Understanding the Latest Results From Lennar, Lands' End, and General Mills

On this episode of Market Foolery, Chris Hill is joined by Bill Barker from Motley Fool Funds as they review the earnings from companies reporting late in the season, including Lennar (LEN -1.01%), Lands' End (LE -4.59%), and General Mills (GIS 1.12%).

And to wrap up the discussion, they look at a particularly noteworthy email from a listener with very strong opinions regarding Wawa.

A full transcript follows the video.

This video was recorded on March 21, 2017.

Chris Hill: It's Tuesday, March 21st. Welcome to Market Foolery! I'm Chris Hill, and joining me in studio today from Motley Fool Funds, Bill Barker. Happy Tuesday!

Bill Barker: Thank you!

Hill: We got some earnings. We're winding down earning season, and yet companies still keep cranking out the earnings.

Barker: They continue to earn money and report on it.

Hill: They continue to report on it. [laughs] I think it's clear to anyone who's listened for a while, not everyone is reporting earnings. But Lennar is. Let's start with the home builder, Lennar. First quarter profits little better than expected, overall revenue was a little lower than expected, shares down a bit, but that's off of what is essentially a 52-week high. How are we doing when it comes to home builders?

Barker: Home builders most recently reported, for the March numbers, the highest level of home builder confidence in 12 years. 

Hill: Is that good?

Barker: They think things are good. It may be the case that it's a good question to ask whether confidence means that things are going to go well, because that has not always been the case. If you reflect back to 12 years ago in 2005, that was a really good time to start getting out of home builders, and certainly you wanted to be out of them by 2007. Lennar had a pretty good quarter. It's up over 20% for the year, and a lot of the expectations were priced in prior to today's release, more or less on track with what they guided to.

Hill: Not that we're making big industrywide calls here, but it seems like for the last few quarters, whether we've talked about Lennar or Toll Brothers or any of the big home builders, generally the results were good. If you are the average investor just occasionally taking in headlines about housing, it all seems to be going in the right direction. I guess my question is, is now the time to maybe take a pause, and if you're thinking about home builders, maybe think twice?

Barker: Let's go over a couple of the numbers and answer it that way. Deliveries for the quarter were up 13%, and orders were up 16%. The backlog is now up 24% to last year, and revenue is up 17%. Those are numbers, high teens and above numbers, which, if you compound them out, get you really rich over periods of time.

Hill: One quick question. Backlog refers to what? Is that orders that haven't been fulfilled yet?

Barker: Yeah, what they have ordered that --

Hill: "We haven't built the homes, but we have the orders for them."

Barker: Yeah. These aren't brand new orders, these are the new orders plus the old new orders that they haven't done anything about. So this is what they have to do, this is what they're going to be working on, this backlog. So, that's all very good, and if these numbers compounded the way numbers of some companies compound over time, as you say, you get very rich. But, as we know, there is almost nothing more cyclical than home building, which boomed and crashed and it's not hard to remember exactly when those things happened, and what the consequences of them were. There's been a lot of regulation in the meantime to hopefully prevent that kind of peak and valley for home builders and for our economy as a whole. But it's still going to be a cyclical industry. And right now, the cycle is on the way up.

Hill: You just reminded me when you were talking about the confidence of the home builders themselves of the movie version of Michael Lewis's great book, The Big Short. It's a phenomenal movie, for anyone who hasn't seen it, definitely check it out. It goes through the housing crisis, and profiles some of the people who saw it coming. But that was -- there are a couple of scenes in there where you have the outsider investor, whether it's Dr. Michael Burry or the character that Steve Carell plays, who's looking deep into the data, they see the numbers coming, and then when they talk to people in the housing industry, it's nothing but sunshine and rainbows. Like, it's all, "Everything's great, the market is going great!" There's a scene where Carell and his team go down to Florida, and a real estate agent is showing them around and it's looking pretty sketchy.

Barker: So, the market was, and the film shows that parts of the market were seeing things more efficiently than other parts. One thing to remember is, home builders in '07 were already, as stocks, although, that is when work peaked, the stocks were already declining precipitously. I think Lennar, to take an example -- I'll look this up quickly -- it fell 64% in 2007. We think of 2008 as when all the trouble started. Home numbers by the beginning of 2008 were already declining precipitously, and that was something that investors got out of these in 2007, despite the fact that that was peak sales for the company. It's only now getting back to 2007 annual revenues. 2007, it did $10.1 billion. Over the last 12 months, before today's report, got back to $10.9 billion, after bottoming around $3 billion in 2010 and 2011. So, it was a deep decline, it's made it all the way back, we're back to where we started. The company has made money in that time. You've made money if you held all the way through. But, it is worth keeping in mind that, when you see these numbers, they are part of a cycle. They're not part of a compounding, better results every year number, which is a different way to invest, a different thing to look for.

Hill: Let's move from housing to apparel. Lands' End wrapped up their fiscal year with their fourth quarter results. The results seem fine, but that's all they seem. They have a new CEO, a guy by the name of Jerome Griffith. I don't know too much about Jerome Griffith, except some of the comments that he was making, forward-looking in terms of what his priorities are as CEO. It seems like No. 1 on his list is looking at what Lands' End is doing in e-commerce and really expanding on that, really doing that in a much better way than they're doing right now. I think anyone who's a shareholder of Lands' End probably applauds that, because this is a stock that's kind of going nowhere fast.

Barker: It went down into the basement fast. As I've talked about before, I think one of the keys to life is to have an easy act to follow. The new CEO does, because, wow.

Hill: [laughs] Well done, Jerome.

Barker: Federica Marchionni who was given the heave-ho back toward the end of last year, and had tried to refashion Lands' End as a more upscale fashionable thing with higher price points and more stiletto shoes and things you don't associate with the brand. If you go to Lands' End's site today, you'll see they're still trying to get rid of the women's shoes that she had, the heel shoes, two-thirds off. Good time to go shop at landsend.com if what you need is high heels, because they're getting out of that. They're going to get back to basics. And I think that's going to help, and has helped already with the perception that there's a brighter future ahead than the struggles that they had trying to get people to think of them as a completely different kind of store than their customers wanted.

Hill: I'm not saying that CEOs in any industry should not try to innovate, should not try and aim higher than whatever results that they're putting up. Any industry. I'm not saying that. But I do find it odd when apparel CEOs decide that what's really going to move the needle for their business, and therefore for their shareholders, is to divert pretty significantly from what they've been doing. I mean, I've always thought of Lands' End as good, tried-and-true, basic clothing in a wide variety, for kids, for women, for men. So, the notion that that's what she had laid out as the blueprint, that this is what's going to do it, it's like, you don't need to do that. Just execute in a profitable way. That's all you need to do. Keep cranking out good clothes in a profitable way.

Barker: She had been at Dolce & Gabbana and Ferrari prior to Lands' End, and I blame the board, because I think she came in with a plan, and they knew what her background was, where her successes were, and I assume that the dialogue between them was, she was saying --

Hill: "Here's what I'll do if you hire me."

Barker: Yeah. "I think there's something more fashion-forward than what you guys are doing, and that's where your future lies, and that's my expertise." And they hired her and took a shot at it, and it was kind of a disaster from the beginning, and she didn't move to company headquarters, she stayed in New York and flew in for a day or two a week, maybe, something like that, so there were culture issues. I think it was destined to fail, and if anything good can be said of it, it's that they got out of it quickly.

Hill: Well, good luck, Jerome Griffith.

Barker: So, now, they have a new start, and they have somebody whose background is in Tumi Holdings, which was, he sold it off, Samsonite bought it.

Hill: The luggage company?

Barker: Yeah. More upscale than Samsonite. But, he's worked at Tommy Hilfiger and Gap as well in his past life. So, he has more of a background that one would consider appropriate for your vision of Lands' End.

Hill: Let's move on to General Mills. Third quarter revenue falling ... I should probably add yet again. This is the seventh quarter in a row of falling sales for General Mills, the parent company of Cheerios and other delicious cereals, but Cheerios is probably with they're best known for.

Barker: One of the many things. Chex, of course. They've got a lot of different brands --

Hill: Wait, do you eat Chex? Have you ever eaten Chex cereal?

Barker: Yes.

Hill: I just can't get around Chex as a cereal. As a mix, that's fine. And it's only fine there.

Barker: Do you eat Cheerios?

Hill: Sure, yeah.

Barker: Do you eat Rice Krispies?

Hill: Yeah.

Barker: What about Chex seems so objectionable? It's not like you're restricting yourself to the sugary cereal category. Chex is as much of a classic as those two.

Hill: I'm not debating that. I'm just saying it's not as good as those two.

Barker: I think you're wrong. I think most of the listeners agree with me.

Hill: [laughs] Not on that one.

Barker: You know, unless they're four years old or two years old, and they're eating Cheerios out of the little baggie that their parent --

Hill: This is a large, stalwart company. I'll give you a week. Go back and find me the conference call. At any point in history, when the management of General Mills came out and said, "We crushed it this quarter, and you know what was doing it? You know what was the big mover for us? Chex. Chex is getting it done. We can't make Chex fast enough. That's how much people love it."

Barker: They don't have "the big mover". That's not with General Mills is about. It's about doing virtually the same thing over and over again. And that has shown up in the stock, and that has shown up in the numbers, and when you say that it's down seven quarters in a row, true. On the other hand, it's continued to deliver as a stock. The earnings are pretty much where they've been for the last couple of years. It is a very stable company which, at the moment, is down a little bit for the year. If that continues to be the case, that'll be the first time in over a decade that shareholders have not had positive returns from this stock.

Hill: I was going to say, you had sent me something this morning before we were taping -- all kidding aside -- this really was one of those stocks that was a compounding machine over decades.

Barker: Yes. I wrote about this in 2005, an article called "High Percentage Bets on the Future," and one thing it did was talk about some quotes from movies as a hook for saying, the future ends up being a lot more similar to the present than you think over long periods of time, and part of the proof of that is that among the best-performing stocks over 40 years, going into the time that Jeremy Siegel wrote his book The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, General Mills was one of the top performers of the S&P over a 40 year period. And it's been 12 years since then, and it's continued to outperform the market over that time period. I have the 10-year and the 15-year data in front of me, and General Mills has outperformed the market by about 2.2% over the last 10 years, and about 1% over the last 15 years. Actually, packaged foods as a group have done much better than that. It has underperformed the packaged foods group over that time period by about 2%. Why is that? One, they were a little bit late to organic foods, and that's been something that has made inroads, and they're also fighting off private label. So, packaged foods as a group have done very well. Think, the last 10 to 15 years must have been dominated by tech. Still, food -- good thing to invest in.

Hill: They seem to have managed their brand portfolio pretty well --

Barker: With the exception of Chex, apparently, which you think of as a dead brand that nobody's ever eaten.

Hill: I'm just saying it's an "Oh yes, we also have this, for the very tiny group of people who rank Chex as their No. 1 favorite cereal. We're there for you. But we know you're a small and dwindling number." But, you don't hear much about General Mills looking to sell off major brands in their portfolio. They've done a good job of just managing -- because yes, it's cereal, but it's also, as you said, it's packaged foods, it's pizza, it's soup, it's different snacks, they have an organic chain. So, they've done a very good job with that and managing the shelf space within grocery stores.

Barker: Growing up, what was the percentage of sugary cereals that you would have been eating, out of total?

Hill: Very low.

Barker: Very low, they were not welcome in the Hill house?

Hill: Not by my mom, no. Very welcome by me, but no. In fact, it got to the point where, every year for Christmas, one of my gifts would be -- you know how they sell the individual boxes? You can buy a package of eight individual boxes? Yeah, I would get one of those at Christmas.

Barker: A single serving of Frosted Flakes?

Hill: Exactly.

Barker: And you'd have to make it last for the year.

Hill: Frosted Flakes, Froot Loops, Cocoa Krispies, back then it was Sugar Pops as opposed to Corn Pops. So, I would get one of those, and it was like, "Ooh! Eight days of sugary cereal breakfast for me!"

Barker: So, when you went off to college, did you go crazy?

Hill: I didn't go crazy, but I didn't limit myself to basic Cheerios or Wheaties. Those were the two. What about you?

Barker: Wheaties is another General Mills brand. Probably about 75% sugary cereals, from what I recall. There was a lot of Frosted Flakes, Lucky Charms, Trix, the whole thing. But my mother loved me. That's, I guess, the difference.

Hill: [laughs] How dare you!

Barker: I mean, she didn't love my health, I guess, but just me as a total package.

Hill: [sighs] I just ... I'll have to think of a way to respond.

Barker: A way to come back from that. 

Hill: Yeah, exactly. The last time you were on, maybe the last two times you were on, we talked about Wawa.

Barker: Yeah.

Hill: The first time, it was just, in passing. 

Barker: You can turn off the podcast now if you're sick of Wawa.

Hill: Yeah, if you're sick of Wawa, we'll see you tomorrow. And, the last time you were on, we talked about some of the email we got. Since then, we got ... I kind of feel like I need to read this whole thing.

Barker: Or, you could post it, if you have the permission from the author.

Hill: I don't have the permission yet, so I'm just going to read this. 

Barker: You have the permission to read it, but not to post it, you're saying? I shouldn't make you split hairs here, because you don't want to overthink this, you just want to deliver quality to listeners, really, regardless of the ethics of it.

Hill: [laughs] Exactly. And this is quality, this is one of the best emails we've gotten since we started doing Market Foolery. "Chris, it was not my original intention to write you. I was going to let Bill Barker's praise of Wawa stand on its own. But then I saw the posts on the Facebook page from the Buc-ee's and Casey's General apologists, and I knew I couldn't let such an affront reality go unchallenged. Wawa is objectively, unequivocally, the best convenience store in the world. Bill Barker only touched on a very small portion of Wawa's greatness. He mentioned how early they adopted touch screen ordering for their hoagies, something which Panera et al only did recently, a full dozen years after Wawa had it in all their locations. As a man who grew up in central New Jersey, 30 minutes outside of Philly, let me tell you how much I appreciate being able to get my food without having to talk to other people. Native Jerseyans have been accused of many things but being overly concerned with social niceties is not one of them. Anyway, let it suffice to say that the accuracy and taste of the sandwiches produced by this custom machine hoagie maker process are above reproach. I must have missed the part where Bill Barker talked about the pretzels at Wawa. I know someone from Philadelphia wouldn't have neglected to mention them. They are, in a word, phenomenal. When you make your pilgrimage -- no other word does it justice -- I recommend the plain, oval shaped Philly style pretzel. You will be tempted by the cheese-filled pretzels under the hot lamp. Remember: you're a beginner. Start with the essentials." Let me pause for a moment. He's already hinted at the greatness of this email with a sideways shot at you for not being a true Philadelphian. 

Barker: The shots become less and less sideways as the email progresses.

Hill: The email continues. "Speaking of essentials, you should probably pick yourself up a jug of iced tea. It was never my thing, but others go wild over it. I was always more of a coffee guy, or, kid. I think I started drinking Wawa coffee when I was 11. The coffee deserves its reputation. And yes, Wawa has ATMs with no fee. What does Buc-ee's have? 38 urinals? How is that even remotely useful? Once again, the insecurities of Texans have led them to conflate size with quality. By such logic, Siberia would make an excellent vacation destination. I can only imagine Buc-ee customers like the insane number of urinals because it allows them to stand 40 yards away from the next closest person. They must worry their cowboy hats would accidentally touch if they were any closer." This is such a great email. "You said on the latest podcast that someone sent you an email saying simply "Sheetz > Wawa." I'm not terribly surprised that the person recommended Sheetz without using frivolous things like complete sentences. I've been to Sheetz. It very obviously caters to the type of person who orders their food based on the picture on the menu. I thought Denny's proved conclusively that such practices were not a sign of quality. I've never been to Casey's General. Like all things Midwest, it sounds very polite and inconsequential. Another individual recommended a place called the Pine Cone which exists only in Wisconsin which, I learned recently, is technically part of America and not a Canadian province, as is commonly believed. They posted a picture of a cream puff to show the virtue of the establishment. I don't know why they thought that would help their argument. It looked like something I would eat if I wanted listeria but didn't have the time to wait in line at Chipotle." That was on the Facebook page. Motley Fool Podcast. If you're on Facebook and you would like to join us, please do.

The email continues. "I say all that to say this: go to Wawa. You won't regret it. Anyway, I love the podcast. I found it two years ago and now listen to it every day while I'm driving or in the gym. I have to say I'm very pleased with your decision to include advertisements. Now I don't feel at all guilty about listening and not paying for any of the Motley Fool services or products. I never actually felt guilty before the advertisements came, but theoretically, I might have one day. Don't feel bad about not winning the father of the year award. You have a good shot at "Most Northeastern Thing Said in the History of America" award for your comment about "visiting Delaware every year for a rowing regatta," so there's that." Again, a phenomenal email.

Barker: Yes.

Hill: And a takedown of everyone and everything, including you and me. [laughs] 

Barker: Yeah. And if you're from either Texas or Wisconsin and feeling defensive about the shots taken there, just remember, the author took shots at his own homeland of central New Jersey.

Hill: Yes.

Barker: It was equal opportunity.

Hill: Yeah, everyone.

Barker: And given a couple hundred more words, there would have been more and more locations and individuals and establishments that were mocked and measured as coming up woefully short of Wawa. Just shows his intelligence.

Hill: You have to respect an email that lays waste to absolutely everything and everyone, and does it and such an eloquent manner. So, we stand in awe.

Barker: You appreciate all well-written emails.

Hill: I appreciate all emails, period. But, emails like that ... those are the emails that get forwarded to people like you and Bill Mann and Roger Friedman and others, just like, "Oh my gosh, look at this."

Barker: Gotta share.

Hill: Gotta share this. One more thing to share, and that's foolfunds.com, and that's where Bill Barker and Bryan Hinmon, Charly Travers, Tony Arsta, Dave Meier, Nate Weisshaar, the whole Fool Funds crew. The analysts at large down there are hard at work. You can check out their writings, you can check out their funds. Go to foolfunds.com to check it out. Thanks for being here!

Barker: 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!