On this episode of Market Foolery, host Chris Hill is joined by Motley Fool analysts David Kretzmann and Aaron Bush to discuss some of the many companies releasing earnings reports this week.
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BetweenChipotle (NYSE: CMG),Twitter(NYSE: TWTR), and iRobot(NASDAQ: IRBT), the trio of companies all gave shareholders reasons to smile.
A full transcript follows the video.
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This video was recorded on April 26, 2017.
Chris Hill: It'sWednesday, April 26th. Welcome to Market Foolery! I'm Chris Hill, joining me in studio today from Rule Breakers and Supernova, David Kretzmann and Aaron Bush. HappyWednesday, gents!
David Kretzmann: Hey, Chris!
Aaron Bush: Happy Wednesday.
Hill: This is one of those days when we have three companies we're going to talk about today. We could easily talk about ten other companies. That'show many companies are reporting today. But,we have to choose,because we're not doing an hour long show.
Kretzmann: We could.I don't know if anyone would listen.[laughs]
Hill: Two thingswould happen if we did an hour long show. Long-timelisteners, to your point, would just cut out,they would just be like, I'm done. Once they hit the 35 minute mark, they'd pull the plug. The other thing is, Kristine Harjes iscoming in in a little bit to host Industry Focus, andwe don't want to incur the wrath of Kristine Harjes and the Industry Focus crew.
Bush: She'll boot us out.
Hill: So,let's start with signs of life --I can't believe I'm saying this --signs of life fromTwitter. Shares are up 11% this morningafter a first quarter report that included, Aaron, a rise inmonthly active users. The revenue fell, forthose of you who actually pay attention to money. The revenue fell, but thatseems to matter less than the fact that monthlyactive users are on the rise.
Bush: Yeah,I think the 10% pop in the stock today isa little misplaced, in my opinion. I don't really thinkit was that great of a quarter,to be honest with you, Chris. I thinkyou could say it was a mixed bag. Revenue was down,margins and cash flow were up, users were up. Butultimately, I do think, when you piece it all together, the news is more bad than it is good.
Hill: Wow, really?
Bush: I think so. On one hand,it's clear that Twitter is slowly making changes. They're slow, they'reungodly slow when it comes tohandling user issues like abuse andimproving the actual timeline. But they areimproving their cost, free cash flow is growing,the user base is growing, dailyactive users was up 14% year over year, which isactually pretty great. And I do think that's because ofsome of these efforts they put in placefrom theproduct perspective.
That said, revenue, youcan't just ignore that. That's huge. It's down 8% over the last year, and this is the 11th quarter in a row of adeceleration. The first quarter that it's down. That'spretty bad. I think the moral of the story here ispretty simple. Twitter's ads arecurrently not competitive withFacebookandGoogle,not even close. Andit's a huge undertaking for them to become competitive. So, you cancelebrate all these other wins, butat the end of the day, this isthe business. Turning the ship around is still a multi-year process, and the slower they move, the higher the odds of them getting whacked.
Hill: So,the people who are on Twitter itself, butalso reporting in the media, etc, who are saying, among other things thatCEO Jack Dorsey has bought himself some time, this was a good quarter, let's quiet down the drumbeat of, he needs to choose betweenbeing CEO of Twitter and being the CEO ofSquare. You're saying "No".
Bush: I think this is beyond him. This isbeyond what any one person can change at this point.I do think a lot of the changes that he has put into place have been positive, but revenue, youcan't overlook that.
Kretzmann: Yeah,Aaron mentioned the competition fromGoogle and Facebook. As far as digital sales go,those are definitely the big giants in the room. But then, asTwitter is doubling down on its live videostrategy, they're starting to compete more withSnap, whichhas a very engaged user base. The growth therehas slowed a little bit, it'll be interesting to see what Snap's metrics look like, and how those compare to Twitter, as far as ad engagement and user growth. But, yeah, it'snot a good combination when you have users going up, but ad revenue going down. And Twitter saidthey expect that disconnect to continuefor the rest of the year. Thisprobably won't be the last quarter that revenue goes down. In the meantime, their pace of stock-based compensation hasreceded a little bit, but their diluted share count increased over 1%just from the last quarter. So, in the process, asrevenue has completely decelerated and now is declining, their share count has climbed up. SoI went back and looked, ifTwitter wanted to bring its share count back to the same level it was in 2014,a few months after it went public, they wouldhave to spend $1.9 billion just to getback to that break even level with the share count. What that shows is, the bar thatthey have to cross at some point toreward shareholders isperpetually getting higher as they continue to dilute shareholders. So, that'snot a good trend to have when your revenue is dropping.
Hill: Andshare-based compensation,that's one of those things that,if you're the average investor, it'sunderstandable if your eyes gloss over, and it's easy to dismiss it and focus on the more headline-oriented things like revenue andmonthly active users. But when we talk about some of these tech companiespotentially putting themselves up for sale, youneed to recognize that share basedcompensation is a huge factor in that, the fact that they'regoing out and hiring people and convincing them to stay on board and not jump ship, a lot of thathas to do with, "Look, we'regoing to give you more shares." Goback and look atLinkedInbeingacquired byMicrosoft. Asmuch as anything, it was the share-based compensation within LinkedIn that made theleaders of that company go, "Wehave to figure something out quick."
Kretzmann: Yeah,because that's one of the main currencies they have for paying theiremployees. And competition between employers inSilicon Valley is not going to disappear. I think that's a dangerous thing for Twittershareholders and something to watch. At first glance,on the balance sheet, it does look pretty strong. We have net cash of $2.2 billion, as Aaronmentioned, you have free cash flow, which is going up, butstock based compensation is still a hugecomponent for that positive cash flow production. So, thebalance sheet, to me, isnot as strong as it looks on the surface, because $1.9 billion just to break even with your share count two years ago, that takes up most of their net cash today. Theinvestments that they've been making up to this point are not paying off. At some point, that trend has to reverse for shareholders to be rewarded.
Bush: Oneother thing that David and I were talking about earlier today is how slow they move, and what thatreally means when you look long term. I think it's easy to look at theseincremental changes andthink about where things should go. But the pace that they move, these larger tech companies likeFacebook and Google,they could do it at the snap of a finger, what these guys take six months to do.
Hill: I was going to ask you about that. It's,in some ways, anunfair question because unless you're spying onheadquarters at Twitter,there's no way for you to have the information to answer this question,but I'm going to ask it anyway. Why do you think that is?I've seen you write about this, I've seen other people touch on it. Thepopular image that we have of Silicon Valley is, among other things, it's a fast culture, it's a nimble culture. The way things move at Twitter, theymight as well be the U.S.Department of whatever. When youthink of bureaucracy, you think of Washington D.C. When you think of fast and nimble and cutting-edge, you think of Silicon Valley. Twitter'slack of speed is really astonishing.
Bush: I do think I know one big reason behind it. I think a lot of it stems fromthe very early days of the company. They never had tostruggle to reachproduct/market fit. So,never in their journey tofigure out how to improve what they're doing, theynever had an issue. They justthrew something out there and it worked. So then,they just kept on capitalizing on what worked, but never really changed the product itself. Now that they're up competing against thesecompanies that have been changing their platform atpretty innovative speeds for years now, they're finding that gap so much larger that it's just, in comparison, it takesso much more time to get out of.
Kretzmann: Yeah,it seems like Twitter just doesn't have near the focus on theactual product. What is their platform,fundamentally, compared to Snap or Facebook,where you have leaders that are so product-driven, and it driveseverything they do. From there, you find the business model that fits. But with Twitter, it seems like they're very scatteredtrying to figure out the direction of the company and what their actual product is.
Hill: All right, let's move on to Chipotle. First quarterprofits came in higher than expected. Same store sales were up 18%. I realize that is off of,go back a year in time, off a terrible quarter a year ago. Still,it's nice to see that it's up 18%. Stock up a little bit, not amazing, although it has risen about 30% in the last six months. So, I don't know,maybe we shouldn't expect too much of a pop off of this.
Kretzmann: Yeah,I think the key for investors is,the metrics are moving in the right direction.I think you can safely say the turnaround has begun. As long as they can keep moving at this pace, I think good things are ahead for shareholders. But, it will still take time. It'llprobably be at least a year and a half, I think, before we get back to those pre-crisis levels, as far as metrics go. But, yeah, same-store sales up about 18%, theirrestaurant level operating margins are trending up. This quarter was almost at 18%,but that's still quite a bit lower than the 28%restaurant level operating margin we sawright before the crisis hit in 2015. All those metrics like restaurant sales, sales as a whole across the company, margins, they'removing in the right direction, it's adefinitive turnaround fromwhere the company has been going for the past year and a half but still some work to do to get back to those pre-crisis levels.
Bush: Yeah,when I was reading through the call, andwhat they've been doing to move back to the levels that they were, I think I was pretty impressed with what they were doing. Ifyou look, for example, at theonline sales, that increased 54% over the past year. I know that's something in the past we've talked about.Chipotle is not very good at that compared to others. So,it seems like they're moving in the right direction. Still have room to improve. They're revamping their restaurant tour program, which also was a pain point.
Hill: Is this the management program?
Bush: Yes,this was their management program. Chipotle has always promoted internally. But, if you grow too fast andpromote too quickly, that can lead to problems,especially if you incentivize poorly. So,they've been doing a lot of work aroundfiguring out what metrics are best toincentivize their managers and field team leaders. It looks like that is improving. Just,how they're interacting with consumers and turnover of their leaders. That's good. They also just closed, this quarter, 15 ShopHouse locations. So, they're moving past that --
Kretzmann: Stillsad about that, though.
Bush: Yeah,it's unfortunate for those of us, in the past, who were optimistic at some point. But it's good that they are diverting those resources, now, to higher-impact endeavors.
Hill: I'm aChipotle shareholder.I'm glad they decided to pull the plug on ShopHouse,because I got tired of wondering when they were going to roll it out. The first couple of years, what you heard was a lot of, "They'retaking their time, they're not going to rush it." But at some point, you move so slowly thatit's natural to ask the question, "What is wrong with this concept?" Either it's ready to be rolled out or it's not. Thefact that they said, "We're packing it in on that, we're going to focus on the main brand locations and go from there," I'm glad.
Kretzmann: Yeah, andon top of everything else Chipotle was dealing with for the past year, I think trying to work out issues at ShopHouse, it was just becoming a distraction. To me, that really was the theme of this quarter, it was very clear that Chipotle is refocusing. And I think part of that is boosted by Steve Ells taking over the sole leadership role as CEO. Monty Moran, who was co-CEO for a while, retired late last year. So I think you're seeing that focus from Steve Ells. And in the call, he mentioned revamping thatrestaurant tour program, as Aaron mentioned. But the focus of that is a "relentless focus on customer experience." So, sort of a Jeff Bezos-esque comment there, really trying to figure out what the priority is there for their management program. And they mentioned that they now have the lowest turnover with general managers in more than eight years.
Hill: That's great.
Kretzmann: Yeah. A lot of thingsmoving in the right direction. I think you're seeing, internally, a refocus on prioritizing the guest experience. As they get traffic into the stores, their throughput should really be able to increase with digital orders, because they're starting to launch kitchens in the back of the restaurants specifically for digital. That should theoretically take people out of that front line, more people can go through thatfront line. Therestaurant, in other words, will be able topump out more burritos, more orders. If they can get that traffic back to pre-crisis levels andhopefully beyond that, these stores could be much more profitable than they were a few years ago, and they were incredibly profitable then.
Hill: Yeah. And that is, in some ways, the promise of this investment, if you're a shareholder or a potential shareholder. Because the headlines have been so bad, and rightly so, for the last couple years. But you go back to 2013 and 2014, and they were putting up these type of same-store sales numbers, not off of a low base, off of a pretty high base. So, when they would come in with double-digit comp increases, that's just breathtaking. So, the idea that they're looking at what Panera has been doing and saying, "How can we do that? How can we up the people walking in and picking up their food and walking out? If we can get our throughput even higher, that's great."
Bush: I think the biggest news out of all of this is they're going to start testing two new desserts.
Hill: [laughs] Is that the big news? What are the desserts they're testing?
Bush: They only announced one of them. It's calledbuuelos. It's these fried tortilla strips with honey, cinnamon, and sugar. So, super healthy.
Kretzmann: Fitsright with their healthy ingredients theme.
Hill: I hear that honey is supposed to be healthy,I've heard that from time to time.
Kretzmann: Cinnamon, I think.
Hill: Cinnamon is a spice.
Kretzmann: Sugar ...
Bush: Justignore that it's fried.
Hill: You know,it's dessert, it's not supposed to be healthy if it's dessert.
iRobotshares hitting an all-time high today after first quarterprofit more than doubled expectations. Aaron,this is not a beat by a penny typesituation, they crushed it. They also raised theirguidance for the whole fiscal year. Holy cow.
Bush: Roombas are taking over the world. That'sall you can really say. Yeah, they crushedexpectations. I think what we're seeing right now is they'rewitnessing an inflection in demand of their Roombas,which is very impressive.Believe it or not, the Roomba last yearwas the most sold vacuum cleaner in the U.S., in terms of dollars spent. Yeah, wow. To me, thatalmost feels like the rise of the Roomba occurredsomewhat stealthily. Looking atthe product compared to past iterations,you really do see the improvements that have been coming through. They work better, they have more connected features, which will play a role more so as the connected homesinevitably start popping up more and more. The Roomba itself, obviously, is killing it.
But, beyond the Roomba, there are other products and moves the company has made that also excites investors. The Braava, for one, that's iRobot's hardwood cleaner, right now, that'sstill a tiny fragment of revenue, but it's selling well. It also has these wipe consumables that consumers need to buy, so it adds a form of recurring revenue for the company, too, which is always good to see. iRobot just bought back its Asian distributors, which gives it more control in how it sells in that continent. That's actually a pretty huge deal. I think later this year, we should expect Japan's growth to accelerate. We'll see themsignificantly ramp up business in China. That should be a huge deal. The Braava inparticular could sell particularly wellbecause hardwood floors are more of a norm over there. So, reallygiving that second product they have a huge boost. Then, lastly, theinnovation machine that they have just keeps on running. They'rejust as much as software company at this point as avacuum cleaning robot company. So, new robots that perform new tasks, likelawn mowing, whatever else they have in store, should beexpected. As time rolls on, these robots aregoing to do their jobs better and better. I think investors shouldexpect more beats going forward. This is impressive.
Hill: I was on their website and saw they also have a robot pool cleaner. I don't have a pool,but I thought, I would 100% buy one. There aresome people who actually enjoy mowing their lawn. I'm not one of them,but there are some people who are like, "It'srelaxing, I'm outside in nature," that kind of thing. I can't imagine anyone owning a pool and saying, "Oh,I'm looking forward to a day of Zen and relaxation of cleaning my pool." No. Buy that thing, set it loose on the bottom of your pool, and you're done.
Kretzmann: I think our digital age hasmade people lazy enough that iRobot ishitting the inflection point, finally, wherepeople just want to automate everything they can.
Hill: Is 100% of theirbusiness just consumer? Do they have any sort ofbusiness-to-business relationship where they're going to a hotel chain or something like that and selling them en masse?
Kretzmann: I think now that they'reentirely a consumer goods, consumer-facing company. Last year theydivested a defense or security division. I think they're primarily selling to the U.S. military at that point. I think that makes sense, because the consumer market is sizable. In the U.S. alone,robot vacuum cleaners are about 20% of the totalvacuum market. Just that robot vacuum cleaner portion, which is growing, is about $6 billion or so. So, there's a sizable market there. And iRobot really is the dominant brand in the U.S., Europe, and Asia. So, I think doubling down and really focusing on thatconsumer market makes sense for them. Since they divested that security division last year, the stock has done really well. I don't follow this closely enoughI know if those two are completely related, or one caused the other. But to me,it makes sense for them to focus on that consumer market,because I think that's where the majority of the growth is.
Hill: Aaron, the stock is up about 15% today. We love it when a stock hits an all time high. ButI have to ask, how expensive is this stock? When you look at it, do you think, "OK, this is great for shareholders, but right now, today, this iskind of a pricey stock?"
Bush: It is a pretty pricey stock.I think it's definitely earned it. Just seeing, today, the stock go up 15%, I think if this company continues to execute the way it has, and if this inflection point is real, thenI don't think it is as pricey as it may seem to a lot of investors.
Kretzmann: Yeah, it's still just a $2 billion company. I could see that bumping up,especially if they could maintain that brand leadership position, which they seem to have carved out pretty nicely.
Hill: Beforewe get out of here,I should mention that Rule Breakers,the service started by David Gardner that both David and Aaron work on, the new issue of Rule Breakerscomes out today with two new stock recommendations fromDavid Gardner and the team. You cancheck it out by going to podcasts.fool.com. Justscroll down to the bottom of the page,and you can kick the tires onMotley Fool Rule Breakers. Check out the new issue. Thanks for being here, guys.
As,always, people on the program may have interestsin the stocks they talk about,and The Motley Fool may have formal recommendationsfor or against, so don't buy or sell stocks basedsolely on what you hear. That's going to do it forthis edition of Market Foolery. The show is mixed by Dan Boyd.I'm Chris Hill. Thanks for listening, we'llsee you tomorrow!
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fools board of directors. LinkedIn is owned by Microsoft. Aaron Bush owns shares of Chipotle Mexican Grill, Facebook, and Twitter. Chris Hill owns shares of Chipotle Mexican Grill. David Kretzmann owns shares of Chipotle Mexican Grill, Facebook, and Twitter. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Facebook, iRobot, and Twitter. The Motley Fool has a disclosure policy.