Dylan Lewis (3:19)

These are really, I think, two of the best of breed type products in the space. They typically have been able to put up very good results even when other companies have struggled. They have been very early to things like mobile and online ordering. They've been really smart in some of their offerings and getting people back into the stores. I feel like if we are seeing these types of numbers from strong providers as earnings season goes on, we're probably going to be seeing even more pain from some of the weaker players.

David Meyer (3:48)

I think you're spot on. These are two of the best operators in the business, literally the best operators. And if they're seeing their margin, you know, on the franchise side, they're seeing those margins get cut and you know, again, demand diminishing. It doesn't bode well for others, especially if you don't have the operating prowess to figure out how can I, you know, how can I relieve the pain a little bit from, you know, from a shareholder perspective, how can I, you know, where can I get a little bit more efficient? And you're exactly right. Look at Chipotle. Chipotle is still opening stores and they're opening stores with their fast lanes and you know, they're still opening stores internationally. It's not like they're stopping because again, this is a very, this Chipotle is a very strong business and Domino's is doing the same thing. These are both strong businesses. So I agree, looking ahead at, it'll be very interesting to see what other companies report and then compare it to what these two bellwethers have reported.

Dylan Lewis (4:47)

Sticking with the theme of companies and the big picture, over the weekend, prices at discount e commerce companies based out of China like Shein and Temu went up for American buyers. David, this is these two businesses that generally have specialized in these de minimis products and items that come in duty free under $800 saying to the consumer this is going away and we need to show you exactly what these prices are going to be.

David Meyer (5:12)

And they did. You know, again, I'm not, not meaning to laugh, but it is pretty incredible when a company comes, you Know, companies come out and say expect prices to increase 90 to 400%. 400%. Think about that. That's 5x. The reason for it is there was a loophole if you brought in less than $800 worth of goods that the tariff was de minimis the that you, you were tariff free essentially because of the, that small amount. And that loophole has been closed. And I again, I think this is another sign of things that are, you know, what's to come. Right. If these are two companies that relied on this loophole essentially to drive sales and I think you have some data that you're going to share in a sec about where, you know, to consumers who are looking for lower cost goods in order to, you know, help with their lives, like this is a lot of pain for them. A lot of pain.

Dylan Lewis (6:15)

Yeah. And I think, you know, she and Temu, both businesses based out of China and so I don't think it's surprising for them to be in their press releases for this stuff saying this is why we're doing this.

David Meyer (6:26)

Correct.

Dylan Lewis (6:26)

Right.

David Meyer (6:27)

The idea is to put pressure back on the United States.

Dylan Lewis (6:30)

But even businesses domestically have started to be pretty transparent about the fact that pricing is due to tariffs. We've seen that even itemized on the receipts in some places. And I don't think for a lot of retailers there's much upside in absorbing that cost and making it opaque. I think a lot of them are going to be quite literal with what the increase is because they know they don't have too much control over it.

David Meyer (6:53)

You're absolutely right. So let's think about this from the largest perspective possible and that's a company like Walmart. Okay. Walmart operates on thin margins. Right. That's how it works. You get to the store, you buy stuff from them all the time. The stuff keeps turning and turning and turning quickly through the store. That's how they make their money. Right. They're not, they're not charging high margins for any of the stuff in their stores. But Walmart has buying power. They have, they are what's called a monopsony. They can say, they can go to their suppliers and say, you know what, you're going to have to eat this. I'm not eating this in terms of the margin profile. But you know, smaller companies and many other retailers who also operate on thin margins, they don't necessarily have the balance sheet strength to be able to, or the, or the power, the sheer bargaining power to be able to absorb this. So again, I'm looking if I want to look and see where the US economy is going. I'm looking at the restaurants as they continue to report and I want to see who's getting impacted and how, what the level of impact is. I'm also looking at retailers and they report next month. They're about a month off the cycle. I want to know exactly what they're saying, what are they doing, what is their response? Because I agree with you, I do not think that they can. I think they're going to have to pass prices on. Their margins are just too thin to absorb a great deal of it. So we'll see how that affects demand. Right. Price goes up, demand tends to go down. Unless you absolutely need that product.

Dylan Lewis (8:27)

You teed me up for a data point, so I got to deliver.

David Meyer (8:30)

When.

Dylan Lewis (8:30)

When we were prepping for today's show, I came across this note from UCLA researchers. They looked at the role of de minimis ship for different types of consumers based on zip codes. De minimis shipments from China make up about half of direct to consumer shipments for lower income zip codes, more than double that of the richest zip codes. And so I think to take that piece of data and then bring it into the conversation we were just having about Domino's and Chipotle. There's a compounding of factors that seems to be happening here, especially for the low end consumer.

David Meyer (9:04)

Yes.

Dylan Lewis (9:04)

And it feels like the retail outcomes for me over the, over the next year or so is going to be pretty split out into who do those businesses cater to.

David Meyer (9:15)

I completely agree. And we can think about it from this perspective. Unfortunately, a tariff which is an import tax. Right. Bringing goods into the United States, that is a massively regressive tax. It is everybody on the lowest side of the income profile. They are, they get hurt more it when it becomes more expensive for them to pay for the goods that they need for their lie to run their lives. It, they feel it like people, people in the higher income brackets. Yes. They don't like it, but they can figure out, you know, how can I manage this? How can I get substitutes? Right. Maybe I just cut my budget back a little bit. My lifestyle doesn't really change. But it really impacts the low, lower end of the income spectrum. And unfortunately that also means less taxes. Right. Because they pay sales taxes and things like that. So it's going to be very interesting again to see to gather all this data over this earnings season and get a snapshot of where we are and where we're going.

Dylan Lewis (10:19)

We have the benefit of reports from companies at a couple different points. In where goods are bought and where they get to also results out from Sia and Old Dominion Freight over the last couple days, they are telling a very similar story, Essentially saying, hey, we know January and February is typically a slower period for us. March is when we tend to see things pick up. Looking at the results. That has not happened.

David Meyer (10:43)

Yeah, that did not happen. And Saya was very, very upfront about this, that they, in their modeling, Right. This company is a very old, very mature trucking company. They said, look, we expect a lift every March, and we didn't get it. We did not get a lift in demand for our trucks. Now, unfortunately, that has a major impact. And for them, right, they. They have to keep those assets productive because those are essentially fixed costs to them. They have the trucks, they're paying for the trucks, they're paying for the labor, which is a little less fixed. That impacts their margins. Right. If they impact their margins, that means there's less investment dollars that they can make to open up new centers, to buy new trucks, et cetera, et cetera. So this, you know, for them individually and for Old Dominion as well, like the lower demand means, lower margins means, lower cash flows means what am I going to do if I want to try to invest my way out of growth? It's not that easy. They probably have to figure out where they're going to cut costs. But to your point, trucking is a leading indicator for the economy. Right. These are the people who, when stuff comes into the ports, they move it all around. Right. Or when stuff gets manufactured, they move it from one place, you know, goods from one place to another. And you have both companies essentially saying the same thing. Demand is down, people don't, we're not moving as much goods. You know, I don't mean to beat this, you know, to belabor this point too much, but these are great. In my opinion, these are great indicators of where we're going to see where the economy is going. Based on these sets of companies, what they're actually seeing as a result of their first quarter results and then what they're projecting into the second quarter, into the full year, we're seeing lots of companies basically say uncertainty, uncertainty, uncertainty. I don't know what the macro is going to do. I need help. I need the administration to tell me this tariff is off and I can deal with it, or this tariff is on, and here's the, here's the amount, because that's the only way they can plan to figure out where, you know, where am I going to take my company, where am I going to make my investments? How much do I need to add labor? Do I need to shed labor? I just find this absolutely incredible that all this is going on in a country that is as huge and complex as ours, especially in a global economy. We're going to see how this experiment plays out. In my opinion. I think we're going to feel some more pain before something actually changes.

Dylan Lewis (13:17)

Facing all of that uncertainty, management at Old Dominion Freight Line this quarter tried to get the market to focus a little bit on the market share story. That was something that was really important for them. They want to talk about sustaining their market share and basically saying there's a lot of stuff out there that we can, cannot control. We are going to win market share and as we see a lot of activity come back into the channels, we will benefit. That's a very similar tone to what Domino's management said. Basically, we want to continue to sustain our market share growth because that is something we can control and it's one of the keys to our long term success. I'm seeing from management teams right now within the realm of what we can do, this is the rubric that we want to be graded on.

David Meyer (14:02)

And I think you bring up an absolutely huge point in the way the Motley fool as an organization and as a group of investors, the way we try to invest and that is we really focus on high quality companies. A company is not going to say that in a time of uncertainty, if it doesn't have balance sheet strength, if it doesn't have good cash flows, if it doesn't have management teams that have been through these cycles before to say, you know what we, this is, this isn't a lot of fun right now, but we know what we're doing, we know where our advantages are. We have good balance sheets. Surprisingly Old Dominion, while it has been shedding some cash on their balance sheets and increasing their share buybacks, they actually have a relatively strong balance sheet with very little debt. So if they needed to take on some debt in order to help them get through this cycle, they can do that. Chipotle Domino's, right. Those both have pristine balance sheets. Like they're managed very well. They would not be able to say those things unless they were the high quality companies that they are.

Dylan Lewis (15:07)

So David, it sounds like an interesting of market share. You're saying a little bit of balance sheet strength something you're looking for during these times. Anything else on your mind?

David Meyer (15:13)

Absolutely. I mean you just, you can't have it because what's. What else is happening right recently, right? Interest rates are going up. If you're a company that needs to borrow money, this is the wrong time to be borrowing money.

Dylan Lewis (15:25)

David Meyer, thanks for joining me today. Appreciate it.

David Meyer (15:27)

Thank you. Thank you for having me this awesome conversation.

Anthony Chavon (15:32)

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Dylan Lewis (16:00)

All right listeners, coming up next, Anthony Chavon and Ricky Mulvey take a look at home builders and the four major economic forces hitting those stocks.

Ricky Mulvey (16:15)

Homebuilders were on a good run as a whole. The group has smashed the return of the S&P 500 over the past five years. State Street's Homebuilders ETF returned about 180% to the S&Ps 86%. Higher interest rates cooled action in the existing housing market and a housing shortage meant steady demand for new houses. But in 2025 ant we have some new forces. The US imports a lot of building materials. For example, most of our gypsum or drywall comes from Mexico and Canada. China is a major supplier of refrigerators and much of the labor force that are involved with building houses are immigrants. More than half of drywall ceiling tile installers are immigrants. So we've got four major forces going on here to helping a housing boom and two which we can gently call our headwinds. So I know you look at these companies closely. How are the home builders holding up in 2025?

Anthony Chavon (17:11)

Yeah, I think right now the home builders are holding up just fine. You know, as you mentioned, this is still an issue with long term tailwinds. We have a shortage of housing in this country, but also something I feel like we don't talk about enough is that the median age of an existing home in the US is now 40 years old. So as homes age, maintenance costs also increase. So I think that could generate even more demand for home builders moving forward. Now you also mentioned a few headwinds. So do I think that the homebuilding market is as strong as it was a few years ago? No, I don't. And ultimately the reason why I believe that is mostly because of supply. So if you look at the monthly supply of existing homes on the market, it's now back to pre Covid levels and it's trending higher. And with each passing years, the golden handcuffs or the lock in effects on existing homeowners continues to weaken since the average mortgage rate on outstanding mortgages and current mortgage rates gradually converge together. So that's a bit concerning to me that existing supply directly competes with home builders and at the same time, home builder inventories of unsold homes, they're also at the highest level since 2009. And incentives like mortgage rate buy downs, they're also still very high. So those two things can only exist for so long before home builders are forced to reduce their prices. So I don't really have any concerns about that demand for housing. But the supply side of the equation, at least in the near term, makes me a bit more cautious on home builders moving forward compared to just a few years ago.

Ricky Mulvey (18:46)

But the flip side of that, if you're looking for a house right now, maybe you're getting a few more incentives if you're looking for a new home, could be a little bit of a better time to buy. That's what I'm hearing from you, Is that correct?

Anthony Chavon (18:55)

Yeah, I think that's accurate.

Ricky Mulvey (18:58)

Let's look at Dr. Horton. This is the largest homebuilder and they recently reported their quarterly earnings. You're seeing the headwinds. Their net income for them down 27%. Homebuilding revenue down 15%. They've also taken 7% of their shares off the market over the past year. They pay a little bit of a dividend if that gets you excited, Ant. And also you have management highlighting more sales incentives, as you mentioned, when you looked at their most recent results, what stood out to you?

Anthony Chavon (19:25)

So, two things. First, the fact that Dr. Horton's stock rose after missed earnings expectations and lowered its full year revenue guidance tells me that the investor sentiment was pretty low going into this report. And then secondly, this management team continues to focus on cash generation and shareholder returns. They are prioritizing share repurchases and dividends. And that's kind of been been a huge philosophical change in Dr. Horton's capital allocation framework in the last 10 to 15 years. And so what I find interesting is that they are now planning to spend 4 billion in share repurchases this year, compared to an earlier expectation of about 2.7 billion. And between share repurchases and dividends, depending on where its stock price trades throughout the rest of its fiscal year, this is a company that has the potential to return roughly 10% of its market cap to shareholders through dividends and buybacks. So as a Returns focused investor. I think that's pretty interesting.

Ricky Mulvey (20:22)

CEO Paul Romanowski was asked about the impact of tariffs. Importantly, they didn't really talk about it in the commentary upfront. They waited for an analyst question that was basically, what is your playbook for this? This is what he said. There's so much noise around tariffs today and is changing day to day, sometimes hour to hour. Hard to figure out exactly where that lands. But over the last several years, our suppliers have done a good job of having to respond quickly to supply chain challeng and we feel like we're in a good position to do that. Our suppliers are in a good position to do that. We do feel that our strength and size and scale across markets will put us in a good position to hold those costs and see the lower end of any impact from tariffs wherever they land. Are you buying that explanation from CEO Paul Romanowski?

Anthony Chavon (21:07)

Yeah, Ricky, I'm actually buying what management is saying. So Dr. Horton's average home sells for about $375,000. Ballpark. Their, their gross margin is about 22% on those home sales. So that implies that their, their average cost to build a home is roughly $295,000. And according to the, the national association of Home Builders, Terrace will increase costs by, by roughly $10,000. And that extra $10,000 on top of the $295,000 original cost, assuming that cost is even borne by Dr. Horton, it's not going to impact profitability or housing costs all that much. And in fact, you know, in a period of policy uncertainty, that may even benefit large homebuilders like Dr. Horton or Lenar, who benefit from scale and low cost advantages, they can take even more market share from smaller, less well capitalized builders.

Ricky Mulvey (22:03)

Well, with respect to the national association of Home Builders, I don't see how you make that projection right now when these costs are changing hour by hour. And I would think the other big issue for these, these companies which would affect small and large home builders is if a lot of your workforce are immigrants, then that's still a huge challenge and could add to the costs. Delays in constructions, construction times, that sort of thing that you can't just fix by talking to a supplier.

Anthony Chavon (22:31)

Yeah, I mean, the tariff uncertainty that you brought up is a good point, but we've already seen some exemptions on building materials already, you know, in the works. So I don't think tariffs will impact the builders by that much. As far as labor goes, this is an industry that's been impacted by labor shortages for years. I used to work in a construction industry, we were always short people. And so I just think that just benefits the larger builders like Dr. Horton, Lennar, NVR, those types of companies that can procure that labor a lot more effectively than a smaller builder. I think the smaller builders are going to definitely have a more difficult time. And I mean, if you look at the market share of some of the larger home builders, particularly Darrell Horton and Lennar, over the last, you know, say, 10 years, they've gained so much market share, and a lot of that's come at the expense of smaller operators. And I think that might continue moving forward.

Ricky Mulvey (23:25)

Something Jason Moser's talked about on the show is that basically when times get tough, when times get more uncertain, that's. That's where the big can get even bigger. And that's echoing what you're saying right now. Let's focus on a small builder. And that's dream Finders Homes. It's a smaller player definitely than Dr. Horton. It's concentrated in the Sun Belt and in Colorado. It runs an asset light model where it acquires these finished lots with options contracts. Management would say this lets them being a lot more nimble. They don't have a lot of land inventory on their books. Is that model meaningfully different from a lot of the other homebuilders you watch?

Anthony Chavon (24:00)

Actually, a lot of homebuilders have actually transitioned to this asset light land option business model. Like 15 years ago, Dr. Horton owned roughly 75% of its lots outright. Today, it only owns about 25% of its lots and controls the remaining 75% of their lots through option contracts. So this is definitely a model that has gained a lot of steam within for the home builders. And historically, when you look at the home building business model, right, it was to acquire land, put it on the balance sheet, develop that land, then actually build a home. And then once the home was sold, homeowners would take those sale proceeds to buy more land and repeat the process. The problem with that model is that a lot of invested capital is just tied up in these land assets where cash is not being returned to shareholders. But this asset light model doesn't tie up all the home builders invested capital into these low returning land assets and allows them to be much more like a manufacturing company that can return more cash flow to shareholders. So I think ultimately it's just been a better model that has been adopted by more home builders over time.

Ricky Mulvey (25:07)

So what's this model mean for these home builders? If we're entering a building slowdown.

Anthony Chavon (25:11)

So the way the model works is essentially a home builder will pay roughly 10% of the purchase price of a lot upfront as a deposit in return for the right to build on that land. But importantly, they don't have the obligation to build on that land. So if macro conditions worsen, a home builder can simply, simply walk away from the deal and all they lose is the 10% deposit. So that minimizes risks. And, and since the asset light home builder doesn't have capital tied up in land, home builders who have used this model have tended to have stronger, much stronger balance sheets than they they did in the past.

Ricky Mulvey (25:47)

We've heard from the biggest home builder, Dr. Horton already dream finders is going to report on May 1st. What are you going to be watching for in that report?

Anthony Chavon (25:54)

Yeah, so Dream Finders guidance calls for a little more than 9,000 home closings in 20. And we saw Dr. Horton reduce its full year home sales guidance. I think last week. If Dream Finders can at least reaffirm its home closing guidance, I think that would be a pretty positive sign for the stock. Especially since there's so much existing new home supply coming onto the market in places like Florida and Texas where Dream Finder sells a large portion of its homes. And as a shareholder of Dream Finders myself, supply has been a big concern of mine over the last year or so. So I'll be looking forward to the home closing guidance management provides.

Ricky Mulvey (26:35)

And we've talked about a few home builders here. How do you think about the investability of this space? Especially when we got, we got so much uncertainty given the forces that we talked about earlier. Do you have some favorites or is this one where you think retail folks would be better off taking an ETF or basket approach?

Anthony Chavon (26:51)

About 2/3 of American households own a home. So this is absolutely an area that us retail folks know pretty well. And it's an area where I think individual investors can have an edge. But to play devil's advocate against myself, I guess the largest asset that most Americans own is a single family home. So the question I would ask is are you comfortable essentially doubling down on the housing market or would you rather diversify somewhere else? If you do decide that you want to gain exposure to the home building industry, I think taking ETF or basket approach is completely fine. I mean that's essentially what Warren Buffett did and Berkshire did a few years ago when they bought a basket of home builder stocks. I think Berkshire since sold those home builders. But I think the strategy still makes sense. If this is a sector that interests you, either now or at some point in the future.

Ricky Mulvey (27:41)

Anthony Chavon, appreciate you being here. Thanks for your time and your insight.

Anthony Chavon (27:44)

Always a pleasure. Thanks for having me.

Dylan Lewis (27:51)

As always. People in the program may have interests in the stocks they talk about. And the Motley Four may have formal recommendations for or against. So buy or sell anything. Based on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Motleyful only picks products it'd personally recommend. Friends like you. For the Motleyful money team, I'm Dylan Lewis. We'll be back tomorrow.