On this episode ofMarket Foolery, Mac Greer is joined by Motley Fool analystsRon Gross andJason Moser as they discuss some of the latest news fromFacebook (NASDAQ: FB) as it expands the Stories feature to its main app.
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Meanwhile, Darden Restaurants International (NYSE: DRI) left investors with a tasty earnings beat with an acquisition for dessert, whileWhole Foods (NASDAQ: WFM) continues to lose millions of customers.
A full transcript follows the video.
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This video was recorded on March 28, 2017.
Mac Greer: It'sTuesday, March 28th. Welcome to Market Foolery! I'm Mac Greer,and joining me in studio, we've got Ron Gross from Total Income and Jason Moser from Motley Fool Million Dollar Portfolio. Gentlemen, welcome!
Jason Moser: Hey!
Ron Gross: Hey,how are you?
Greer: Guys,I'm good. Let's begin withFacebooknewsthatlooks a whole lot likeSnapchat (NYSE: SNAP). On Tuesday, Facebook released its Stories feature in itsmain mobile app. Stories allows users to post photos and videos that disappear after 24 hours. Does that sound familiar at all? Stories wasalready part of other Facebook apps likeInstagram, WhatsApp, and Messenger. Now,Jason, they say imitation is the sincerest form of flattery. ButI'm guessing that if you're Snapchat,you could do without this type of flattery.
Moser: I would imagine. I think they're probably thinking, "Wow,at some point, could you not just do something original?" But, I mean,that's the name of this game. Social networking in general,it's innovative to a point,but at the end of the day, it's all about free flow of information and figuring out ways to communicate with people.
So, whether you'reFacebook orTwitteror Snapchat or Instagram or whatever,you're always figuring out ways to add new little bells and whistles. I do think,as time goes on, it strikes me that --and I'm not the biggest on these platforms.I really don't use Facebook all that much,I don't use any of these other things,other than Twitter. But I think,it becomes more and more difficult to use these platforms. Itseems like they addmore and more bells and whistles to the point that it becomes more and more difficult to use, when really, one of the arguments from inception was that they're easy to use. So,I wonder if we're going to hit a point wherethey become so difficult to use thatthey start turning people off,because you do hit a point where you start adding so many bells and whistles in the hopes of evolving andinnovating that you start scaring people away.
I think that's something that, whileold people like us might consider Snapchat difficult to use, I think a lot of the kids that use it generally like its simplicity and quick, free-flowing nature. To me, the question with Snapchat has always beenwhat can they be beyond the Snapchat app? And when they went public, when they were doing the roadshow, they redefined themselves as a camera companybecause even I think they realized that just being Snapchatisn't going to cut it. That's not going to be a way for them to get big and justify the valuation that the market is giving them today. I do think it'simportant to note that whether you are using Facebook orInstagram or Messenger or WhatsApp,you're still using Facebook. I think that's a testament to the beststrategy in this space -- to own aportfolio of a lot of these apps so that you're going to hit every age group. Facebook iskind of for old people. Instagram is maybe Facebook for younger people. Maybe they're trying to turn Messenger into a SnapChat style offering, as well. It's a unique space,but I think it's really difficultto compete with Facebook becausethey're already so big.
Gross: Yeah,I can't argue with any of that, actually --
Moser: Well,that's good. Stop.
Gross: [laughs] I don't think Facebook Stories is going to steal any of Snapchat's glory. I don't think Snapchat is actually worried thatall of the sudden people are going to start leaving their platform andmoving to Facebook. It didn't happen with Instagram,I don't think it will happen with Facebook proper. Butit does behoove Facebook to have a complete offering --to not have that option to create a story and do those things would hurt it a bit. Youwant to have all the new bells and whistles on your platform,unless, as you said,it becomes a little too complicated. Now,for my mother-in-law, it's going to be too complicated. But she just won't use that part of it,she will continue to like and share things that areembarrassing about her family. But for the folks our age that do want that ability, it's now, there.
Greer: AndI hear you say that no one is going to leave Snapchat, or,people aren't necessarily going to leave Snapchat to go to Facebookbecause of this. But if you are Facebook,you're in a much better position than Snapchat. So, you outlast Snapchat, then you're the only game in town.
Gross: Absolutely. We've beentalking about the usability and the apps and the companies. Then westart to talk about the stock and the capital structure and all that stuff. You would never choose to be Snapchat as opposed to Facebook, thebehemoth here,with an airtight balance sheet, cash flow flowing in, just an incredible market position. Snapchat, I wouldn't touch it.
Moser: This is less aboutstealing people using Snapchat, and more about giving folks areason not to leave any one of those four Facebook platforms. Snapchat has 158 million daily users or something like that. It sounds like a lot, until you compare it to what Facebook has,and then you realize it doesn't really matter,it's relatively inconsequential,especially when you consider that there's probably a decent amount ofcross over there. So,it's really just about Facebook and all of its associated platformsoffering the ability to do these extra things as a value add. It's less about stealing Snapchat's users,and more about offering their users more features.
Greer: Let'stalk about Facebook the stock. Shares up around 25% over the past year. Going forward,what do you think about the stock?
Gross: I'm a shareholder. It's hard to make the argument that it's cheap as a value investor, because you have to look out into the future so much and rely so much on the future, so I'll suspend my value investing, I'lltake off that hat for a minute and say,I'm a shareholder. I have no intention of selling the stock any time soon, maybe ever. It'sthe kind of stock that I'm just happy to let sit there,and watch what Zuckerberg can do.
Moser: Yeah. I think it'svery easy to justifyowning this stock today, andhanging on to it indefinitely. We talked a lot about this last decade being the Google decade, this coming decade is probably going to be more of the Facebook decade, giventhe nature of the move to social. I think that's an advantage that Facebook holds over Google. Google is veryutilitarian in nature. You go to Googleto find something, and then you go somewhere elsewhen you found what you wanted to find. Facebook is garnering a lot ofeyeballs that stick around those properties for a while. So,it strikes me as probably abigger opportunity over the coming decade to be part of that Facebook story, versus something like Google, given those are the two big players in the ad space.
I do want to make the point that,it's a big company today, $400 billion plus. You hear a lot of people talk about, in order for the stock to double, they need to double their market cap. That'snot necessarily the case. They could, in theory, buy back shares, return capital to shareholders in certain ways that the company doesn't necessarily have to double for the stock to do well. With that said, it's a very big company. As it stands, it's still just an ad play. Now, I say "just" -- it's a massive market opportunity. But, we've seen how far Google has gotten thus far with it, and that's pretty far. Facebook has already caught up to it, more or less. So, looking out forward, it's a bit of a reach to say this is a no-brainer winner, but I think it's a pretty steady-eddy holding that you could hang on to for a while.
Greer: Guys,it was a good day forDarden Restaurants. Shares up big on Tuesday on better than expected earnings and news that Darden's would buyCheddar's Scratch Kitchen.
Gross: That'sa good name.
Greer: Ron,that's a great name, it's such a great name. We should also mention that Darden's owns Olive Garden and Longhorn Steakhouse, among others.
Gross: Capital Grille, my favorite. That's a good one.
Greer: Capital Grille. What do you think?
Gross: Thecompany is doing good, and a lot of restaurants are not. The results were pretty impressive, just shy of a 1% same store sales across the board. The highlight was Eddie V's, their seafood concept, at a 4.7%same-store sales increase. That's pretty impressive. Olive Garden, where most of their profits come from, and Steve Broido's favorite, of course,for listeners of the radio show, up 1.4%. So, not too shabby either, especially when you look out across the competition and see there's a lot of folks that are struggling right now. Profits were up strong. They increased guidance. Then, as you said, a $780 million acquisition of Cheddar Scratch, 165 locations across 28 states. It's a value chain. Let me hit you with some menu items. PerhapsI could interest you in some baby back ribsor some chicken fingers. Maybe J-Mo would like aMonte Cristo sandwich.
Greer: Chicken-fried steak.
Gross: Nothing wrong with that.
Greer: Chicken-fried steak, Ron.
Gross: Well,there's a lot wrong with that.
Greer: [laughs] Bite your tongue!
Gross: [laughs] But,this is nice. They'readding a casual dining chainto their portfolio. I like that move. It'shard to say whether or not the $780 million is a good price,because I don't have a lot of financials on this company. We know that they've grown revenue 12% to 15% over the last 10 years. Not too shabby. That sounds good to me. Darden does say it will be accretive to their earnings pretty quickly. That's nice to see as well. Darden doing well.
Moser: I continue to be amazed by the performance of Olive Garden's to-go side of the business. It's not a top of mind whenI'm looking for something to go. Butthey have clearly hit on something here.The performance there, it's continued double-digit growth in the to-go segment of the business that's just, I'm astounded.
Gross: I've never used it personally.I wonder if Steve has.
Moser: I don't remember the last time I went to an Olive Garden, but obviously, a lot of people are going. I think a big catalyst forDarden was when they spun offa lot of the real estate that they owned intoFour Corners Property Trust. They hada lot of restaurants in there wherethey owned the real estate. Basically,they were trying to whittle down theircost structure and just be a really good operator of restaurants. So, theyspun off a lot of that propertyto this property trust.I think it helps shore up the balance sheet. I think it helped themfocus on doing one thing and doing really well, and that is bringing a number of good,middle of the road brand names into their universe, andbeing able to grow those footprints. Again,kind of like that Facebook strategy. Whether you're going to one of theserestaurants, you're still going to a Darden restaurant at theend of the day. And that's very good for them.
Greer: AndI want to go back to the name. I think Cheddar's Scratch Kitchen --
Gross: It'spretty good.
Greer: I think that's the greatest name.I think the worst name isCarl's Jr. Westill don't know how Carl came into possession of Jr. Because it's Carl's Jr.
Gross: It's likeRuth's Chris.
Greer: Oh,that's terrible!
Gross: Yeah,it's hard to say.
Greer: That was some mash up of someone who was married, and then they're not, but, Carl's Jr.?
Gross: Cheddar's Scratch does it.
Greer: It's confusing.I don't want to be confused. I just want food.
Gross: I just want baby back ribs. Youjust want chicken-fried steak?
Greer: You don't like chicken-fried steak?
Gross: No,I do, but it's not the healthiestpiece of food.
Greer: Oh,and all the other items were, I'm sorry. Ron Gross,picture of health.
Gross: Smothered in that white gravy, thatunidentifiable white gravy.
Greer: That's why it's good. We wrap up with tough time forWhole Foods. According to areport from Barclays,Whole Foods traffic has fallen by 14 millioncustomers over the last year andhalf. That's a 3% drop.I should add that Whole Foods co-founder and CEO John Mackey is on the board of directors of the Motley Fool. Jason,according to the report,Krogeris the big beneficiary. Nearly half ofKroger stores are within three miles of a Whole Foods.
Moser: Yeah,it was pretty smart to do that, huh? I guessmaybe they felt like they were on to something. This goes back to what we've been talking about a lot in this space. Scale is really atremendous advantage. Having that big footprint,where you can get things from point A to point Bin the quickest fashion, and really carry a very wide selection of offerings, both private branded and brand names, isimmensely advantageous. I thinkwhat we always wondered with Whole Foods for a time was,would they be able to get rid of that Whole Paychecksmoniker that they had earned. It seemed likethey were doing a pretty good job of that. They were making that way toward offering more 365branded items, which certainly were more affordable. And I think that attracted more customers, for a time. But they really have run into a buzzsaw here in thatevery grocery store concept in the country is copying that model now, and bringing more and more naturals andorganics into their mix. Andfurthermore, we talked about this,Whole Foods doesn't really do a very good job ofattracting the crossover consumer. So, theydon't have a lot of what people really still want. Andthat's a big problem,because now you're telling meI have to go to more than one place to get everything.
Greer: Yeah,I don't want to do that.
Gross: That was always, though. You wouldgo to a regular supermarket for your paper towelsand household items. Then, if you wanted organicsor really good produce or really good meat and fish, you would pop over to Whole Foods. Two trips. Kind of annoying. Now,Kroger's brand, Harris Teeter, you get a lot of that right there. Now,I do not think the quality of the produce in the meats are the same at Harris Teeter and Whole Foods. Whole Foods still does a better job. If I have a dinner party,I'm still going to Whole Foods. But on a regular, weekly basis, it becomes lessnecessary to go to Whole Foods,which is never good for a business model.
Greer: So,what does this mean if you're Whole Foods investor,or you're someone who's looking at the stock?
Gross: I am a Whole Foods investor,and I'm not that thrilled about it lately. Evenover the last five years,the stock is down around 30%. In my head, it was a more recent decline. But they've really been on the downturn for quite some time. I'm not a seller yet. To be honest,I'm not sure why I'm not. It'sbecause I like the experience,I'm a consumer and I shop there,and I'll continue to support it as a shareholder.
Greer: Andyou have lunch there a lot.
Gross: I have lunch there almost every day.[laughs]
Greer: So,they have their prepared foods,some of the stores have bars now, sothey have some built-in advantages, right?
Gross: They do. I remain a loyal customer, and therefore, for now,I remain a loyal shareholder as well.
Moser: I don't know.I'm not a Whole Foods investor. We did own shares of Whole Foods in Million Dollar Portfolio,but we sold them a little while back.I think really, the icing on the cake for us wasin the most recent quarter, when they finally came to reality here in that they needed to pull back on what they saw as their full market opportunity. For a while, they were targeting 1,200 total stores around the country,which, we felt like, was too many. They, I think, now realize that that's too many. They pulled back on that guidance. They put that 365 store concept on hold to reasses which waythey want to go with it. Right now, they're talking about going back to their roots and really focusing on that core Whole Foods customer that helped get them to this point today. It's almost like saying they're going back to that Whole Paychecks moniker. They'regoing back to targeting that consumer. Honestly,that probably is their best bet. I think we'vecome to a point where we realize,Whole Foods isn't going to be able to growas much as a lot of people thought it was going to. So,maybe their best bet is to be that high-end grocer that focuses on a smaller overall market opportunity, but serves that market opportunity in an excellent fashion.
And if they do that, it can certainly still perform well, possibly even see margins getback to expanding if they're able to keep on raising those prices a little bit. Because,for the last few years, they really have been focusing on value, to the extent that you would get it even on the grocery bags. If you have your grocery bags fromWhole Foods you would see on the bags that they were talking about daily deals and value offerings and all this stuff. They weregetting down to having to compete on pricing withall of these other bigger competitors out there. Theycan't win that game. They're too small to do it. So, then you have to wonder, really, is the path to success heresome type of an acquisition? Do they need to acquire something like aPublix to grow that market opportunity and focus on a number of different tiers?Sprouts, a company thatjust went public shortly ago, acompetitor to Whole Foods, sounds like they may beacquired byAlbertsons, whichalso owns Safeway. So,you can certainly see consolidation in this sector. I think Whole Foods ismore than likely going to have to eithermake an acquisition of some sort, or they are really going to be focusing just on that whole paycheck customer, and accepting the fact that they can only become so big.
Greer: I'm not saying it would have been a perfect fit, butI think Whole Foods should have gone afterCheddar's Scratch Kitchen.
Gross: I knew you were going to say that! That's awesome.
Greer:[laughs] OK, guys. Jason, Ron, thanks for joining us!
Gross: Thanks, Mac!
Greer: As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening and we'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Twitter and Whole Foods Market. Mac Greer has no position in any stocks mentioned. Ron Gross owns shares of Facebook and Whole Foods Market. The Motley Fool owns shares of and recommends Facebook, Twitter, and Whole Foods Market. The Motley Fool has a disclosure policy.