Nike Rebounds, and Injects Itself Into the Pharmacy Sector

In this Motley Fool Money podcast, host Chris Hill and senior Motley Fool analysts Jason Moser, Matt Argersinger, and Ron Gross dig into some of the week's more interesting news out of Wall Street, and in this case, the news is dominated by earnings news. Nike (NYSE: NKE) ended a yearlong slide in its North American revenue numbers and outperformed more broadly, too. Spice maker McCormick's (NYSE: MKC) second-quarter profits were up 23% year over year. But comps at Bed Bath & Beyond (NASDAQ: BBBY) dipped again.

Beyond the quarterly reports, BJ's Wholesale (NYSE: BJ) came back into the public sector with an IPO, and the market rapidly bid its shares higher, but soft-drink and sparkling-water seller National Beverage (NASDAQ: FIZZ) tumbled after the Securities and Exchange Commission publicly took issue with some of the metrics the company uses to tout its growth. But for news that may well affect your pocketbook whether you own the stocks involved or not, the guys have to talk about (NASDAQ: AMZN), and what its acquisition of online pharmacy PillPack will mean for the pharmacy industry broadly. All that, and, of course, the analysts will reveal the stocks on their radar this week -- two they like, one not so much.

A full transcript follows the video.

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This video was recorded on June 29, 2018.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill, and joining me in studio this week -- senior analysts Jason Moser, Matt Argersinger, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street, Motley Fool co-founder David Gardner is our guest, and as always, we'll give you an inside look at the stocks on our radar.

With the World Cup as our backdrop, let's start the week with Nike. For the first time in a year, Nike posted sales growth in North America. That was the highlight of its fourth quarter report. Shares of Nike up big on Friday, and Matty, hitting a new all-time high.

Matt Argersinger: Yeah, all-around awesome result for investors, I would say. Revenue growth of 13%, well above guidance, earnings per share above guidance. Total Nike brand revenue up 14%, particularly strong internationally, with China up 35%. But --

Ron Gross: Trump will take care of that.

Argersinger: [laughs] Of course. It really was about North America. Growth of 3% might not seem like a barn-burning quarter, but if you think about the amount of pessimism out there about sports apparel, I feel like investors probably thought, "It's either going to be flat or down." Nike talked about having growth resurging in the second half, but I think this is earlier than expected. I think a lot of investors are saying, "Hey, I think the trajectory is now up again."

Hill: And to the extent that there's been optimism in sports apparel, it hasn't been with Nike and it hasn't been with Under Armour (NYSE: UA) (NYSE: UAA), it's really been about Adidas lately.

Argersinger: That's right. Speaking of Under Armour, I was surprised that Under Armour was actually down on Friday. I thought there would be some sympathy buying there. But, like you said, Adidas was winning last year, and there's this idea that maybe this is just a bit of a zero-sum game right now.

Gross: Where's the line between sports apparel and athleisure, the pretentious athleisure? Is there a differentiation between the two?

Argersinger: I think there is. I use Lululemon as an example, Lululemon has just been on fire. I think that category feels a little broader than what you'd expect with Nike, which is more performance apparel.

Jason Moser: I think it's going to be really interesting to see how Under Armour reports this coming quarter. I think you're right. It's that return to growth in North America that made the difference for Nike this quarter. That has been a big point of weakness for Under Armour here recently.

But Under Armour has also been hampered by some very self-inflicted wounds as well. Inventory management was a major problem. Kevin Plank, I think, took a step back, realized he had to bring some leadership into play to help him manage this business and take it to the next level. It's going to be very fascinating to see not only where Under Armour stands in North America, but also, are they working through this inventory snafu and getting the business back in the right direction.

Hill: Let's move on to a couple of retail stocks moving in opposite directions. First quarter revenue for Bed Bath & Beyond was about what analysts were expecting, but same-store sales were negative. Shares of Bed Bath & Beyond down 10% on Thursday. Although, Jason, they do appear to have recovered from that.

Moser: See, Chris, your statement right there, it's kind of like, I'm trying to find the light at the end of the tunnel. I want to be a glass-half-full guy.

Gross: I don't believe you.

Moser: [laughs] When it comes to Bed Bath & Beyond, I truly can't think of one reason why you would want to own this stock. There are just so many challenges the business is facing. Top-line growth is anemic, comps are down, they're still buying back shares with a net debt position. It's a very difficult space to be in these days, bricks-and-mortar retail. They've spent more than $5.5 billion on shares repurchases since 2014, and all the while, the stock price is down 75% over that same course of time. That's the George Costanza, man! That's the opposite! You don't want to be doing that!

Now, there is, potentially, a catalyst that could help the business with their new Beyond+ loyalty program. It's a membership program, you pay $29 a year, you get deals in store, free shipping on qualified items. That's reducing the amount of couponing. What remains to be seen is if this is a program that can actually gain traction, keep members, and then renew members. Does it mean you want to own the stock? I don't think so.

Argersinger: Wait. If I sign up for that program, will I stop getting the 20%-off blue coupons in my mail every day?

Moser: See, that's where I'm not totally clear.

Gross: You'll probably still get them, but you can throw them away.

Moser: It's like, you can't stop the mail, right? That stuff, I think, is still going to come your way. But maybe you won't have to actually go to the store and use them, you could buy online, or you could go to the store and just present your membership card.

Hill: Is the loyalty program brand new? Or has this been going on? Do you have any sense of how many people are already in it?

Moser: I do not have a sense of how many people are in it. If you look at the website, they actually still classify it as a beta program. The inception started a couple of years back. Still very new program. They're learning a lot from it.

Honestly, I think, you look at something like Restoration Hardware, they tried the same thing. It seems like it's given them another lease on life. Perhaps that'll play out for Bed Bath & Beyond that way, too. But still, a lot to be seen.

Hill: I'm glad you mentioned that because that's what I was thinking of. When Restoration Hardware announced that loyalty program, I think we all looked around the table and said, "There's no way this is actually going to work, is it?" And that's actually paid off for them.

Moser: It's paid off so far. The big question is, can it sustain those renewals? Will people continue to renew as time goes on? That's what Amazon Prime has done so well; that's what Costco has done so well. Restoration Hardware, Bed Bath & Beyond, I'm not sure they have the same place in the consumer's day-to-day shopping experience. That's the question mark.

Gross: RH also revamped their stores, the look and feel and even the merchandising of them, whereas Bed Bath is just a cluster. You walk in there -- I don't know who designed those carts that you can't even push down the aisle. The shopping experience is not perfect.

Hill: At least one bricks and mortar retail stock had a good week. BJ's Wholesale Club was taken private in 2011. It's now back as a public company and shares up 30% on the first day of trading for BJ's Wholesale. Ron, you buying?

Gross: It's like Costco, but not as big and not as good.

Moser: [laughs] I'm going to say that's a maybe?

Gross: If you want to get into the private equity game, this is a good deal: you take a company private at $2.8 billion at around 6 to 7 times earnings. You take $2 billion of dividends out of it while it's private, then you take it back public at a similar valuation, which is, however, now 40 times earnings, and you retain 69% of the stock. If you can get that, I say, get that.

But, as far as differentiating itself from the Costcos and the Sam's Clubs of the world, it really doesn't. It's a very similar business model, which actually is a good business model. The membership fees in this particular case amount to about 52% of the company's EBITDA. That's nice recurring revenue, nothing wrong with that.

But, it's quite small compared to the competitors. They have about five million numbers, versus Costco, which has about 51 million members. They have about 215 clubs, where Costco has 750 clubs. So maybe the glass-half-full, Jason over there, would say there's plenty of room for growth, but I think it's just a very competitive space.

Moser: It's very funny, the feelings that brands elicit. The only real experience I had with BJ's was back in 2005, 2006, when we were in Atlanta, and we were getting ready to go to Kazakhstan for a two-year post there. We had to bring diapers for two infants for basically two years. So, we made a week's worth of runs to BJ's Wholesale and would walk out with four boxes of diapers every day, until our garage was actually stacked to the ceiling with boxes of diapers. The neighbors were beside themselves, thinking we were running some kind of black market for diapers or something.

Hill: This week, Amazon moved even further into the healthcare industry when it bought PillPack, an online pharmacy business, for $1 billion. PillPack is licensed to ship prescriptions. Matty, just like that, Amazon has scale in this game.

Argersinger: I know. If there was any doubt that Amazon was going to get into the drug distribution business, quashed that this week. I'll just note that the disruption that this has done, particularly to Walgreens, CVS and Rite Aid, if you look at when the news was announced on Thursday, those three companies lost $10 billion in combined market value. By the way, the market was up on Thursday. Really, that's the story.

This is the big step. I think Amazon made one step a week ago when they announced who the director of this new healthcare company was going to be. Now, they've firmly put their foot into the drug distribution business, where there is this middleman, high-margin distribution business that is ripe for disruption.

Gross: Also interesting news recently, they're trying to really work on that last mile, the actual delivery to the home. Now, you can become your own trucker, franchisor, with an Amazon van. For a $10,000 investment, you, too, can have your own Amazon delivery business. That's going to be really interesting, too, especially as we move to things like one-day, same-day delivery of things like prescriptions.

Hill: That sounds like an adult version of having a paper route. That sounds like the paper route of the 21st century.

Argersinger: I'm glad Ron brought that up, because if you look at FedEx and UPS, another $3 billion in market cap lost on Thursday as well!

Hill: Let's go back to the drugstores for a second. Beyond the loss in market cap -- I don't want to paint them all with the same brush, but the head of Walgreens made some comments that really struck me as whistling past the graveyard, in terms of, "Well, there's a lot more to the pharmacy business than delivering medication." I understand that, and yet it really did seem like they're not taking this threat very seriously.

Argersinger: I question that. It's probably more complex than we think, but ultimately, that's what we're doing here. People are getting drugs, whether it's drugstore or delivery. The nice thing about PillPack is, it's delivered, it's on-demand, it comes in pre-sorted packages, so you know what to take on a given day. I just think that's a really compelling value proposition for customers. So, I question whether it has to be any more complex than that.

Hill: By the way, I know we're long-term investors, but Walgreens has been in the Dow Jones Industrial Average for less than a week, and it's already down about 10%.

Argersinger: Congratulations!

Hill: Some bad timing there.

Shares of McCormick up 10% this week. Spice maker's second quarter profits came in 23% higher than a year ago. Jason, I don't love this company as much as you do. I don't know anyone who loves it as much as you do. But, I mean, they're totally getting it done.

Moser: I just wish, on one conference call, we'd have management say, "That was a spicy meatball!" or something like that. There are a lot of reasons to be enthusiastic about this business. I think the market's enthusiasm is based mostly on the fact that the RB Foods acquisition from a few quarters ago is proving to be the right decision, a smart decision, a good decision that the business is benefiting from.

If you look at the two segments the company operates in, the Consumer segment, which is what we stock our spice cabinets with, that grew 16%, with growth in all three regions; the Flavor Solutions segment -- which, man, I still love that renaming. It used to be Industrial. They call it Flavor Solutions now. Growth of 15% there.

I think the most encouraging thing is that the balance sheet, post-acquisition, that was one of the big question marks. It continues to strengthen. While operating income is covering interest expense about 6 times over, that will get better as time goes on, they've actually made $350 million in prepayments to the borrowing that they took out for this acquisition. They're going to pay it off ahead of time.

Then from there on out, you have this company with some of the most powerful brands in flavor and spice around the world. Again, I say it every time. The value proposition? Ninety percent of the flavor and only 10% of the cost of what you're eating, you just can't miss out on that.

Argersinger: It's been amazing, given what we've seen with the rest of the consumer-staples sector. McCormick kind of falls in that, and yet McCormick has defied all that. Do you think it's because they have such good brand placement on the high-end and low-end? So they're not really suffering --

Moser: I think that's the key. A lot of people ask about, I go to the spice aisle, and I see all the McCormick stuff, but I'm going to buy this other store-brand stuff -- well, that's the thing, McCormick has a lot of that store-brand, private-label business as well. And when you look at French's and Frank's Red Hot and all of these different seasonings and flavors and spices, they just have such a big share of it all together. It's a tough thing to compete with.

Hill: Let's face it. There are a lot of companies that make a lot of acquisitions, and a lot of them don't work out. So kudos to McCormick for, among other things, making the recent acquisitions work.

Moser: I think the skepticism, at least, on this RB Foods acquisition, initially, was warranted. It was a big deal. They had to borrow a lot of money to make it happen, but it's just proving to work out.

Hill: National Beverageis the parent company of several brands, including La Croix sparkling water. Shares of National Beverage fell 12% in two days after the SEC raised questions about the company's sales metrics. Ron, for background here, Nick Caporella is the CEO at National Beverage. He is known, among other things, for some creative, fun press releases. But I guess he got their attention when he started rolling out things like VPO, velocity per outlet. I don't even know what that means.

Gross: [laughs] I love wacky CEOs, it's just so fun. Velocity per capita. They help National Beverage create growth "never before thought possible." What more do you need? Obviously, the SEC doesn't like that. It also doesn't like comments like, "VPO was flashing solid green numbers."

There's a lot of bluster there. I would warn investors to be careful of CEOs with a lot of bluster, that like to type in all caps. They're very promotional. To companies out there, if you want to use a metric, explain the metric or don't use the metric.

Here, they told the SEC to go take a hike, and that they didn't need to define the metric because it didn't really affect the company as a whole, it was just a goal set by certain customers. They, quite frankly, did not respond to the SEC, and it seems to have been dropped. But, be careful of bluster.

Hill: La Croix is the best-selling sparkling water in the country, so they have a little bit more going on than just bluster.

Gross: For sure they do. I'm not a fan of the stock at 27 times forward earnings when you have Pepsi and Coke at around 19 to 20. But the growth probably is higher. But, there's a bit of a fad element going on here. I drink a lot of flavored seltzer. Those La Croix flavors are a little much for me personally, but they sell.

Hill: Alright, let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?

Gross: An interesting one for me, Lam Research (NASDAQ: LRCX), LRCX, leader in the semiconductor industry. They make the machines that make the chips. Really fast-growing company, high margin, recurring revenue, strong return on invested capital and free cash flow. They're returning at least 50% of their free cash flow through buybacks and a growing dividend. The dividend was just increased 120%, which gives you a forward yield of 2.5%. Recent pullback in the stock creates a pretty nice entry point.

Hill: Steve, question about Lam Research?

Steve Broido: Is there any relationship between Intel and AMD here?

Gross: AMD is the biggest competitor, I would say, to Lam Research. Then you have companies like Micron and Taiwan Semiconductor and Intel who are actually clients of the folks that make the machines that make the chips.

Hill: Jason Moser, what are you looking at this week?

Moser: Going with Snap (NYSE: SNAP), ticker SNAP. This is not in the good way. I'm thinking investors might want to steer clear of this one for a little while still. Probably saw here recently in the news that Instagram hit 1 billion users, 400 million daily users, which is more than twice of Snap's platform, Snapchat. Instagram is now getting into long-form video to compete more with YouTube. I think Instagram is starting to scratch a lot more itches out there.

We talk a lot about the valuation on Snap. If you look at Snap today, now trading at 18.5 times sales, Facebook 12.7, Twitter 13, the problem is, Snap is still not profitable. You can't give these guys the benefit of the doubt. If you're going to buy this one, wait until they demonstrate some success and buy it on the way out.

Hill: Steve, question about Snap?

Broido: In five years, is Snap still around?

Moser: I have a hard time seeing it, but perhaps they've diversified into some other apps that bring in a little bit more on the user side.

Hill: Matt Argersinger, what are you looking at?

Argersinger: Delta Airlines (NYSE: DAL), one I've brought up before to you guys. In case you haven't noticed, oil prices are kind of high. Therefore, fuel prices have surged. In fact, fuel prices are up 50% year over year. That was kind of unexpected. Look, it's overshadowing what Delta is doing in terms of passenger revenue, costs per fuel, buying back shares. The stock is below $50 again, you have almost a 2.5% dividend yield. Ticker DAL, Delta Airlines.

Hill: Steve, question about Delta?

Broido: Do you have a preference when you're flying?

Argersinger: I actually do. I've found my experience on Delta -- maybe I'm biased -- is better than most U.S. airlines that I've experienced.

Hill: Delta Airlines, Snap, Lam Research. Steve, do you have one you want to add to watchlist?

Broido: I think I'm heading to the sky.

Argersinger: Yay! There we go.

Hill: Do you have a preferred airline, Steve?

Broido: Not really. Southwest is always fun.

Hill: All right. Ron Gross, Jason Moser, Matt Argersinger, guys, thanks so much for being here!

Argersinger: Thanks, Chris!

Gross: Thanks!

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 Amazon, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Intel, McCormick, Nike, Twitter, Under Armour (A Shares), and Under Armour (C Shares). Matthew Argersinger owns shares of Amazon, Delta Air Lines, Twitter, and Under Armour (C Shares) and has the following options: long January 2019 $15 calls on Twitter. Ron Gross owns shares of Amazon, Costco Wholesale, and Nike. The Motley Fool owns shares of and recommends Amazon, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Costco Wholesale, CVS Health, FedEx, Lam Research, Lululemon Athletica, McCormick, National Beverage, Nike, RH, and Southwest Airlines. The Motley Fool has a disclosure policy.