In this episode of MarketFoolery, host Chris Hill chats with analyst Emily Flippen about a few of the market's biggest stories. Mall-based retailers Express (NYSE: EXPR) and Abercrombie & Fitch (NYSE: ANF) both reported on Thursday, sending their stocks in different directions.
What happened? Is mall-based retail not dead? What's setting Abercrombie apart, and should other struggling retailers (cough, Gap (NYSE: GPS)) take notes? What can Express do to turn its bad luck around? Then, the two dip into the Fool mailbag to answer a listener question: What about that whole waste management industry? And what about Waste Management stock in particular? Listen to find out more.
A full transcript follows the video.
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This video was recorded on Nov. 29, 2018.
Chris Hill: It's Thursday, November 29th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Emily Flippen, in the house. Thanks for being here!
Emily Flippen: Thanks for having me!
Hill: We're going to dip into the Fool mailbag. We have to start with a tale of two retailers, Abercrombie and Fitch and Express, both with third quarter reports out this morning. Kind of like we saw yesterday with two stocks with a huge difference in their spread. Abercrombie and Fitch up about 20% this morning, Express down about 10%. It was worse than that when the market first opened. Let's start with Express. Any time I see a company like this, and by that, I mean, it's now somewhere in the neighborhood of a $450 million market cap. They are struggling in what is historically a tough industry. Apparel retail is a tough industry. My first question to you is, how bad of shape do you think Express is in right now? Just on the surface, in the wake of this report, and it's not a particularly big company, I'm wondering how much trouble they're in?
Flippen: I don't think they're in as much trouble as JCPenney or Sears or something. They haven't gotten to that point yet. But I do think that as a company, they're operating in a segment that isn't going to be there in the future. It's middle-line retailer. You have your high-end goods aimed at adults, then your discount goods. TJ Maxx vs. Nordstrom. And they're in this weird middle zone where they're trying to get somebody at that $40-50 price point. It's really a challenging area to be in. I'm not sure if they've really bottomed out. I do think that it is concerning, if I were Express, to be operating in this segment where we're seeing retailers be really pushed. Like you said, it's a hard area to be operating in.
Hill: It sounds like you're saying, maybe not so much a knock on Express and their management, it's just the space that they're in. You think this could go away?
Flippen: I would not be surprised. I think it could be acquired, I would also not be surprised by that.
Hill: No, I'm saying the space. When you were talking about, what is Express trying to pull off, in terms of who they're appealing to, one of the things I was thinking was, "Wow, that sounds a little bit like Gap." In the same way that Old Navy is more discount, aimed at a younger consumer, Banana Republic a little higher end. And as we've seen in Gap's quarterly reports over the last couple of years, that's kind of how that's played out for that company. Old Navy's doing well, depending on the quarter Banana Republic does pretty well, and Gap, the namesake brand, is the one that struggles.
Flippen: Exactly, and I think it's for exactly that reason. They're playing in the middle market. Malls in America, where the majority of their revenue used to come from, people browsing through, walking, they now have to push these people to start ordering online. And the problem is, when you're ordering online, suddenly your options have exploded. You're no longer limited to where your ability to walk in a mall is. Express' management maybe hasn't pushed digital sales as much as they should have, so I'm not surprised to see this middle area falling through. You get the people who are going to continue to buy higher-end stuff online, and people who are probably going to be buying these lower-end, discount clothes in stores.
Hill: Let's flip it around for Abercrombie and Fitch. Are they as good as this report? The stock is up close to 20%. They're having a great day. Good for them and good for their shareholders. But you widen the lens and you look at, "Oh, this is a stock that's basically where it was a year ago."
Flippen: This is something I love. We talked about the middle industry. It's really interesting. Yeah, Abercrombie and Fitch reported today, beat expectations. Both companies beat expectations, but the guidance at Express is what caused their stock to drop. It was really interesting, because when you think about Abercrombie and Fitch, you think, "They must be a competitor to Express," because they're in that middle $40-50 price range, as well. And when you dig into the numbers of Abercrombie and Fitch, you'll find that as a brand itself, Abercrombie and Fitch actually didn't do that well. And when you start looking at their sub-brands -- Hollister, that's one that's doing really well. You notice the different segments at Abercrombie and Fitch are going after here compared to Hollister. Hollister is aimed at younger audiences -- millennials, kids, teenagers. When you go on their website, it's not men and women, it's boys and girls. And those are the people you're probably going to get with that price range, where they want that brand name recognition, but they're not going to nourish them, they're not going to spend a few hundred dollars on an outfit. But they're also not shopping at discount retailers because they still want that cool factor. So, I think we're seeing a lot of success for Abercrombie and Fitch in comparison to Express because of the fact that they have this Hollister brand, which is really differentiating their services.
Hill: Also, with Abercrombie and Fitch, you look at the numbers that they just put up -- I think you're right, as much as anything, the guidance that Express gave is what is doing that stock in today. With Abercrombie and Fitch, their guidance for the holiday quarter was pretty strong, particularly on the same-store sales front. And their same-store sales for the third quarter was up 3%. That's not an amazing number, but it's certainly better than people were expecting.
Flippen: 3% as a company. Abercrombie and Fitch itself, about 1%. That's on par with Express. Express' same-store sales were flat. It was the Hollister brand that was up 4%. When you look at those two separately, Hollister is the one that's really killing it in this space. Abercrombie and Fitch is just being dragged along.
Hill: Do you suppose on any level, there are conversations that are going on, whether it's Express or Abercrombie and Fitch or at Gap, where someone in the room is saying, "We really need to think about what is going to change the game for us in terms of this middle market retail, or we need to seriously consider getting out of it?" At least in the case of Abercrombie and Fitch and Hollister, Hollister is the one that's doing better, but Abercrombie and Fitch is the better-known brand. There's some brand appeal there. Maybe you can't put a number on it, but it's certainly a higher recognition factor than with Hollister. In the case of Gap, I get that it's the namesake brand, but still, they've got two other brands that are pretty darn strong. I'm wondering if, on any level, you as an analyst want to reach out to them and be like, "Seriously, either figure out a way to change the game or get out of the game altogether."
Flippen: I would not be surprised. In fact, I would be very disappointed if management in these companies weren't having that conversation. I don't think anyone is blind to the fact that that's where the market is going. But I think you hit the nail on the head when you talked about the brand. A lot of these companies, the reason why they haven't moved out of the game is because they attribute a lot of value to their brand. They think they can drive customer growth through brand name recognition. To an extent, that's what we see with Abercrombie and Fitch and Hollister. These are brand name clothing, they have their labels, their logos, right there for you to see. So, I'm not surprised to see that these maybe compete better vs. Express, which is a retailer. You can't tell an Express sweater from any other sweater that you could buy anywhere else, because they're not that brand name.
Hill: Yeah. I was on the Express website this morning. That was one of the thoughts I had. And I think it's just express.com. I was looking at it and thinking, I can't remember ever seeing any of this out in the world. Whereas pretty much every week, I'll see a young person with, whether it's Gap, Old Navy, American Eagle, Abercrombie and Fitch. Certainly a lot of Hollister, that sort of thing. You can see that stuff out there.
Our email address is firstname.lastname@example.org. Question from Tom Crone, who writes, "Longtime listener, first time emailer. I'm a beginner investor building a small defensive dividend portfolio through Robinhood. I currently have shares in Walmart, Kraft Heinz, Tyson Foods, Verizon, AT&T, Bank of America, as well as a dividend aristocrat ETF. I'm looking to round out my portfolio with consumer beverage stocks, either Coca-Cola or Starbucks, but I'm also considering adding Waste Management (NYSE: WM). One thing I do not hear a lot about is the waste that all of this increased production and growth produces. I know Waste Management and Republic Services are the two leaders in the industry but would love to hear your thoughts on waste management stocks as defensive stocks. Thanks for all you do and all the great content you provide." Thanks for listening, Tom! Great question.
You and I were talking right before we started taping, Waste Management, one of those companies with a straightforward name. They're in the business of trash. And it is decidedly unsexy as a business. But if you've been a shareholder of Waste Management for the past 10 years, you've been handsomely rewarded for that.
Flippen: I love the idea of owning a portfolio of defensive dividend stocks. Especially with a market that's overrun with tech companies and these high valuations, I love the idea of having a more modest portfolio that's just sitting back and doing the work for you. And when you look at a lot of those names, like Walmart, Kraft Heinz, none of these are, like you said, sexy companies. None of these, you're going to say to your best friend, "Yeah, I bought some Walmart yesterday." It's not that exciting.
Hill: "I've got a hot tip for you. It's called Walmart."
Flippen: [laughs] But these are great companies! These are great companies to own. While they might not be your next Facebook or Amazon or Netflix, they're going to be great companies that likely are very cash positive and can pay a steady dividend.
Looking at waste management itself, it's not something that we spend a lot of time talking about. Like you said, nobody really likes to talk about waste management. But when you have an economy that's growing and scaling, you're going to have increased waste. It's a natural part of that progress. So, I like the idea.
I think when you look at Waste Management in particular in comparison to some of these other dividend paying companies or industries, you have to be aware of some of the unique risks that Waste Management poses. The first being, of course, normal economic cycles. Coming out of the recession, that would have been a great time to buy into Waste Management. You know that as a country, we're going to continue to grow and develop, especially throughout that period. A good argument could be made that we're reaching the peak of our economic cycle now. We're having lots of houses being built, lots of different businesses being built. All of these things produce waste. That's an important thing to realize. This is going to be, to an extent, a cyclical kind of investment, because while we do produce more waste, it does depend a lot on the economic cycles that we're in.
It's also important to recognize that this has exposure to commodity prices. You might think, Waste Management doesn't have exposure to commodities! They're not selling oil here! But, to an extent, they sell recyclables. It's a smaller part of Waste Management's business, but they do have to still sort out these recyclables and sell them. The biggest buyer of our recyclables is China. A lot of issues with China right now. The biggest one is that Chinese regulatory authorities are getting really mad at the U.S. because when we send them recyclable material, it's not really recyclable. We don't do a great job of being like, "Here's a clean glass or plastic or aluminum container!" We send everything in one pile. So, there's been a lot more regulations, in terms of what we can sell them and we can't sell. And that does hurt companies, because it increases the cost that our waste management companies have to do to differentiate what can be recycled, what can't be recycled, what we can sell back to the market, what are the prices for aluminum or paper fibers, how much can we get for this. So, to an extent, it is kind of variable.
Those are unique risks that you'll get when you buy into Waste Management. But as a long-term investment, this is a cash company with long-term contracts, very predictable cash flows. As part of a dividend portfolio, it can be a great addition.
Hill: One more thing working in its favor -- and, to that extent, Republic Services' favor as well -- high barrier to entry.
Flippen: Oh, completely! There's so many regulations. For example, owning landfills is a natural part of this business. You can't just go build a landfill when you're trying to get into waste management. It's not part of the business, you can't do it. So, yeah, there's very, very high barriers to entry. Arguably a duopoly in this space. As far as inherent competitive risks, I agree, pretty low.
Hill: I'm thinking about Tom's portfolio with the dividends. Look, it's always great to look at a stock in your portfolio, or just your portfolio at large, and see growth over time, whatever time period you choose to look at. But one of the sneaky, fun ways that growth can happen in your portfolio is with dividends. It doesn't get the biggest headlines, it's usually something that gets thrown into a press release in the quarterly report. "Oh, by the way, we're pumping up our dividend by another couple of pennies," that sort of thing. But over time, if you've got dividend aristocrats in your portfolio, you are faced with the happy problem of, "Now what do I do with this cash?" There are some who say, "No, I'm not going to turn the dividend into more shares. I just want the cash." That's what happens with dividend aristocrats over time. Eventually, you get to the point where you have enough shares, the cash is piling up in your portfolio, and you have to figure out what you're going to do with it.
Flippen: Exactly. And usually, with a lot of these companies that pay steady dividends, you have a pretty long lead way to figure out whether or not there's an issue that's coming. You're aware of the fact that dividends start decreasing, cash stops coming, that's a big sign to have you if you're a dividend investor that maybe things are squeezed. GE is a great example of that, a company that used to be a great dividend aristocrat, but now is non-existent. But there's a long lead way there. We're looking at a year of potential for this dividend to be cut. As a dividend investor, you have a longer lead way with your investments to whether or not that investment is going to turn quickly on you.
Hill: Emily Flippen, thanks for being here!
Flippen: Thanks for having me!
Hill: As always, people on the program may have interests in 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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next time!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN and SBUX. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN, FB, NFLX, and SBUX. The Motley Fool recommends JWN, TJX, and VZ. The Motley Fool has a disclosure policy.