The retail sector just had its best week of the year, and companies across the board are seeing big pops on solid earnings reports.
In today's episode of MarketFoolery, Chris Hill talks with Jim Mueller from Motley Fool Stock Advisor, Supernova, and Phoenix 1 about what's behind this pop in the retail sector. The hosts also dive into earnings reports from Lowe's (NYSE: LOW), Home Depot (NYSE: HD), Urban Outfitters (NASDAQ: URBN), and more. And in honor of Thanksgiving, Jim talks about one stock investment he's made that's tanked to rock bottom, and another that's soared from $19 a share to over $1,400 in a decade.
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A full transcript follows the video.
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This video was recorded on Nov. 21, 2017.
Chris Hill: It's Tuesday, November 21st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio from Stock Advisor, and honestly like 17 other different services, Jim Mueller in the house. Thanks for being here!
Jim Mueller: Hey, Chris! Thanks for having me!
Hill: I've honestly lost track of how many services you work on.
Mueller: Three, technically.
Hill: Is it only three? I say only three, of course, I don't work on any. But, I assumed you work on --
Mueller: Stock Advisor is my home service, I've been there the longest. And then, I've been on the Phoenix 1 team and Supernova since inception, but took over the lead a couple of years ago when Rick Munarriz moved off to lead Phoenix 2. And then, I joined Options three years ago, right around that time.
Hill: And, like most people in the Options service, you have written into your contract that you don't have to be in the same room with Jim Gillies over a certain amount of time.
Mueller: [laughs] I like Jim!
Hill: We love Jim! Are you kidding me? We love Jim Gillies! Alright, even though it's a short week for us because Thanksgiving is this week, the Earningspalooza rolls on, and we're going to talk retail today. We're also going to preview the Thanksgiving special on Motley Fool Money this weekend. Let's start with Lowe's. Third quarter profit more than doubled. Same-store sales for Lowe's up nearly 6%. The stock is flat to down slightly. Is that because of guidance?
Mueller: Yeah, pretty much. They had a pretty decent quarter. They beat estimates with earnings by $0.03 for EPS, and they had a 6.5% increase in sales, that beat estimates as well. Comps came in higher than estimates at 5.7%, but management didn't really follow through with that and say, "We're going to say that 2017 is going to be a little bit better than you might have thought." Thanks Irma, thanks a little bit Harvey, which contributed about $200 million to their sales, about a 1% boost. But they said, "Nah, we're going to stay conservative." So, the market says, "OK, we'll stay conservative on your stock, too."
Hill: So, when you look at Home Depot and Lowe's, it really has been the case for the last three or four years that whatever Home Depot does in terms of their quarterly results, you can feel pretty confident that Lowe's is going to do almost as well. They're going to be slightly less good. They're going to do good. And Lowe's is one of those stocks that, if you've held Lowe's for a long time, you've done well. You just haven't done as well as if you also owned Home Depot.
Mueller: Yeah, not quite. I mentioned $200 million in sales from the hurricanes that Lowe's called out. Home Depot called out $282 million in sales. I found a quote this morning from Brian Nagel of Oppenheimer. He said after Irma came through Florida, he visited stores of both brands in Miami, and he said that Home Depot seemed to be the one that was being more aggressive in getting those hurricane sales. And it might have turned out that he was right.
Hill: As a consumer, do you shop at one over the other? I go to Home Depot simply by virtue of geography. The Home Depot in Alexandria is closer to my home and more in line with where my weekly travels take me than Lowe's is.
Mueller: Same here. The Home Depot in Springfield, where I live, is right on the way home from work. I go over there for a couple of other retailers as well fairly often. So, yeah, I don't even know where the nearest Lowe's is.
Hill: I think it's down Richmond Highway.
Mueller: That's out of my way.
Hill: We talk about baskets of stocks. Jason Moser talked the other day about the war on cash, and the basket of stocks he bought for the war on cash. I'm wondering, when it comes to home improvement -- if you look at the storms that we had, and look, storms can be very destructive to people's homes, and in some cases, they can be deadly, but in terms of, if you're in the home improvement business, on some level, you are slightly rooting for storms of one nature or another, because that's ultimately going to be an opportunity for the business.
Mueller: That's awfully cynical of you, Chris.
Hill: I'm trying not to be cynical, but I think, that's just ...
Mueller: You make a fair point, and storms do drive a bunch. But the bigger driver for these kinds of companies is the new home building and home sales in general. People want to upgrade their homes before they put them on the market, and that drives a lot of business for Home Depot and Lowe's. As far as a basket, you mentioned earlier that Lowe's has trailed HD. Both have done very well, but Lowe's has trailed Home Depot. But, if you're invested in one or the other, that's almost a toss-up. They've both been buying back stock, they both have a fair amount of debt, they both have decent growth of the past five years. Buy them both, sit on them. And if you want even more exposure to housing, you could start buying some of the home builders, even railroad, because they ship a lot of lumber for the housing industry. So, it depends on where you want to draw the line.
Hill: And by the way, there was a good stretch of time, what we like to refer to in Home Depot's case as the Bob Nardelli years, where Lowe's was crushing Home Depot. So, it's been a great run for Home Depot lately, but who's to say that doesn't flip one more time?
Mueller: Buy them both.
Hill: Shares of Urban Outfitters up 11% this morning. Third quarter profits and revenue came in higher than expected. And just like Lowe's same-store sales were higher than expected, Urban Outfitters' same-store sales weren't high, up 1%, but they were expecting a loss.
Mueller: Full disclosure here, I'm not cool enough to shop at Urban Outfitters.
Hill: Neither one of us. I was out, my wife and I were meeting some people for dinner in Georgetown, and at one point the kids at the table said, "Dinner's done, we're going to go to Urban Outfitters." We caught up with them eventually, and that was my thought walking in there. I just thought to myself, "The only reason I'm here is because my children came here."
Mueller: I don't even think I've stepped inside a store. Getting back to their quarter, they did pretty well. Revenue grew 3.5% all told, to a record level, $893 million. They adjusted a little bit for the hurricane effects, because they did see some slowdowns because of those. But, they figured that was about a two-thirds of a percentage point loss on comps for each of their brands. If you back that out, they get about a 2% overall on comps for the whole company. But what was really big was the 5% comps growth in Free People, their wholesale direct-to-consumer section. That was really strong. And 2% at Anthropol --
Mueller: I told you I don't shop there. [laughs] 2% growth at that brand, and even their namesake brands, Urban Outfitters, saw 1% growth. So, all three sections of the company are doing pretty well. This makes me wonder, is the retail malaise over or not? They're certainly not the only ones that are up. Abercrombie & Fitch had a 24% jump last Friday when they reported much better than expected earnings.
Hill: And Gap, recently, when they did their last quarter, same sort of thing where their comps, that's the through line for all of these fashion/apparel/niche retailers, that in general have gone through a really rough patch. I'm wondering, even with the rise of Urban Outfitters today, it's still down about 20% over the last 12 months. And I'm wondering if all three of these reached a point where they just got oversold.
Mueller: That's definitely possible. The retail malaise started roughly a year ago, or even lapping last year at this point in results, so it's a lower hurdle to get over. But, everyone is going to be watching the holiday quarter season now.
Hill: Yeah. It's interesting, because I'm not rooting against any of these companies, but I'm sure there are investors out there who, whether it was Gap or Abercrombie & Fitch, Urban Outfitters, look at them and think, "Gosh, people think they're going out of business, they're not, there's opportunity here." But it's like, maybe, wait, because this is that quarter. This is the big quarter for every retailer, and you kind of want to see how they do.
Hill: As I mentioned, this weekend on Motley Fool Money, it's our Thanksgiving special, it's one episode of the year where we actually use a sound effect. We blow the whole budget.
Mueller: [laughs] OK, now I have to listen.
Hill: Yeah, now you're going to listen. But, one of the things we do is stick with the Thanksgiving theme and go around the table and talk about stocks that we're thankful for, but we start with a little humble pie, a stock that we got wrong. With that in mind...
Mueller: Are you going to ask me?
Hill: I'm going to ask you. What's a piece of humble pie, a stock that you're like, "Hoo, boy, I kind of missed that one."
Mueller: OK, I'm going to set this one up a little bit. The company's name still is technically Acusphere. It's on the pink sheets now. It used to be on the NASDAQ under the ticker ACUS.
Hill: [laughs] So, here's what we know so far. It was on the NASDAQ, and now it's on the pink sheets. Go on, I think I know where this story's going.
Mueller: You know this, I'm not sure our listeners know this, but I have a PhD in molecular biology and... biochemistry. I had to think there for a moment. I've been here 10 years, I haven't used it very much.
Hill: That's alright.
Mueller: But, when I first got it, I thought, "I'm hot stuff here, Mr. Scientist, so I can make the biotech picks." And this is the one that taught me that just because you have an advanced degree in a field doesn't make you an expert in that field, especially when it comes to investing.
Hill: So, what did this company do?
Mueller: They developed a product called Imagify. These were very tiny non-toxic gas bubbles that could be injected into the bloodstream, and used with echocardiography, where sound waves are sent in and bounced off, in this case, the liquid gas barrier. So, a very strong signal. And doctors could spot blockages in your coronary arteries for heart disease. They thought this was going to replace the current technology, which involves some radioactivity that was tracked through the body, and where the radioactivity isn't was where the blockages occurred. So, they submitted to the FDA, they went public in late 2003, at about a split-adjusted $100 per share. And that's a reverse split adjustment, so it was about $10 per share when it IPO-ed. And unfortunately, the FDA said thanks, but no thanks, and the stock price went down and down and down and down. And I bought it twice. Once in 2006 at $35 adjusted, and once in 2007 and $25. I sold at $0.07.
So, that's a 98% loss on that first investment. But I saved myself an additional 71%, because now it's trading at $0.02. [laughs]
Hill: And that's the thing, when people say, "It can't possibly go any lower." Is it at zero? Because unless it's at zero, it absolutely can't go lower.
Mueller: Yeah, you can still lose 100% of whatever money you have left.
Hill: You know what? Some absolutely bought your shares at $0.07 a share with that mindset.
Mueller: I know they did. [laughs] I was able to sell them.
Hill: Now, what about a stock that you're thankful for?
Mueller: Thankful for? There has to be no other stock than Netflix (NASDAQ: NFLX). I've owned shares of that company for 10 years or more, and I've followed it for Stock Advisor for at least that long, since before they were doing any of the streaming. I've watched them disrupt their own business from DVD mailing to offer streaming and now the DVD mailing, they're just letting it die a slow death. I mean, it still generates cash, so why get rid of it, but I know they've been closing warehouses and stuff like that. Two or three months ago, I just cancelled my DVD mailing side of it after having a disc sit on my table for a year. Like, you know what? I'm not really watching this, so it's time to let that go. But, the streaming is taking off. I know everyone is concerned about the cash spending that they're doing, but the profitability is showing up. The U.S. is solidly profitable on the streaming side. All the countries they launched in before 2014 are all profitable, together and individually. The spending is, just as they made this massive launch in January 2016 into the rest of the world, which is essentially mobile, and there are 3 billion mobile accounts around the world that can support Netflix. Whether the people with them can afford the monthly fees or not, that's a little bit different. But the opportunity is still very, very large for the company.
Hill: And the stock up almost 60% just year-to-date alone.
Mueller: Yeah. And that's hardly the only year they've had that happen. But, of course, in 2011, they had a Qwikster, so it was down something like 75%, from $300 down to $50-something.
Hill: And this is why we talk about having a diversified account, a portfolio of stocks. You're going to have the winners, you're going to have the Acusphere, and you can only lose 100% of any one stock. But, but if you have a big winner, it's going to make up for so many losers.
Mueller: Yeah, and this is the one that's going to make me rich. [laughs] I mean, I rode that thing all the way down from $300 to $50, those are those are pre-split numbers. But, today, again, on the same scale, it's at $1,400. So, from $50 to $1,400, and I bought it...
Hill: $0.07 a share?
Mueller: [laughs] No. I wish. No, I think my bases was around $19. And it's at $1,400. So, doing pretty well.
Hill: Happy Thanksgiving! Thanks for being here!
Mueller: Thank you!
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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Chris Hill has no position in any of the stocks mentioned. Jim Mueller, CFA owns shares of Netflix and has the following options: long January 2019 $110 calls on Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has the following options: short January 2018 $170 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.