WEBVTT - Bloomberg Intelligence: Capital One, Discover Deal 0:00:02.920 --> 0:00:07.240 Bloomberg Audio Studios, Podcasts, radio news. 0:00:09.960 --> 0:00:13.840 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:00:13.920 --> 0:00:16.599 weekdays at ten am Eastern on Affo car Playing and 0:00:16.720 --> 0:00:19.600 Broud Auto with the Bloomberg Business App. Listen on demand 0:00:19.680 --> 0:00:23.320 wherever you get your podcasts, or watch us live on YouTube. 0:00:24.960 --> 0:00:27.560 Nice m and a trade here in the financial space 0:00:27.600 --> 0:00:31.000 here today we got Capital One Financial. They're acquiring Discover 0:00:31.320 --> 0:00:34.560 Financial and thirty five billion dollars all stock deals, so 0:00:34.640 --> 0:00:36.640 the need to go to the bond market. They're going 0:00:36.680 --> 0:00:39.720 to create the largest US credit card company by loan volume, 0:00:39.800 --> 0:00:42.560 giving the combined entity struggle foothold against some of the 0:00:42.600 --> 0:00:44.080 big Wall Street behemos. 0:00:44.159 --> 0:00:44.840 Let's see what's. 0:00:44.760 --> 0:00:48.120 Behind the deal here, and with the numbers show us 0:00:48.159 --> 0:00:51.440 Ben Elliott, he's consumer finance anols for Bloomberg Intelligence. Jurnes 0:00:51.479 --> 0:00:55.000 us via zoom from Washington, DC. All right, bet, what's 0:00:55.040 --> 0:00:57.600 Capital One thinking here? Is this another one of these 0:00:57.680 --> 0:00:59.680 deals that's really driven by scale? 0:01:01.040 --> 0:01:03.640 Yeah, so everything's driven by scale and the credit card business, Paul, 0:01:04.160 --> 0:01:06.800 And the big thought here from Capital One is that 0:01:07.600 --> 0:01:10.240 if they can acquire this sort of rare and valuable 0:01:10.319 --> 0:01:15.840 thing that Discover has, which is a discrete proprietary payments network. 0:01:16.600 --> 0:01:18.800 Then they can sort of start to compete with the 0:01:18.880 --> 0:01:22.200 Visa and MasterCard on a much bigger scale over time, 0:01:22.280 --> 0:01:23.880 and they're paying a premium for it. 0:01:24.640 --> 0:01:27.479 Ben is the timing at all surprise just given kind 0:01:27.520 --> 0:01:30.600 of the issues that Discover had towards the end of 0:01:30.640 --> 0:01:31.360 twenty twenty three. 0:01:32.240 --> 0:01:37.000 So it leaves Capital One with a potential legal overhang. 0:01:37.440 --> 0:01:41.400 The legal issues are not settled yet at Discover. They've 0:01:41.400 --> 0:01:43.200 had a couple of new issues that are sort of 0:01:43.280 --> 0:01:45.199 outside of the scope of of what they've been dealing 0:01:45.200 --> 0:01:47.960 with over the past couple of years. Discover's been talking 0:01:47.960 --> 0:01:49.760 about sort of a five hundred million dollars a year 0:01:49.880 --> 0:01:53.320 run rate of additional compliance expense. So that's sort of 0:01:53.360 --> 0:01:55.280 a burden that Capital One is going to have to 0:01:55.360 --> 0:01:58.680 take on with this acquisition. But I think it's probably 0:01:58.800 --> 0:02:00.840 pretty well understood the sc of that, and I think 0:02:00.840 --> 0:02:02.680 it's it's probably priced into the deal. 0:02:03.200 --> 0:02:06.920 All right, So give us a sense of the size 0:02:07.040 --> 0:02:10.920 of Visa, I guess, the Visa network, the master Card network, 0:02:11.000 --> 0:02:14.480 and now this new combined network is it is it 0:02:14.639 --> 0:02:16.800 competitive to Visa and MasterCard? 0:02:16.840 --> 0:02:21.800 I guess even amics So historically it's completely non competitive. 0:02:22.320 --> 0:02:26.240 Visa and MasterCard together are about penn trillion in domestic 0:02:26.440 --> 0:02:30.360 US credit and debit card volume, and Discover is about 0:02:30.400 --> 0:02:33.679 five hundred and fifty billion. So it's always been this 0:02:33.680 --> 0:02:36.320 sort of the tiny, you know, red headed stepchild of 0:02:36.360 --> 0:02:38.760 the of the large payment networks. But you know, if 0:02:38.800 --> 0:02:41.600 you add to that capital ones hundreds of billions of 0:02:41.680 --> 0:02:46.080 dollars of credit card loans and you sort of extrapolate 0:02:46.160 --> 0:02:49.000 future growth there, it has the potential to sort of 0:02:49.760 --> 0:02:52.400 compete more like an American Express, which is closer to 0:02:52.480 --> 0:02:53.360 one and a half trillion. 0:02:54.040 --> 0:02:56.440 Then I feel like we can't talk about deals without 0:02:56.680 --> 0:03:00.679 the threat of regulatory scrutiny. What does this bring and 0:03:00.760 --> 0:03:04.200 what could the FTC raise any red flags about? 0:03:05.320 --> 0:03:08.160 Yeah, so I'm obviously not a regulatory expert. Paul knows 0:03:08.240 --> 0:03:10.560 well that we have a great m and a analyst 0:03:10.600 --> 0:03:13.880 Bloomberg Intelligence. Generally, I'm sure you guys will ask her later. 0:03:14.000 --> 0:03:18.880 But overall, this deal I think will be relatively sort 0:03:18.880 --> 0:03:23.680 of non offensive to regulators. You know, Discover is historically 0:03:23.760 --> 0:03:26.720 not been very competitive with the large networks, so actually 0:03:27.080 --> 0:03:29.200 bringing sort of the power of capital want to bear 0:03:30.080 --> 0:03:32.560 will make it more competitive with the large networks was 0:03:32.639 --> 0:03:35.520 as the potential to give customers a real sort of 0:03:35.720 --> 0:03:39.560 fourth alternative, whereas in the past you really only had 0:03:39.560 --> 0:03:42.160 one option. Right, you get a Discover card, it only 0:03:42.200 --> 0:03:45.440 has one sort of set of of rewards. It's got 0:03:45.480 --> 0:03:48.480 a relatively low credit line versus some of the other offerings. 0:03:48.520 --> 0:03:51.320 It doesn't have sort of you know, high end travel 0:03:51.480 --> 0:03:54.560 rewards offerings. So I think if Capital One can start 0:03:54.600 --> 0:03:56.440 to issue some of its sort of higher end cards 0:03:56.720 --> 0:04:00.080 on the Discover network, that could be pro competitive, and 0:04:00.200 --> 0:04:03.000 that might make the deal somewhat more attractive to regulators. 0:04:03.520 --> 0:04:06.240 So I'm looking at MasterCard. The shares of MasterCard and 0:04:06.320 --> 0:04:09.120 v so each down maybe two three percent. Do they 0:04:09.200 --> 0:04:11.800 really care here in terms of a response. 0:04:12.640 --> 0:04:17.120 You know, I think they're looking at this as sort 0:04:17.160 --> 0:04:20.120 of an interesting gambit. It's definitely like, you know, it's 0:04:20.120 --> 0:04:22.400 a shot across the bow visa MasterCard. But this is 0:04:22.440 --> 0:04:27.840 a huge, probably decades long battle that Discover Network, backed 0:04:27.880 --> 0:04:30.280 by Capital One, will be fighting. You know, they plan 0:04:30.400 --> 0:04:34.120 to keep the Discover branding in place for the most 0:04:34.160 --> 0:04:38.239 part and shift primarily debit card volume to Discover at first. 0:04:38.839 --> 0:04:40.880 So you know, even in the first call, it three 0:04:40.960 --> 0:04:42.920 years of this transaction, They're not really going to be 0:04:43.000 --> 0:04:47.560 issuing Capital One credit cards on the Discover network, and 0:04:47.680 --> 0:04:50.680 so that really puts off any concern for Visa and MasterCard, 0:04:51.160 --> 0:04:53.560 you know, into the medium to long term. 0:04:54.680 --> 0:04:58.240 Ben in terms of kind of what these credit cards 0:04:58.560 --> 0:05:02.600 offer Discover from my understanding, mainly cash back. Capital One 0:05:02.760 --> 0:05:04.760 has a range of some of those rewards cards. How 0:05:04.800 --> 0:05:08.400 does that impact potentially acquiring new customers and new users 0:05:08.440 --> 0:05:10.880 of for both companies or I guess the folded end company. 0:05:12.200 --> 0:05:14.520 Yeah, so I think that will make it a challenge 0:05:14.800 --> 0:05:17.840 for Capital One to issue some of its sort of 0:05:18.400 --> 0:05:22.080 high fee, high reward cards on the Discover network because 0:05:22.200 --> 0:05:25.200 historically the Discover network's only been used for a very 0:05:25.279 --> 0:05:28.120 limited cash back card with caps that I think it's 0:05:28.160 --> 0:05:31.200 like fifteen hundred dollars a quarter of cash back. So 0:05:31.360 --> 0:05:33.680 for your high spenders, people who are putting tens of 0:05:33.760 --> 0:05:36.120 thousands of dollars on a credit card, that's not a 0:05:36.160 --> 0:05:39.680 very attractive offering. So that means that the brand has 0:05:39.760 --> 0:05:43.360 not been sort of in their minds as you know, 0:05:43.400 --> 0:05:46.800 a potential credit card they might acquire. So Capital One 0:05:46.880 --> 0:05:48.800 is going to have to do some relatively heavy lifting 0:05:48.839 --> 0:05:52.080 and you see that in what is a very modest 0:05:52.440 --> 0:05:55.800 run rate synergy assumption in their in their sort of 0:05:56.120 --> 0:06:00.679 deal model which only cuts back discovers marketing costs ten percent. 0:06:01.480 --> 0:06:04.360 So you know one is gonna have to do some 0:06:04.440 --> 0:06:07.000 pretty heavy marketing I think to start to leverage that 0:06:07.080 --> 0:06:08.080 network on the credit card. 0:06:07.960 --> 0:06:11.760 Side, the American Express. What's the investment call there these days? 0:06:12.080 --> 0:06:12.240 Ben? 0:06:12.320 --> 0:06:14.240 What are investors thinking about MX? 0:06:15.160 --> 0:06:18.320 You know, MX is the super premium fashion of the 0:06:18.440 --> 0:06:24.040 highest spending, sort of most financially sound customers. So that 0:06:24.560 --> 0:06:28.960 is a sort of you know, it's sort of a 0:06:30.320 --> 0:06:33.479 recession safe trade, if you will. So you know, when 0:06:34.080 --> 0:06:36.640 people are looking at the forward curve and they're they're 0:06:37.279 --> 0:06:39.960 seeing rate cuts, you know, they're expecting a recession. Potentially 0:06:41.120 --> 0:06:42.800 they look at the AMX spender and think that this 0:06:42.960 --> 0:06:46.960 person will last the longest and have the sort of 0:06:47.040 --> 0:06:50.600 lowest level of charge offs through a potential recession. So 0:06:51.080 --> 0:06:54.200 that makes it very attractive. And additionally, MX is a 0:06:54.400 --> 0:06:59.040 ton of momentum in acquiring millennial and gen Z high 0:06:59.080 --> 0:07:03.320 earning customer, which is the most valuable sort of wallet 0:07:03.360 --> 0:07:05.200 chair that's out there, and MX does it better than 0:07:05.200 --> 0:07:07.640 anyone else, So that also kind of makes them attractive 0:07:07.640 --> 0:07:08.200 to investors. 0:07:08.520 --> 0:07:12.720 Hey, Ben, here at Bloomberg LP, we recently switched our 0:07:12.840 --> 0:07:17.600 corporate credit card from one vendor to another. Why did 0:07:17.640 --> 0:07:20.320 that happen? Is that simply priced? Somebody came along and said, hey, 0:07:20.560 --> 0:07:21.680 Bloomberg will do it cheaper. 0:07:21.760 --> 0:07:23.240 Is that how that that business goes? 0:07:24.600 --> 0:07:24.800 Well? 0:07:24.840 --> 0:07:27.600 Obviously I have no insight into that particular deal, but 0:07:29.440 --> 0:07:30.720 you know, that can be a number of things. That 0:07:30.800 --> 0:07:33.000 can be the sort of reward structure, that can be 0:07:33.040 --> 0:07:36.160 the cost structure. That could even just be you know, 0:07:36.240 --> 0:07:40.480 simple sort of customer service and applicability of sort of 0:07:40.560 --> 0:07:45.000 technology on the on the corporate fulfillment side. So you know, 0:07:45.280 --> 0:07:48.360 I don't really have any insight into what that particular was. 0:07:48.960 --> 0:07:51.840 It all works for me. It all goes to redo 0:07:51.960 --> 0:07:53.400 keeper of the whatever the card is. 0:07:54.120 --> 0:07:57.920 All right, Ben, So what is the big competitive overview 0:07:58.080 --> 0:08:01.680 of kind of consumer finance? Are we using more credit, 0:08:01.960 --> 0:08:05.920 more debit, more venmo what a kind of the big 0:08:05.960 --> 0:08:06.400 trends there? 0:08:07.360 --> 0:08:10.920 Yeah, So there's been a huge growth in credit volume 0:08:11.040 --> 0:08:13.840 over the last couple of years, especially sort of in 0:08:13.920 --> 0:08:16.240 the post pandemic period. There's been even more of a 0:08:16.280 --> 0:08:20.120 secular shift away from cash. As for the various sort 0:08:20.160 --> 0:08:25.560 of channels. Right, credit is really attracted to higher end consumers, 0:08:25.600 --> 0:08:29.520 people with more discretionary income, because that offers the huge 0:08:29.640 --> 0:08:32.920 valuable reward potential. And then if you step down to 0:08:33.280 --> 0:08:35.600 debit cards, there's some cash back but for the most part, 0:08:36.080 --> 0:08:38.520 not a lot of rewards there, but there's some convenience. 0:08:39.000 --> 0:08:42.120 And then sort of the lower tier kind of fintech 0:08:42.200 --> 0:08:45.760 payments systems, you know, they offer they're sort of targeted 0:08:45.800 --> 0:08:50.559 at sort of youngers or gen Z lower spenders, and 0:08:50.600 --> 0:08:52.920 they are the people who are exploring things like buy now, 0:08:53.000 --> 0:08:54.679 pay later, which is sort of a way to give 0:08:54.679 --> 0:08:56.240 credit to people who don't really have a lot of 0:08:56.480 --> 0:08:59.120 credit history or substantial earnings history. 0:09:00.080 --> 0:09:01.319 Ben, thanks so much for that. Appreciate it. 0:09:01.400 --> 0:09:04.559 Ben Elliott, consumer finance analysts for Bloomberg Intelligence is joining 0:09:04.640 --> 0:09:07.200 us via zoom on from Washington, DC. And then there 0:09:07.240 --> 0:09:09.599 are those of us walk around with a lot of 0:09:09.720 --> 0:09:11.120 cash because that's how you play. 0:09:11.600 --> 0:09:13.280 You pay who do you pay in cash? 0:09:13.360 --> 0:09:15.880 I got very few people, very few people now, And 0:09:15.920 --> 0:09:17.760 it used to be I mean, but I mean, you 0:09:17.880 --> 0:09:19.560 walk into a bar in the Jersey short you got 0:09:19.640 --> 0:09:21.360 to put a fifty down on the bar to make 0:09:21.360 --> 0:09:22.679 sure you let them know you have let them know 0:09:22.679 --> 0:09:23.200 you're serious. 0:09:23.559 --> 0:09:25.600 I mean, I'm not going to give them like tap 0:09:25.679 --> 0:09:27.520 my phone. I mean they throw me out. But no, 0:09:27.760 --> 0:09:30.320 you're right. I mean you just don't use cash anymore now. 0:09:30.520 --> 0:09:32.719 I only use cash at wholal carts in New York 0:09:32.760 --> 0:09:35.200 City and my dive bars that I can't say their 0:09:35.280 --> 0:09:37.000 names because otherwise people go to it, so we got 0:09:37.080 --> 0:09:37.760 to keep it secreted. 0:09:37.800 --> 0:09:39.240 But those are the only places I use cash. 0:09:39.320 --> 0:09:41.800 I know it's crazy, so but I mean, now it's 0:09:41.880 --> 0:09:44.360 just I'm thinking. You know, one of the greatest companies 0:09:44.440 --> 0:09:47.199 or technologies in that space was Square. They're the ones 0:09:47.240 --> 0:09:49.920 that revolutionized, I think for the local retailer. I mean, 0:09:49.920 --> 0:09:51.160 because all you have to do is stick nothing on 0:09:51.240 --> 0:09:53.480 your phone, and then a local retailer immediately has the 0:09:53.559 --> 0:09:54.440 ability to. 0:09:54.559 --> 0:09:57.760 Kind of migrate to a you know, you know more 0:09:57.800 --> 0:09:58.720 of electronic payment. 0:09:58.880 --> 0:10:01.640 That completely changed, especially here in New York City, where 0:10:01.640 --> 0:10:03.520 if you would go to a farmer's market before you'd 0:10:03.559 --> 0:10:05.000 have to worry about do I have enough cash? 0:10:05.040 --> 0:10:06.280 What if I want to buy more things? 0:10:06.720 --> 0:10:07.280 Just have to pay. 0:10:07.360 --> 0:10:08.440 It's so much more simple. 0:10:08.520 --> 0:10:13.000 But so great company Square, great ticker symbol SQ. 0:10:13.520 --> 0:10:15.160 What do you do then you change a name of 0:10:15.200 --> 0:10:16.600 your company to block Plock. 0:10:16.880 --> 0:10:19.120 You traded sixty five bucks, down from a high of 0:10:19.200 --> 0:10:19.840 two to eighty one. 0:10:20.000 --> 0:10:22.439 Yep, just crazy, let's change our name. 0:10:24.280 --> 0:10:28.120 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:10:28.240 --> 0:10:31.760 weekdays at ten am Eastern on applecar Play and Android 0:10:31.800 --> 0:10:34.520 Auto with the Bloomberg Business App. You can also listen 0:10:34.679 --> 0:10:37.760 live on Amazon Alexa from our flagship New York station, 0:10:38.160 --> 0:10:39.480 Just Say Alexa Play. 0:10:39.600 --> 0:10:41.160 Bloomberg eleven thirty. 0:10:42.240 --> 0:10:45.680 Talking about Home Depot Company reported some numbers here, let's 0:10:45.679 --> 0:10:47.839 bring in Drew Redding. Drew covers all the home building 0:10:47.880 --> 0:10:50.360 stocks which had just been ripping really for the last 0:10:50.400 --> 0:10:52.040 couple of years, because that's the only way to get 0:10:52.040 --> 0:10:53.160 a home is you got to build a new one. 0:10:53.440 --> 0:10:55.760 And he also covers all the companies that are around 0:10:55.800 --> 0:10:57.080 the home building industry. 0:10:56.800 --> 0:10:57.760 Including HD. 0:10:58.520 --> 0:11:01.520 It's up about six tens of one percent here today, Drew, 0:11:01.520 --> 0:11:03.760 thanks so much for joining us here. Break down what 0:11:03.960 --> 0:11:07.120 you saw and heard from our good friends at Home Depot. 0:11:08.240 --> 0:11:10.439 Sure, so the three and a half percent decline and 0:11:10.520 --> 0:11:13.480 same store sales was pretty much freight in line with 0:11:13.600 --> 0:11:16.280 what was expected. You have to keep in mind though, 0:11:16.640 --> 0:11:19.000 coming into the quarter, the bar was pretty low for 0:11:19.120 --> 0:11:22.480 home depot. They continue to face the consumers who were 0:11:22.520 --> 0:11:25.800 pulling back in big ticket discretionary categories, so think things 0:11:25.920 --> 0:11:30.839 like flooring, cabinets, countertops. Conversely, they're seeing relative strength in 0:11:30.920 --> 0:11:33.000 some of the smaller scale projects, so there's big ticket 0:11:33.040 --> 0:11:36.760 projects are being deferred. We do think eventually they get completed, 0:11:37.080 --> 0:11:39.199 but that may be more of a twenty twenty five story. 0:11:39.679 --> 0:11:42.320 But coming into this quarter, the real debate was around 0:11:42.640 --> 0:11:45.360 how twenty twenty four was going to shape up. So 0:11:45.440 --> 0:11:48.959 they offered guidance suggesting that same store sales would fall 0:11:49.040 --> 0:11:51.520 about one percent, and given what we heard from a 0:11:51.559 --> 0:11:54.280 handful of their suppliers over the last couple of weeks, 0:11:54.679 --> 0:11:56.800 which we're calling for a flat market, I think people 0:11:56.960 --> 0:11:59.480 it caught people a little bit off guard. Ourselves included. 0:12:01.040 --> 0:12:02.760 We do think that the first half is going to 0:12:02.800 --> 0:12:06.480 be comparatively weaker than the second half as rates start 0:12:06.520 --> 0:12:08.040 to pull back, and we think you could maybe get 0:12:08.080 --> 0:12:11.440 a little bit bit of a boost from the housing market. Drew. 0:12:11.520 --> 0:12:13.160 This may be a dumb question, but when I look 0:12:13.160 --> 0:12:15.199 at some of the consumer data that we've been seeing, 0:12:15.640 --> 0:12:19.040 we are seeing a rising ninety day credit card delinquencies. 0:12:19.320 --> 0:12:21.880 How do things like that, What does the normal spender 0:12:21.960 --> 0:12:24.280 at home depot look like? You're mentioning kind of a 0:12:24.360 --> 0:12:27.319 pullback on some of those bigger projects. What kind of 0:12:27.520 --> 0:12:30.600 demographic does home depot really see in terms of driving 0:12:30.720 --> 0:12:33.079 sales and kind of putting those numbers together. 0:12:33.880 --> 0:12:36.800 Yeah, so about eighty percent of home depots customers or 0:12:36.840 --> 0:12:40.600 current homeowners. They typically have higher incomes, so they are 0:12:40.920 --> 0:12:44.040 higher spenders and they're a little bit more resilient of 0:12:44.120 --> 0:12:47.000 a customer. I think where we're seeing the relative weakness 0:12:47.080 --> 0:12:49.840 is in some of the low end spending, which has 0:12:49.880 --> 0:12:52.800 kind of gone away on the DIY side. But you know, 0:12:52.840 --> 0:12:54.679 if we look big picture, what's happening in the home 0:12:54.720 --> 0:12:58.720 improvement market is we're seeing a reversion to more typical 0:12:58.960 --> 0:13:02.200 spending pattern. So if you think back to the pandemic, 0:13:02.360 --> 0:13:06.040 we had the share of PCEE that went towards household 0:13:06.120 --> 0:13:08.839 durables was at all time record, and we've seen that 0:13:09.000 --> 0:13:12.160 moderate since really the first half of twenty twenty three. 0:13:12.280 --> 0:13:13.839 So we think that there's a bit more of a 0:13:14.120 --> 0:13:16.959 reversion that needs to take place with the remainder of 0:13:17.080 --> 0:13:19.760 this year, which is going to keep total industry sales muted, 0:13:20.760 --> 0:13:22.680 you know, but you talked about the consumer. You also 0:13:22.760 --> 0:13:27.360 have the consumer out there who's battling with the cumulative 0:13:27.440 --> 0:13:30.319 impact of massive inflation over the last couple of years. So, 0:13:30.800 --> 0:13:33.000 you know, while we look at the head headline number 0:13:33.000 --> 0:13:35.439 and we see that it's moderating, it's really the cumulative 0:13:35.480 --> 0:13:38.360 impact that's kind of pressuring spending in the category. 0:13:39.160 --> 0:13:41.319 Hey, Drew, what's the What do you think is a 0:13:41.400 --> 0:13:44.200 normalized top line growth rate for like a home depot. 0:13:44.240 --> 0:13:44.720 I'm I'm looking. 0:13:45.200 --> 0:13:47.520 You know, pre pandemic was kind of mid single digit grower, 0:13:47.559 --> 0:13:49.959 then of course exploded, you know, during the pandemic was 0:13:50.000 --> 0:13:52.839 some you know, big double digit gains. What do you 0:13:52.880 --> 0:13:54.319 think what do you kind of model out here for 0:13:54.400 --> 0:13:55.079 top line growth? 0:13:55.920 --> 0:13:59.040 Yeah, I think I think in a normalized environment, which 0:13:59.080 --> 0:14:01.839 we think we get back to in twenty twenty five, 0:14:01.960 --> 0:14:04.679 is probably in the three to four percent range as 0:14:04.679 --> 0:14:08.280 a baseline. You know, there's a couple of industry factors 0:14:08.320 --> 0:14:10.240 that we think will support that. Like I mentioned, we 0:14:10.320 --> 0:14:14.160 think as rates start to moderate, perhaps as we get 0:14:14.200 --> 0:14:16.520 through this year, we think that you could start to 0:14:16.520 --> 0:14:19.880 see a boost from existing home sales. Remember, existing home 0:14:19.920 --> 0:14:22.600 sales are the lowest level more than twenty five years, 0:14:22.680 --> 0:14:26.160 and we know that people who move spend about twice 0:14:26.160 --> 0:14:29.640 as much on remodeling as those who don't. So while 0:14:29.680 --> 0:14:34.240 we don't see total housing turnover returning to you know, 0:14:34.360 --> 0:14:36.800 kind of that five and a half level anytime soon, 0:14:36.840 --> 0:14:38.440 we do think the fact that things have been so 0:14:38.640 --> 0:14:40.920 depressed does serve as a tail and as we move 0:14:40.960 --> 0:14:43.440 through the year. At the same time, you know, we've 0:14:43.520 --> 0:14:47.160 had over forty percent increases in home prices since the pandemic, 0:14:47.320 --> 0:14:50.640 so homeowner's equity right now is at all time ties. 0:14:50.880 --> 0:14:53.800 The average home has about three hundred thousand dollars in equity, 0:14:53.840 --> 0:14:56.120 So we think that's a source of pent up demand 0:14:56.240 --> 0:14:59.480 for big ticket projects that once again, as rates start 0:14:59.520 --> 0:15:03.000 to moderate, people will get more comfortable with tapping that equity. 0:15:03.480 --> 0:15:05.440 And drew with that in mind, you mentioned some of 0:15:05.480 --> 0:15:09.400 those big purchases, bigger projects. How much of that was 0:15:09.520 --> 0:15:13.360 pulled forward though during the pandemic when people were buying homes, 0:15:13.400 --> 0:15:15.920 we saw a booming market around the US, and it 0:15:16.000 --> 0:15:19.960 did seem like cash being relatively free with the surplus 0:15:20.080 --> 0:15:23.160 spending and stimulus checks, that people were putting money into 0:15:23.360 --> 0:15:24.080 home improvement. 0:15:25.640 --> 0:15:27.840 Yeah, great question, and I think that goes back to 0:15:27.880 --> 0:15:31.040 the share of personal consumption that was spent on home improvement. 0:15:31.360 --> 0:15:33.080 It was a lot of that stimulus money that was 0:15:33.120 --> 0:15:36.040 out there for everybody. In terms of the big ticket project, 0:15:36.120 --> 0:15:37.880 we think more of the pull forward was probably done 0:15:37.920 --> 0:15:40.080 in the DIY segment. That's really where you saw the 0:15:40.080 --> 0:15:43.720 boom early in the pandemic. That being said, we have 0:15:43.840 --> 0:15:47.480 seen contractor backlogs over the last couple of years be 0:15:48.000 --> 0:15:51.480 you know, elevated compared to more traditional levels. So to 0:15:51.600 --> 0:15:53.960 some extent, it has been in both the DIY and 0:15:54.120 --> 0:15:57.320 big ticket category. But we do think that the big 0:15:57.360 --> 0:15:59.880 ticket categories where we're likely to see more growth from 0:15:59.880 --> 0:16:03.160 home depot as they go after the professional contractor, as 0:16:03.200 --> 0:16:06.480 they leverage you know, the age investments consumers are making 0:16:06.560 --> 0:16:08.480 because of the age of the housing stock that pentep 0:16:08.520 --> 0:16:09.560 equity they have in their home. 0:16:11.080 --> 0:16:14.040 He drew from an investment perspective, how do you differentiate 0:16:14.760 --> 0:16:16.320 home depot versus lows. 0:16:18.200 --> 0:16:19.840 Yeah, so, I mean both of the stocks that you 0:16:19.920 --> 0:16:23.440 mentioned earlier. The housing names have ripped recently. I think 0:16:23.960 --> 0:16:26.600 home depots since the end of October is up more 0:16:26.600 --> 0:16:29.040 than thirty percent because investors were placing their bets that 0:16:29.720 --> 0:16:31.960 the fed of rat height cycle would come to an end, 0:16:32.320 --> 0:16:33.760 so I think they're trying to get out ahead of 0:16:33.800 --> 0:16:36.600 that and out ahead of that. Improvement in home sales. 0:16:37.000 --> 0:16:40.840 In terms of comparing the two, Home Depot has really 0:16:40.920 --> 0:16:43.440 benefited relatives to the Lows recently because of their exposure 0:16:43.480 --> 0:16:47.920 to that professional customer. It's driven you know, outside outside 0:16:48.400 --> 0:16:52.720 same store sales. It's driven better margins, and we expect 0:16:52.760 --> 0:16:55.240 that the professional contractor is going to be a relative 0:16:55.320 --> 0:16:58.360 area of strength going forward. Now with that being said, 0:16:58.520 --> 0:17:01.120 Home Depot is trading out a premium to the market 0:17:01.760 --> 0:17:05.040 and one of the biggest premiums versus Lows over the 0:17:05.119 --> 0:17:09.080 last decade, you know. So to the extent that Low's 0:17:09.200 --> 0:17:12.119 is able to leverage its investments in e commerce and 0:17:12.240 --> 0:17:15.840 in their professional contractor business, that could be something to 0:17:15.920 --> 0:17:16.359 look out for. 0:17:16.880 --> 0:17:20.119 And drew, as we mentioned Dr Horden Toll Brothers, all 0:17:20.160 --> 0:17:24.440 these homebuilders building out new apartments, new homes. Does that 0:17:24.600 --> 0:17:26.879 benefit Home Depot or Lows or is that going to 0:17:26.960 --> 0:17:28.680 more benefit the likes of a whirlpool. 0:17:30.520 --> 0:17:33.720 Yeah, so that's that's primarily more geared towards the building 0:17:33.760 --> 0:17:38.119 product manufacturers, and Lows business is more built around that 0:17:38.240 --> 0:17:41.240 remodeling market and less so on the new construction side. 0:17:42.320 --> 0:17:43.919 So what's the. 0:17:43.960 --> 0:17:47.600 Average ticket size of a home depot? And not recently 0:17:47.640 --> 0:17:50.119 ask is I'd never really go there? So what's like 0:17:50.160 --> 0:17:53.400 an average ticket size? And is it different between home 0:17:53.480 --> 0:17:54.240 depot and lows? 0:17:55.119 --> 0:17:58.479 They're similar, probably somewhere between seventy five and ninety dollars. 0:17:58.960 --> 0:18:02.159 And what we've seen more recently is that that average 0:18:02.200 --> 0:18:03.960 ticket size has come down and that's one of the 0:18:04.040 --> 0:18:06.720 things that's pressuring same sotore sales. And the reason that 0:18:06.840 --> 0:18:08.800 average tickets are coming down is because you don't have 0:18:08.880 --> 0:18:12.320 the same leverage to big ticket spending those categories I 0:18:12.400 --> 0:18:16.040 mentioned earlier, like flooring, like cabinets, like countertops, Those are 0:18:16.080 --> 0:18:18.680 some of the things that really drive that growth. And 0:18:18.760 --> 0:18:22.000 with that pullback, we've seen a moderation and ticket we're. 0:18:21.840 --> 0:18:24.840 Talking about the sales declining for a fifth quarter in 0:18:24.960 --> 0:18:28.200 a row. When does that break out? Is it just 0:18:28.359 --> 0:18:32.080 easing cop numbers going to ultimately lead to a rebound. 0:18:33.160 --> 0:18:34.760 So that'll be part of it. I mean, the way 0:18:34.800 --> 0:18:36.840 we're looking at the market is that the second half 0:18:37.040 --> 0:18:39.840 outperforms the first half. I think home depot and the 0:18:39.960 --> 0:18:42.720 industry can start to return to growth later this year, 0:18:42.840 --> 0:18:45.360 kind of exiting twenty twenty four, and we think once 0:18:45.400 --> 0:18:47.840 we look ahead to twenty twenty five, that's when you 0:18:47.920 --> 0:18:50.520 start to see a more normalized growth in my environment 0:18:50.560 --> 0:18:52.600 in that low single digit range. Call it. 0:18:53.040 --> 0:18:55.680 All right, So home Depot they're primarily a US company. 0:18:55.800 --> 0:18:58.399 Did any of these companies think about opening stores outside 0:18:58.440 --> 0:18:58.760 the US? 0:19:00.560 --> 0:19:02.480 Yeah, they have. I mean both home Depot and Lows 0:19:02.480 --> 0:19:07.720 have had businesses outside of the US. Low's recently sold 0:19:07.760 --> 0:19:11.160 its business in Canada. Home Depot operates in Mexico as well. 0:19:11.240 --> 0:19:13.200 But for both of them, they've both made an effort 0:19:13.240 --> 0:19:16.000 over the last several years to really focus on the 0:19:16.119 --> 0:19:19.960 US market. So that's been a strategic initiative for both 0:19:19.960 --> 0:19:23.000 of them, just because they see that long term growth 0:19:23.720 --> 0:19:25.400 in the housing market and that's really where they want 0:19:25.400 --> 0:19:26.399 to focus their attention to. 0:19:26.880 --> 0:19:29.200 All Right, Drew, great stuff is always appreciate getting some 0:19:29.280 --> 0:19:32.360 time Drew reading. He's a home builder analyst at Bloomberg Intelligence. 0:19:32.440 --> 0:19:36.920 Joining us via zoom from the Bloomberg Intelligence headquarters in Princeton, 0:19:37.119 --> 0:19:37.679 New Jersey. 0:19:39.160 --> 0:19:43.000 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:19:43.119 --> 0:19:44.880 weekdays at ten am Eastern. 0:19:44.720 --> 0:19:47.200 On Apple car playing and broud Otto with the Bloomberg 0:19:47.280 --> 0:19:47.920 Business App. 0:19:47.960 --> 0:19:51.160