Motley Fool Money - The Compounding Consumer Crunch

Episode Date: April 28, 2025

Lower income consumers are already struggling, and the end of the de minimis exemption will make things even harder for them. (00:21) David Meier and Dylan Lewis discuss: - Domino’s earnings sending the same warning signals as Chipotle – lower income eaters aren’t ordering as often.. - Temu and Shein pushing tariff increases to American consumers over the weekend. - Old Dominion Freight Lines and Saia signaling fewer goods are coming into the U.S. (15:53) Motley Fool Analyst Anthony Schiavone and Ricky Mulvey take a look at homebuilders and the four major economic forces hitting those stocks. . Companies discussed: DPZ, CMG, PDD, SAIA, ODFL, DHI, DFH. Host: Dylan Lewis Guests: David Meier Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Timu makes the price of tariffs known. Motleyful money starts now. I'm Dylan Lewis, and I'm joining for the airwaves by Motleyful analyst David Meyer. David, thanks for joining me. Thank you for having me. Today we're going to be talking results from Domino's, some of the major logistics providers weighing in on the macro, and a bit more pressure on the American consumer.

Last week, we saw results from Chipotle. This week, this morning, we see results from Domino's, and I've got to be honest, David, I feel like we're seeing a lot of the same things with both these results. The consumer is not eating out quite as much as it used to. Yes. In fact, it's almost eerie how close their U.S. same source sales decline were, both in the mid-single digits, decline. For the dominoes, it was a half a percent, and for Chipotle, it was 0.6%.

Yes, both companies talked about lower-income folks are not. eating out as much. And it's probably because they're trying to figure out where they can save money in their budgets. And these two companies are feeling that effect right now. If you are looking for bright spots in the report here, I think it was largely a downer report. But looking for the bright spots, the company did reiterate its 3% annual growth target for U.S. comps very far away from where it was for this recent quarter. And I guess they feel like on the back half the year, if the picture solidifies more, if they get more insight into what pricing might be, they might be able to recover some of that ground. I guess you could also look

to the international segment for some bright spots here, but I feel like that's about it. I think you have hit the nail right on the head. Some of the U.S. sales will be dependent on promotions. Basically, they want to get people ordering pizzas, ordering food from them, and, right, Right now, the international segment is extremely healthy, which put up comps of 3.7% for the first quarter, which is quite good, relatively speaking. I mean, I hate to be a downer, but the other problem that is there is franchisees are actually seeing their margins get pinched, and that's not good, right? I mean, basically what I'm saying is they actually need this volume.

Domino's needs volume of customers in order to. get some scale on the cost of goods sold that are going up, unfortunately, for them, as well as the, you know, as well as consumers in the United States. So it'll be very interesting to see how this plays out. I mean, I think this is actually a really good barometer of what, you know, what customers in the U.S. are feeling and where they're going to try to save their money, how they're going to make their decisions about spending. This is, I mean, Chipotle and Dominoes will be a great microcosm of what's happening in the economy, in my opinion.

And these are really, I think, two of the best-of-breed type providers in the space, right? I mean, 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. 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 relieve the pain a little bit 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's 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, 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. All right, sticking with the theme of companies in the big picture, over the weekend, prices at discount e-commerce companies based out of China, like Sheehan and Timu, 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. And they did. Again, I'm 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 percent. 400 percent. 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. the tariff was de minimis. You were tariff-free, essentially, because of that small amount. And that loophole has been closed. And 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 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. Yeah, and I think, you know, Cheon and Timu, 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. Correct. The idea is to put pressure back on the United States.

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. 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 are what's called a monopsony. They can say, they can go to their supplier 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 regions, retailers who also operate on thin margins, they don't necessarily have the balance sheet strength to be able to, 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 U.S. 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. You teed me up for a data point, so I got to deliver. When we were prepping for today's show, I came across this note from UCLA researchers, they looked at the role of de minimis shipments 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 Chapoelais, there's a compounding of factors that seems to be happening here, especially for the low-end consumer. Yes. And it feels like the retail outcomes, for me over the next year or so, is going to be pretty split out into who do those businesses cater to?

I completely agree. And we can think about it from this perspective. Unfortunately, a tariff, which is an import tax, right, bringing good into the United States, that is a massively regressive tax. It is everybody on the lowest side of the... the income profile, they get hurt more. When it becomes more expensive for them to pay for the goods that they need to run their lives, they feel it. 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? Maybe I just cut my budget back a little bit. My lifestyle doesn't really change. but it really impacts the 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 gather all this data over this earning season and get a snapshot of where we are and where we're going. 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 Line 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. Yeah, that did not happen. And Saya was very, very upfront about this. 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 and demand for our trucks. Now, unfortunately, that has a major impact. And for them, right, 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, 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 for. 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 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. 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 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. Facing all of that uncertainty, management at Old Dominion Freight Line this quarter, tried. to get in the market to focus a little bit on the market share story. That was something that was really important for them. They wanted 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. And I think you bring up an absolutely huge point in the way the Mali 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? 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. They are managed very well. They would not be able to say those things unless they were the high quality companies that they are. So, David, it sounds like in addition to Mark a share, you're saying a little bit of balance sheet strength, something you're looking for during these times, anything else in your mind? Absolutely. I mean, you just, you can't have it because 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. David Meyer. Thanks for joining me today. Appreciate it. Thank you. Thank you for having me. This awesome conversation. These days, I'm all about quality over quantity, especially in my closet. If it's not well made and versatile, it's just not worth it. That's honestly what I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin. They work directly with safe ethical factories and cut off the middlemen so you aren't paying for brand markups or fancy stores, just quality clothing.

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take a look at Home Builders and the four major economic forces hitting those stocks. Home Builders 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 Home Builders' ETF returned about 180% to the S&P's 86%. Higher interest rates cooled action in the existing housing market, and housing shortage meant steady demand for new houses. But in 2025, we have some new forces. The U.S. imports a lot of building materials.

For example, most of our gypsum or drywall comes from Mexico. in 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 slash 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 homebuilders holding up in 2025? Yeah, I think right now the homebuilders are holding up just fine. As you mentioned, this is still an industry with long-term tailwinds. We have a shortage of housing in this country. But also, something that I feel like we don't talk about enough

is that the median age of an existing home in the U.S. is now 40 years old. So as homes age, maintenance costs also increase. So I think that could generate even more demand for homebuilders 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, I, 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 effect 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 big concern to me that existing supply directly competes with homebuilders. And, you know, at the same time, homebuilder 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. 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? Yeah, I think that's accurate. Let's look at D.R. Horton. This is the largest home builder, and they recently reported their quarterly earnings. You're seeing the headwinds there. 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? So two things. First, the fact that DeR. 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 a huge philosophical change in D.R. Horton's capital allocation framework of 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 return roughly 10% of its market cap to shareholders through dividends of buybacks. So as a returns-focused investor, I think that's pretty interesting. CEO Paul Romanowski was asked about the impact of tariffs. Importantly, they didn't really talk about it in the commentary up front.

they waited for an analyst question that was basically, what is your playbook for this? And 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 challenges, 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 Romanoowski? Yeah, Ricky. I'm actually buying what Batesman is saying. So, D.R. Horton's average home sells for about $375,000 ballpark. Their gross margin is about 22% on those home sales. So that implies that their average cost to build a home is roughly $295,000. According to the National Association of Homebuilders, Terrace will increase costs by roughly $10,000. And that extra $10,000 on top of the $295,000 original cost, assuming that cost is even borne by D.R. Horton,

it's not going to impact profitability or housing costs all that much. And in fact, in a period of policy uncertainty, that may even benefit large homebuilders like D.R. Horton or Lennar who benefit from scale and low-cost advantages. They can take even more market share from smaller, less well-capitalized builders. 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 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 ant. 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 terrorists will impact the builders by that much. As far as labor goes, this is an industry that has 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 that just benefits the larger builders like D.R. Horton, Linar, NVR, 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 D.R. Horton and Linar, over the last, 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. Something Jason Moser talked about on the show is that basically when times get tough, when times get more uncertain, 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 DreamFinders' Homes. It's a smaller player, definitely, than D.R. Horton. It's concentrated in the Sunbelt and in Colorado. It runs an asset light model, where it acquires these finish slots 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? Actually, a lot of homebuilders have actually transitioned to this asset light land option business model. Like, 15 years ago, D.R. Horton owned roughly 75% of its lots outright. Today, it only owns about 25% of its lots. It controls the remaining 75% of their lots through option contracts. So this is definitely a model that has gained a lot of steam with 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 homebuilders, investment 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. So what's this model mean for these home builders if we're entering a building slowdown? So the way the model works is essentially a home builder will pay roughly 10%

of the purchase price of a lot up front as a deposit and 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 walk away from the deal and all they lose is the 10% deposit. So that minimizes risks. And since the asset light homebuilder doesn't have capital tied up in land, home builders who have used this model have tended to have much stronger balance sheets than they did in the past.

We've heard from the biggest home builder, D.R. Horton already. DreamFinders is going to report on May 1. What are you going to be watching for in that report? Yeah, so DreamFinder's guidance calls for a little more than 9,000 home closings in 2025. And we saw Dior Ahornton reduce its full-year home sales guidance, I think, last week. If Dreamfinders 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 and new home supply coming onto the market in places like Florida and Texas where DreamFinder sells a large portion of its homes. And as a shareholder of DreamFinders, myself, supply has been a big concern of mine

the last year or so. I'll be looking forward to the home closing guidance that management provides. We've talked about a few home builders here. How do you think about the investability of this space, especially when 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? About two-thirds 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 homebuilding industry, I think taking METF, Fort Worthbasket 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 homebuilder stocks. I think Berkshire since sold those homebuilders, 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. Anthony Schiavon, appreciate being here. Thanks for your time and your insight. It's always a pleasure. Thanks for having. As always, people in the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against some buyers are something based on what you hear. All personal finance content follows Motleful editorial standards, and is not approved by advertisers. The Motleful only picks products it would personally recommend friends like you.

For the Motleyful Money team, I'm Dylan Lewis. We'll be back tomorrow.