On this episode ofMarket Foolery, Chris Hill welcomes Motley Fool analyst Bill Barker to the show to break downseveral quarterly reports, none of which managed to please investors.
There were only a few bright spots for Kohl's(NYSE: KSS) in a weak quarter, but venerable department store chain Macy's(NYSE: M) missed badly. Whole Foods(NASDAQ: WFM) managed to stay in line with expectations, whileSnap's(NYSE: SNAP) first report as a public company did not paint a pretty picture.
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A full transcript follows the video.
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This video was recorded on May 11, 2017.
Chris Hill: It's Thursday, May 11th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Motley Fool Funds, Bill Barker. Thanks for being here.
Bill Barker: Thanks for having me.
Hill: Thank you for braving thetorrentialdownpour out there. It is torrential.
Barker: I was able to make it upfrom inside the office to inside the officewithout getting wet. What route do you taketo get from the first floor to the fourth floor? Do you go outside? Are you Spider-Man?
Hill: Youknow what, I don't talk about that.I'm not supposed to talk about that. The other Avengers told me, they're like, "Justkeep it quiet."
Barker: Just take the elevator, the elevator works. I know you have a fear of them,many people do. There's nothing to be ashamed of, butI'm telling you, it works and it keeps you dry.
Hill: Fair enough. We havea bunch of things to get to. There's a big shake up atWhole Foods. Oh, we'redefinitely going to talk aboutSnapchat'sfirstquarterly report. But we'regoing to start with retail. Macy's and Kohl's bothreporting first-quarter results.Macy's, wowdid they miss big on profits and revenue, and their same-store sales were downmore than 4.5%.Kohl's, a couple ofbright spots with Kohl's. They'rediscounting less, this is something we saw last week withCoach. That'shelping a little bit in the case of Kohl's, it'shelping with customer traffic, which was a little higher, so that's good. But their comps were still down, their revenue was light, andboth these stocks are down today, although Kohl's down about 5% to 6%, Macy's down 13% to 14%. Macy's is just having a brutal 2017.
Barker: Yeah, it'spretty fine, the differencesbetween the two reports. Really, it has more to do with expectations and acomparison of Kohl'sfirst quarter last year, which was really weak. So it was a relatively easy thing to improve upon. Macy's is shedding sales. You have 3% to 5%fewersame-store sales at your store, you'reclosing stores, and the margins are going downbecause they are still discounting. There's no good number, there is no goodnumber in the Macy's report.
Hill: I mean,if a year from now, one of these companies was up for sale --I can't believe I'm asking this --is it Macy's? Because it wasn'tall that long ago that Macy's was reallydoing pretty well in part because they managed their store footprint so well. Now,Macy's, in the S&P 500, onlySignet Jewelersis having a worse 2017 than Macy's in terms of the stock performance.Macy's is 499thout of the S&P 500 in terms of year-to-date performance. Is Macy'smore likely to be sold than Kohl's?
Barker: I suppose it might be, although I don't know whyI should speculate on something I don't have any insight on,between two of those getting sold. I think they'reboth going to decrease theirfootprint, they're going to keep selling storesif they're smart. I think Macy's has slightly more debt, so I'd bea little bit more worried about that. Debt isvery cheap right now, of course. You would prefer to be taking on debt and buying back shares. Butif you're Macy's and you've already got a dividend of 5%, a yield of 5%, they'repaying out a lot of the profits that they do havein the form of dividends. It's tough to cut thedividend. If you cut the dividend, you'regoing to see your stock price get hammered. So even though it's possible thatsomebody in management might think, "We should buy back our shares because they're about thesame price they were 20 years ago, why nottake advantage of that," they can't, I don't think.
Hill: You justwent in the direction of what was going to bemy next question about the dividends.It does seem like,that's a move we've seen with other companies, buteven in cases where acompany has cut their dividendsignificantly, 50%, 75%, they suspend it, even insituations where companies havetelegraphed that move, you always see the sell off. AndI'm just wondering,in the case of Macy's, is thatjust going to be a bridge too far for many investors,particularly on the institutional side?
Barker: It'sclose to a last resort, I think, for the company. It's a known flag, thatif you can't pay your dividend, there are big problems.I'm sure they wish their dividend was not as high as it is. Although, they can keepselling property. The most important thing for Macy'sright now other than getting fashion right, which is constantly an issue for them, is to manage their real estate well, and by that, includemaking the rightsales. Theydon't want to get into theposition -- and,there are a lot of other sellers out there,betweenJ.C. Penney,Sears,you have a lot ofproperty coming on the market. Youdon't want to be throwing yours in there at the wrong time. So you need a fair amount ofexpertise as to whereyou can get value for your earnings. And that might help themkeep paying the dividend. They'reable to pay it with their current earnings, but the trend is pretty bad for where earnings are going, for Macy's and Kohl's.Kohl's is not particularly better off,it's just been following up on a slightly weaker last year,so they have slightly easier comps. But, their yieldis also about 5%. Someinvestors might look at that and say, "A5% yield is pretty good,I'd like to get 5% on stock." Butthis looks more like a value trap to me.
Hill: Let'smove on to Whole Foods. Second quarter results were aboutas expected in terms of profit and revenue. Thebig story with Whole Foods is the shake up. Andit's a pretty big one. Five newindependent directors aregoing to be on the board. There's a new chair,Gabrielle Sulzberger, whocomes from the world of private equity, a new CFO. I thinkall of these things taken together are what have shares of Whole Foods market up 1% to 2% today. John Mackey is on ourboard of directors here at the Motley Fool, wealways point that up forpurposes of disclosure. I'm a shareholder of this company. That there was a shake up --
Barker: Are you?
Hill: Yes. Thatthere was a shake upwas not necessarily a surprise to me. That it was this big did surprise me. Just when you think about the scope in terms of operations and a new chair. And I have to say, I'mhappy about the fact thatone of the new people on the board of directors is Ron Shaich from Panera Bread. I think any business that deals withselling food of any kind, if you have Ron Shaich on your board, your board just got better.
Barker: Yeah,he's impressive. I've seen him at conferences. He gives good conference. He also has done an outstanding job withPanera.To focus on him, I'll do that because I know hisbody of work better than the other new directors. He'sjust been involved in selling Panera to JB.
Hill: Andhe couldn't have looked happier.
Barker: And there'sso many rumors out aboutwho might be interested in buying Whole Foods. You have Jana, who has taken a stake and isagitating for big shake ups. They'veshaken up the board,maybe not in the way that Jana is trying to dictate. But, that'splaying a little bit of a defense. But they're also, by getting Shaich on, andsomebody who has a private equity background, playing some offense as well, in terms ofpositioning themselves to react responsibly to all of these rumors of who might be interested in buyingWhole Foods, including [Amazon.com], that'sactually why the stock is aselevated as it is right now. Youonly have to go back a month and a half ago before that rumor came out, to find Whole Foods trading at about $30 a share, it's $36 today, it's a stronger performance today than the market generally but not up that much.
Hill: Let meget into the weeds a little bit here with Jana Partners. For those who don't know, Jana Partners,private equity firm, took a stake in Whole Foods. Part of the story of the shake up ispeople trying to figure out --I think this is largely seen as,as you said, aresponsible response toall of the legitimate business questions about Whole Foods Market. But it's also seen as, "You knowwhat's going to keep Jana Partners at bayat least for a little while? If we bring in not just a little fresh blood but a lot of fresh blood."
Barker: Yeah. Going back to Shaich, I think, thePanera experience is a reasonably goodoverlap for Whole Foods. Panerahas the advantage of moving toward morehealthy ingredients in their food andhaving the time to do it, announcing, "We'regoing to get rid of cage-fedproteins and alsomove toward getting out of antibiotics," andvarious things, andhaving time to do that, rather than starting from where Whole Foods is, at a sort of a purity. It's harder to get to the place wherepeople want to go, which is buying Frosted Flakes,from the purity side, which is where Whole Foods is. So adding some of the things that people -- by "people", I meanmostly me --would like to buy at Whole Foods and can't find there. And I think they're boxed in a little bit. Panera had theadvantage of getting healthierat a time when people are gradually, or enough of them, aregradually improving their diets,rather than being in a spot where Whole Foods is, wheretaking steps to improve itsselection in terms of the breadth ofpeople who would like to shop theremeans that it's taking a stepaway from its core mission.
Hill: Itwould be nice,once in awhile -- atCostco, there's the wholesurprise aspect, and I know this from Mac Greer, who loves to shop atCostco, and talks about, "Oh,the treasure hunt, if you go there, there'salways a surprise or two." That would be nice,if every once in awhile youwalked into Whole Foods and it's like, "Look,Captain Crunch! It's on the shelf! I'mtotally buying that just because it's here!"
Barker: They canhave the guilty pleasures aisle.
Barker: Right? They could just say, "Alright,this is bad for you. You know it, we know it. Butcome on, everyone has their guilty pleasures." Andthat would be the most crowded aisle in the store.
Hill: When you go on a diet, I've heard, there's a cheat day. Yeah, that's like the cheat aisle, aguilty pleasures aisle,I like that.
Barker: Youshould be on the board. You're a shareholder. You haveall these great ideas.
Hill: "Tocounteract all the wisdom and experience of Ron Shaich,we brought in this dope." Youmentioned the 365 concept, and I'm curious where you think that goes.
Barker: I didn't mention that.
Hill: You did, briefly.
Barker: When? Last time I was on the show?
Hill: A couple years ago, the big story with Whole Foods was, "OK, they're going to roll out these smaller-footprint 365 stores." A year from now,where do you think that is? Is that completely shelved? Is that gone now that you have all these people? Because it kind of seems likeit would be really easy to just put that whole notion aside.I don't think you bring in Ron Shaich and a new chair andall these other independent directors and just tell them, "No,we just want you to nod and smile at the plans we've had in place for a couple years."
Barker: Yeah,I think that Whole Foods is better offfocusing on massive fine-tuning. Theaffinity program isgetting the data on its customers throughloyalty programs and that sort of thing. The thing that they'reso far behind the competition, rather than taking on new ventures, they have their hands full. It's not that they've beenmaking lots of mistakes so much as competition has appeared, it is well-financed, it knows how to do groceries, and it has seenWhole Foods turf andthe profitability that's availableif you do organic right. Andeverybody's getting in andgiving them competition. So they have a lot to fend off, and are better offprotecting what they have,rather than pursuing grand new ventures.
Hill: Snap,parent company of Snapchat, issued itsfirst quarterly report as a public company, andfrankly, it's hard to imagine itgoing much worse than it did. The loss wasbigger than expected, the revenue fell short. The user growth wasweaker than expected. Stop meif there's a silver lining out there. No one wasexpecting them to turn a profit. They're in growth mode. I get all of that. Butthis was pretty bad. Andthe conference call, which we'llget to in a second, only made it worse.
Barker: They are in growth mode,and I think that's worth ... OK, so year over year, what was their revenue increase? 12 months, 2016 to 2017 for the first quarter,percentage-wise,how much do you think they grew?
Barker: Almost 4x. They're up286%. So, when you say, "I don't see how it could have been much worse,"I would say, not everybody grows at286% year over year. And it is true that that was not enough to match themarket expectations, and they put in a lot of growth, spruced up their numbers, before going public alittle bit less than a quarter ago. Daily active usersdidn't quite meet expectations, but still grew to 166 million from 122 million. So, that's36% growth indaily active users.Only slowing down 5% over the last quarter. So,if you're looking for a silver lining,I would say this --hyper growth is hard,hard to measure. And it isalmost always wrong inone direction or another. Theyunderperformed the hyper growth expectations. Market waspricing in better. After today's report, they'reback down toa little bit, 10% above, where they IPO'd at.
Hill: Can weget to the conference call?
Barker: We canget to the conference call. It waschallenging to come up with anything positive about it. They're growing, they'renot growing profitably, andthat's a big problem. A lot of investors are going to say, "Idon't really care about the growth.I want to see the profits growing,not just top-line growth." And you're not doing that. And youpaid yourself a lot in stock options last quarter. And there is a net loss of $2.2 billion, most of that was stock-based. But that's a real expense.
Hill: And one more thingpeople would be excited about on Wall Street is if the user number was growing at some exponential rate, to go from 158 million to 166 million, that's what welike to call tepid, in terms of quarter over quarter growth. It'sperfectly reasonable to me thatthe stock is down more than 20% today. In addition toall of these numbers -- and,again, the quarterly report isbackward looking, as it is forany public company -- but Evan Spiegel the CEO,gets on the conference call,doesn't really give anysort of specific guidance in terms ofwhat they have in the pipeline, and tries to play it cool like, "Oh,we want to continue to surprise people." It's like, you know what? Surprisesin the world of investing are greatif it's a surprise on the upside. Surprising on the downside is never a welcome thing.
And the money quote from the conference call is when he was asked aboutFacebook, and was asked point-blank,"Are you scared of Facebook? Why or why not?" And he laughed and talked about, "Well, we're acreative company, we'refocused on creativity," and then took a shot atFacebook by saying,and I'm quoting here, "JustbecauseYahoohas a search box,it doesn't mean they'reGoogle." WhichI think bags the follow-up question, "Didyou just compare yourself to Google? And,by the way, did you justcompare Facebook to Yahoo? Because neither of those things are even close." And I think, it points to a big red flag that has beenout there for a long time about Snap, which isEvan Spiegel. Does he have aSheryl Sandbergin the way that Mark Zuckerberg does? Does he have a team? He's a creative guy, but I'm not surehe should be running this business. And three months from now, if they put up another quarter like this, thenyou really have to bang the drum for what we like to calladult supervision.
Barker: Yeah,that's possible. I imagine you willhear that if they don'tproduce better numbers, ornumbers more in line withwhat people are expecting. Also, if he doesn't do a better job on the PR. Becausethis is not the kind of attention that he needs on challenging ... I mean, they're in a fight with Facebook.
Hill: They'reabsolutely in a fight with Facebook.
Barker: They're absolutely in a fight, so it probably doesn't actually change anything. They're not going to wake Facebook up. Facebook is quite awake and copying everything they do.
Hill: Right.Facebook was awake the second MarkZuckerberg offeredEvan Spiegel $3 billion in cash a few years ago, andSpiegel said no,and then Zuckerberg went to his team and said, "Alright,build me something that's going to take them out."
Barker: Yeah. So,right now, the market cap is about $21 billion for Snap, soI would say that was a good turndown of that offer.
Hill: At the moment.
Barker: At the moment. It may,if everything goes wrong --actually, they have more than $3 billionon their balance sheet in cash, soit would take a lot of cash burn to end up being worth less than $3 billion. I don't foresee that. But they've got a very toughcompetitor, and they'd better bebetter at the game than Yahoo was, whichseems like more of the right comparison for them, withFacebook being the Google.
Hill: Acouple housekeeping notes before we wrap up. Thisweekend, on Motley Fool Money, our guest isgoing to be documentary filmmaker Steve James. You mayremember a little film he did calledHoop Dreams.
Barker: I do remember that. Youcan't call that a little film. That may be the longest film I've ever seen.
Hill: Really? I mean, it's a long film.
Barker: It's a long film. I don't know. It'slonger than Gone with the Wind, isn't it?
Hill: No it's not.
Hill: No,I don't think so. You go ahead and look that up. But, no. It'scertainly one of the longest.I think the longest films I've seen, that,Gandhi, and The Right Stuff.
Barker: The Right Stuff isn'tnearly as long.
Hill: All great movies, by the way.
Barker: How about Reds?
Hill: Never saw it. So yeah,Steve James, new documentary film out calledAbacus.
Barker: 2 hrs and 50 minutes for Hoop Dreams.I thought it was longer.
Hill: Yeah,that's not Gone with the Wind. Last week onMarket Foolery,Simon Erickson was on,one of the things we talked about wasMotley Fool Explorer. I mentioned we'dshare some more details about that. Here are the details. If you want more, you can go to explorerradio.fool.com. Abunch of investing videos thatSimon and the team have put together that you can check out. And, last, on apersonal note, inlate June,I'm doing a family vacation in London and Ireland,going to Dublin, maybe Cork. So,if you have any advice, any tips, hit me up onTwitter, orplease drop an email to firstname.lastname@example.org. I know you have London advice for me. We'll get to thatafter the show.
Barker: After the show?
Hill: Yeah. I need tips.
Barker: Youneed a lot of advice.
Hill: I need a lot of advice. Alladvice for London --
Barker: Secret Cinema.
Hill: -- and Dublinis welcome. Secret Cinema?
Barker: Secret Cinema, that's my vote.
Hill: Alright. We'regoing to wrap up and talk more about it.
Barker: Anda little thing called Wimbledon willoverlap with your time there.
Hill: Uh ... yeah ... Ifit were just me, if it were just me --
Barker: Youplayed a little tennis back in your high school days.
Hill: I did, and if it were just me --
Barker: That was not the sportat which you were state champ, though, is it?
Hill: Yes it is.
Barker: It is?I thought basketball was your state champ.
Hill: Both. WhenI was a senior --
Barker: Check you out, two state championships?
Hill: Let me be very clear. On the tennis, that was like, yes,I was on the team,I was second doubles.
Barker: Maine is a big state.
Hill: Geographically, I suppose. There's not a ton of tennis teams. But as always,people on the program may have interestsin the stocks 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. Ifyou want to read more from Bill Barker and his team, go to foolfunds.com, check out Declarations, the freemonthly newsletter. Thanks for being here, man.
Barker: Thank you.
Hill: That'sgoing to do it for this edition of Market Foolery. The show is mixed by Dan Boyd.I'm Chris Hill. Thanks for listening. We willsee you next week!
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Bill Barker has no position in any stocks mentioned. Chris Hill owns shares of Amazon and Whole Foods Market. The Motley Fool owns shares of and recommends Amazon, Coach, Costco Wholesale, Facebook, Twitter, and Whole Foods Market. The Motley Fool owns shares of Panera Bread. The Motley Fool recommends Yahoo. The Motley Fool has a disclosure policy.