Walmart (WMT): When we purchased WMT as a new long-term investment last June, our thesis was built on the idea that the stock offered both offensive and defensive characteristics.  The defensive characteristics were important with the economy and market in an uncertain period amid high inflation and the Fed’s aggressive monetary policy tightening to slow price increases.  WMT is playing offense by investing in technology to build out a broader revenue stream including full ecommerce capabilities,  buy online pick up at store, advertising, and improved operation execution at the core retail business.  WMT’s 4Q22 earnings report reinforced both sides of our thesis even as the company issued cautious EPS guidance for 2023.  Sales remain strong, showing no signs of slowing consumer economy.  Nonetheless, EPS guidance implies slower sales growth.  EPS guidance is also penalized by non-operating items like inventory timing expenses, losses on investments, and higher interest expense.  Importantly, the excess inventory that hit earnings and the stock price early in 2022 are behind the company.  Throughout the quarterly conference call, management spoke confidently about the future indicating market share gains continued across all income cohorts.  WMT needs its offensive initiatives, particularly in ecommerce and in-store groceries, to hold higher income customers when the economic outlook improves.  We are confident this will be case thanks to a recent history strong management execution and smart strategies.  The defensive strategies of everyday low pricing for the company’s core low- and middle-income cohorts remain effective while inflation is elevated and the risk of an economic slowdown is high.  WMT shares have performed well since our purchase, up 15% against a gain of just 2% for the S&P 500.  We think more positive absolute and relative performance remains ahead for WMT shares driven by better-than-expected results against the conservative reset guidance and continued success gaining profitable market share across the store and online.

Home Depot (HD): HD reported solid results to close 2022 and issued lower than expected guidance for 2023.  Most of the guidance shortfall relates to a discretionary management decision to raise pay across the workforce by $1 billion annually.  We support the initiative as it is another sign of management’s prowess in positioning the company to sustain leadership and continue to gains market share in the home improvement industry.  Much like Walmart, management took a cautious view of consumer demand and guided to flat comparable store sales for 2023.  Unlike Walmart, Home Depot is seeing a slowdown in its top line as it appears the first wave of higher demand related to the pandemic has run its course.  Mostly, this reflects consumer spending preferences shifting back toward services (travel, live events, eating out, etc.) where spending remains well below pre-pandemic levels.  The pandemic led to a boost in spending on homes thanks to work from home, lower housing turnover, and rising home prices.  Northlake believes the emphasis on home improvement spending related to the pandemic is secular.  However, it appears a period of digestion lies ahead in 2023 as a lot of demand has already been fulfilled, while consumers shift toward services spending that takes place outside the home.  Consumer spending on services remains a few percent below its share of total consumer spending before the pandemic.  Management is assuming that services share reverts to historical levels in 2023 in a no-growth economy.  This presents a several-hundred basis point headwind to sales growth.  Should the consumer spending grow or decline vs management’s expectation for little change, HD guidance could prove optimistic or pessimistic.  All of this makes 2023 a tricky year to forecast HD shares.  Northlake maintains a longer-term view and believes the combination of a secular rise in home improvement spending, continued market share gains for HD among consumer spending, and increasingly effective and large initiatives to service Pro accounts will provide strong growth post any digestion period.  We are willing to wait given the high-quality growth and financial strength offered by HD.  Looking ahead to 2024, we think the shares can recover to the mid-$300s.

VICI Properties (VICI): VICI wrapped up a transformational 2022 with another boring earnings report.  The company provided strong guidance for nearly double-digit earnings growth in 2023 boosted by recent acquisitions, inflation escalators in rent, and organic growth investment in properties owned for many years.  Furthermore, guidance is diluted by a recent sale of shares to fund future acquisitions.  In 2022, VICI acquired their largest casino REIT competitor, added major properties on the Las Vegas Strip, acquired their first non-U.S. casinos in Canada, and continued expanding outside of gaming in other experiential assets in theme parks and golf.  VICI remains one of our favorite stocks due to highly predictable growth thanks to quality tenants paying rent on time.  As we have noted in the past, during the pandemic, when Vegas and regional casinos were closed, VICI received every dollar of rent it was owed.  This gives us great comfort should a consumer recession develop in 2023 or 2024.  VICI has been a great investment for Northlake and we expect continued outperformance.  Since the company came public five years ago the total return has been double the S&P 500 and NASDAQ at what we believe is a lower risk level.  Earnings have grown at a CAGR of almost 8% and dividends have average about 5%, leading to CAGR of 13%.    Guidance for 2023 offers more of the same, well ahead of S&P 500 earnings growth estimates of plus or minus 1-2% with a dividend yield under 3%. VICI’s superb management team deserves credit for identifying opportunities, closing transactions, and making smart financing decisions.  Opportunities remain for similar growth in the next five years as there remain many casino properties still be REIT-financed, expansion in non-casino areas is underway, and international markets are large and untapped.  Inflation protection is supported by rent escalators providing further predictability in the company’s consistent business and financial model.  VICI shares still trade a discount to other REITs proving lesser growth outlooks.  Multiple expansion and organic growth offer upside to the low $40s with a current dividend yield of 4.6% adding to the return profile.  Finally, we especially like VICI’s potential return and predictability against an uncertain economic and stock market environment.  Above average growth with below average risk is tough to beat.

Nexstar Media Group (NXST): NXST reported slightly disappointing 4Q22 earnings and 2023/24 guidance.  It is worth noting that the disappointment is against weak sentiment for local TV related to cord cutting.  Additionally, NXST is always held to well-earned and well-deserved high expectations.  Finally, the company’s acquisition of the CW network likely created a confusing set of consensus expectations.  All that said, NXST shares could be entering a more challenging period after being up 16% during 2020’s bear market.  For 2023, the biggest concerns are related to the economic outlook, relationships with virtual distributors like YouTube TV and Sling TV, and continued cord cutting.  The outlook for 2024 improves as another year of political advertising kicks in and losses related repositioning the CW begin to recede.  On a longer-term basis, there is little doubt that NXST massive free cash flow and management’s excellent stewardship of capital allocation will continue.  However, we are beginning to wonder if organic growth opportunities are big enough to offset the secular pressures from a changing TV landscape.  Secular concerns drove our decision to reduce client positions in NXST during 2022 at prices quite close to today’s post-earnings sell off.  For now, we are holding NXST shares as hitting current expectations in 2024 could push the shares to new all-time highs at $220 or higher.  For 2023, we suspect the stock is stuck in a range of about $160 to $200.  We are taking a serious look at taking the win and selling NXST much as we did earlier this year with Comcast. That is a change after years of defending NXST against secular and cyclical concerns and watching the stock triple vs our initial purchases in 2017 against a gain of just 60% for the S&P 500.

WMT, HD, VICI and NXST are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.