In this episode of MarketFoolery, host Mac Greer and analysts Ron Gross and Andy Cross hit on a few of the market's biggest stories. Walmart's (NYSE: WMT) stock is up almost 10% on some strong numbers, but those numbers might not be as strong as they first seem.
J.C. Penney (NYSE: JCP) sinks even further into the pit of despair, and even their rays of business-strategy light have a gloomy pall to them. JD.com's (NASDAQ: JD) stock danced a little tango after the company reported earnings. What mixed nuts did the Chinese e-commerce player put out this quarter, and what do investors need to watch in the future? Tune in and find out.
A full transcript follows the video.
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This video was recorded on Aug. 16, 2018.
Mac Greer: It's Thursday, August 16th. Welcome to MarketFoolery! I'm Matt Greer. Joining me in studio, we have Motley Fool analysts, Andy Cross and Ron Gross. Gentlemen, welcome! How are you feeling?
Ron Gross: Mac, how are you doing?
Andy Cross: I feel good!
Greer: I'm good! I got a new haircut.
Cross: Nice. You look good.
Gross: What do you mean by new haircut?
Greer: Well, my wife cuts my hair. So, as of this morning --
Gross: How long has this been going on?
Greer: For a couple of years. Since we got this hair cutting kit at a retailer that --
Gross: The Flowbee?!
Greer: -- that I will not mention, because I mention it too much. She cuts my hair, and it's awesome.
Cross: It is a retail podcast. And maybe we'll talk a little bit about it.
Greer: Maybe. It is a retail podcast. We're going to talk about some JC Penney, woof. I don't know what else to say.
Cross: It's been woofing for a while.
Greer: I know. I'm going to ask you guys to save JC Penney, but that's later in the show. We'll also talk about China's second largest online retailer. Not the first largest. That would be Alibaba. Clearly not.
Gross: Not even close.
Greer: Not even close. We're going to talk about the second largest. But, guys, let's begin with blowout earnings from Walmart. Shares up almost 10% at the time of our taping. Ron, strongest same-store sales growth in a decade. U.S. e-commerce up 40%. That sounds good to me.
Gross: Yeah. What more do you need to know? I mean, these are strong numbers. Comp sales up 4.5%. Total revenue up almost 4%. As you said, e-commerce up 40%. Very, very important there.
The company certainly helped by strong unemployment in the country, the tax cuts that people are benefiting from. People have extra disposable income. It's flowing through to Walmart. Four straight years of U.S. growth. Longtime listeners will remember, it doesn't seem like four years ago, but we used to talk about how horrible the U.S. business was, and how if Walmart didn't get it together, this was going to be really, devastating. To their credit, they turned around.
Now, not everything is peaches and cream. These good numbers do have a cost. The cost is in margins that are under pressure. That's because they have to spend heavily, they're investing heavily online to compete with Amazon, who else, and others. There's a constant price war going on. You have lowering of prices, you have increased commodity, increased transportation costs. So, you actually have margin pressure. You see operating income actually declining, even though this is, yes, a very strong report.
Greer: Such a buzzkill. Andy?
Gross: I'm an analyst, not a cheerleader, my friend. [laughs]
Cross: It's a really good point. The investments they're making are so substantial. I mean, you just look at the partnerships they're making. We'll talk a little bit about the JD.com. They're buying Flipkart, which is India's e-commerce business. They're making a bet, they bought Bonobos last year for $300 million. When you look at all of those investments that they're making, and just think about, Ron mentioned the comp store growth. Traffic was up 2.2%. It was at 1.3% this time last year. Ticket, Mac, pricing, it was up 2.3% vs. 0.5% last year. It's not just that traffic is actually making progress, but they are actually now seeing a little bit of pricing into their business, which is fantastic.
Greer: OK, Ron, you mentioned Amazon earlier. I have top to bring it to the stock level because we are a show for investors. It appears clear that there is room for both Amazon and Walmart, the businesses. The question is, over the next five to 10 years, can both of those stocks be market-beating stocks? Or, ultimately, is it a zero-sum game, do you think?
Gross: That's interesting. Walmart is not a market-beating stock over the last five years. It's done fine, but you would have been better off in an index fund, quite frankly. To their credit, as we've said, they did turn things around. They're now trading at around 19-20X forward earnings in a market that's only 17-18X. You're paying a premium to the market to own Walmart. I don't think that bodes well from a market-beating perspective.
Now, Amazon's a whole other thing. They have so many things going on. They can pull all different levers and turn up the profitability and turn down the profitability and go in so many different places, whether it's the cloud or whether it's online retail. I believe Amazon can be a market-beater, where I think Walmart, it may be a bit of a struggle.
Cross: Yeah, I'll echo that. You have a nice business that's a $270 billion market cap. They might be able to get $5 in earnings per share next year. The profit picture is going to be a little bit tight. Frankly, I think Home Depot is a much better buy. I own Home Depot, and I'd still buy that today.
Greer: OK, guys, let's keep it on retail. It's not all sunshine and rainbows, unfortunately. Shares of JC Penney down more than 20% on earnings. Greater than expected losses, weaker than expected revenue. Can anything save JC Penney?
Gross: We don't always get it right on this show and Motley Fool Money, but this is one we've been talking about for quite some time, about how it's really a struggle. And, you know, we commonly say, "Does the world need JC Penney?" And we often answer with a no. There's just so much competition out there. So many department stores, so many other types of retail channels that you can purchase similar items in. And they just haven't done a good job. Once again, they had to come out and lower their full-year earnings outlook. "Earnings" is a euphemism. They're actually losing money at the moment.
Kudos to them for closing stores. Sometimes these retailers do over-expand, the footprint gets too large. They did close around 140 stores or so. That's one of the reasons that you saw net sales fall 7.5% when same-store sales were actually up slightly. They had a smaller store base, which naturally leads to lower revenues overall.
They still have 860 stores left at last count. That's still a lot of JC Penney's out there. Probably too many. They don't have a CEO right now, they've got a four-person executive committee kind of running the show. If they're going to kind of turn this, they need some strong, I think, a merchant, to come in and right the ship.
Greer: I want to ask you about something that the CFO said. The CFO said that JC Penney has changed its approach to inventory management from "buying to store capacity to buying and chasing into demonstrated sales trends." OK. It sounds like they're trying to play the fast fashion game. When I see the phrase "buying and chasing," I don't know.
Gross: It's hard to get right, is the problem.
Greer: H&M, right?
Gross: It's so hard to get right. They're renewing their focus on women, particularly middle-aged moms, as they say. They're going to try to be nimble. Being nimble at the department store level is trouble.
Cross: I mean, the market cap of this company is less than $600 million. Walmart does, in one day, more than $1 billion in sales. Walmart has it all going right, and JC Penney has it all gone wrong right now.
Greer: Andy Cross, is there any hope? Or, at this point at JC Penney, is it more about a graceful exit?
Cross: Yeah, I think it's about a graceful exit.
Greer: OK, guys, and for our final story, we are going to China. Now, shares of JD.com opened down on Thursday on weaker than expected revenues. But then, Andy, right before the show starts, I checked the stock, and it's up slightly. I should mention that JD.com is China's second largest e-commerce company. Second to Alibaba, which is around 10X bigger. 10X the market cap.
Gross: [laughs] 10X the size.
Greer: But you know who's counting? So, Andy, what about JD.com?
Cross: Well, you're right. It is a second compared to that mammoth, amazing company. But it's still a $50 billion market cap. It's not like chump change, Mac. It has $7 million in cash, $4 billion in debt. Sales growth for the quarter were up 31%. Now, that was the weakest quarter in a long time for JD.com. I think your original action that you saw in the market was people being concerned that the growth rates have slowed. And that is the case. But for them, it's the same thing that we're seeing with the other retailers who are doing well -- and that is investments they're making.
Their R&D expenses were up 80% this for the quarter. They continue to make investments into their e-commerce platform. Logistics is a big thing. They have more than 500 warehouses across China. They're adding more to the logistics. Something called retail as a service, or RaaS. Maybe you're familiar with SaaS, software as a service. They're going for retail as a service, logistics. They're spending money into technology, AI. They have some big partners too, Mac, including Walmart, who owns north of 10% of it. Tencent, another giant, giant company.
Greer: Heard of it.
Cross: Owns more than 18%, and the founder, Richard Liu, owns 17%. So, some big investors in behind this e-commerce giant.
Gross: Something for investors to be wary of. You have slowing growth and increased spending.
Greer: Tell me more!
Gross: That could translate into a double whammy of badness. However, if you spend correctly, you can rejuvenate growth at some point and perhaps live to fight another day, in terms of the growth rate picking up again. These growth rates are fine. I mean, 30% increase in revenue is nothing to sneeze at. But the question is, what are you going to pay for that? If the growth is decelerating, you'd better be careful what you pay for decelerating growth.
Greer: I want to talk a bit more about that. When we pull back here, and we look at this dynamic, they are the second biggest e-commerce player. But, Andy, as you mentioned, they're a tenth the size. They're a $50 billion market cap. Certainly not chump change. But a tenth the size of Alibaba. When you look at this dynamic, it's kind of the Nike - Under Armour dynamic. You have the second banana, but the first banana is just ginormous. Do you have a preference, as an investor, in terms of betting on the leader or betting on the second banana?
Gross: It comes down to price at some point for me. But I would typically bet on the leader, unless the second banana was really cheap, and I saw an opportunity to buy something on the cheap when maybe others were abandoning it for, perhaps, the wrong reasons. If I had a counter-opinion.
Greer: But not a rotten banana. You need it to be cheap, but not rotten.
Cross: I think betting on the leaders is the way to go. I think, specifically with JD, you look at the co-founder/ CEO still involved and owning a good chunk of the business. Google put in $500 million last month. They're partnering iQiyi, the Netflix of China, to offer a bundle packaging there. China's a massive e-commerce market, continuing to grow. Granted, growth rates might be slowing a little bit. Penetration of internet usage is still relatively low and growing. I think the market is so huge that both of these players can be a winner. JD is much more specific to the e-commerce platform and growing the e-commerce side of their business. In this case, I think going with the smaller player is still a good way to go.
Greer: OK, guys. Let's wrap up with my incredibly unfair, I would never invest this way in a million years, desert island poll. You're on a desert island, and for some reason, you're investing in stocks. You have to pick one for the next five years. You've got Walmart, you've got JC Penney, or JD.com.
Gross: We eliminate JC Penney right off the bat, right? That's easy. Unless there's value investors out there that really might want to take a shot. But I think next step is delisting for JC Penney. Then, it becomes Walmart or JD. I don't typically invest in Chinese companies. I'm always afraid of what I don't know and what's going on there. Walmart, tried and true, American, solid, strong behemoth of a company. That's where I'm going.
Cross: I'm going the emerging market route. EM stocks have gotten pounded, China stocks, recently, with some bad news coming out of Tencent. So, I'm taking the cheaper stock with JD. Even though it's up a little bit, it's been kind of a meh performer. So, JD.com for the long term.
Gross: That's fair.
Greer: If you have a thought on anything we've talked about, if you have thoughts on Walmart, JC Penney, JD.com, or if you have questions, email@example.com is our email. Your questions, your comments. Ron, Andy, thanks for joining me!
Greer: Thanks, Mac! A pleasure!
Greer: As always, people on the show 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 it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We will see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Home Depot, Netflix, Under Armour (A Shares), and Under Armour (C Shares). Mac Greer owns shares of Amazon and Netflix. Ron Gross owns shares of Amazon and Nike. The Motley Fool owns shares of and recommends Amazon, JD.com, Netflix, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot, iQiyi, and Nike. The Motley Fool has a disclosure policy.