it doesn't have to be an industry consolidation opportunity for them to generate that growth. And we really love that. We love when we can find companies that have multiple pillars or multiple drivers behind potential forecasts. You know, we're flawed and erode as humans and our ability to forecast. And so if we have multiple sources of potential growth drivers, it just helps us get some conviction and in the outlook. 

Alec: [00:35:28] Love it. 

Bryce: [00:35:29] Well Tracey, thank you so much for coming on the conversation and we appreciate your time. 

Tracey: [00:35:34] Thanks very much. 

Alec: [00:35:35] Before we go, a huge thanks to our summer series partner, CommSec, the home of investing. If you're looking for more support and resources to build confidence in the market, head to their content hub. Otherwise, you can get $0 brokerage on your first ten trades for Aussie markets. When you join brokerage on US stocks from just $5 USD, and you can invest from as little as $50 through the Commbank App. Download the Commbank out today or visit commbank.com.au. CommSec T&CS and other fees and charges apply. Investing in overseas markets exposes you to additional risk. 

Bryce: [00:36:09] Now stick with us because the next episode is the final episode of our summer series, brought to you by CommSec. We have none other than Anthony Doyle talking about AutoZone.