In this episode of Market Foolery, Mac Greer, Andy Cross, and Matt Argersinger talk about Coach (NYSE:TPR), which beat earnings forecasts as it continues its long recovery; Mastercard (NYSE:MA), which also beat expectations and showed itself again to be a virtual money-printing machine; and Under Armour (NYSE:UA) (NYSE:UAA), which suffered during the holiday season much like the brick-and-mortar retailers that sell much of its athletic gear and apparel.
A full transcript follows the video.
This podcast was recorded on Jan. 31, 2017.
Mac Greer: It's Tuesday, January 31st. Welcome to Market Foolery. I'm Mac Greer, and joining me in studio we've got Motley Fool Chief Investment Officer Andy Cross, also of Motley Fool Hidden Gem's fame, and we've got Matt Argersinger from Motley Fool Million Dollar Portfolio. Gentlemen, welcome.
Matt Argersinger: Hey.
Andy Cross: Hey, Mac.
Argersinger: Glad to be here, Mac.
Greer: Guys, let's get right to it. We've got lots of earnings news and I want to start with Under Armour. Matt, the stock just getting shellacked on Tuesday. Weaker than expected earnings and the company announcing that its CFO was leaving because of personal reasons.
Argersinger: Shellacked is definitely the right word. Anytime you're, you've guided for revenue growth of 20% and it comes in at 12%, and then you guide for the following year of growth of 11% to 12% when you're also expecting 20%, or at least the market's expecting 20%, it's not gonna be a good day for your stock. And so when I look at Under Armour, what we have to remember, this is still very much a retail story. In other words, about 60% of Under Armour's revenue still comes from wholesale sales to department stores, to sports retailers, and it was a really bad holiday season for department stores and in-store retail sales.
I looked at this report from Kiplinger that in-store sales for this past holiday were up just 1.4% year-over-year, which is a pretty anemic growth rate for retail sales. And so we also know that obviously traditional retail faces a lot of structural headwinds, and so anytime you have slower traffic to department stores, that's gonna force a lot of promotional discounting, retailers are trying to move a lot of inventory through, and what happened with Under Armour is there was a lot of discounting. Kevin Plank at least thinks that a lot of Under Armour's brand sort of got shuffled in with the other competitor brands, a lot of discounting, not a lot of sell-through, and therefore, you see the results that we see today.
And especially, we gotta also remember that about 85% of Under Armour's sales still come from North America. They're growing great overseas, but North America was a really weak retail market and that's what we see with Under Armour's results.
Greer: And we had some big retailers like Sports Authority go bankrupt over the last year. How much were they hurt by that, you think?
Argersinger: I don't think . . . that hurt a little bit, but I remember that was probably in the single-digit percentage points. They've kind of moved past that, but still, it's a factor and I think Kevin Plank also mentioned in the conference call that they expect to get a lot of that volume back, that they necessarily didn't in the fourth quarter.
Cross: You know I thought the pollsters had a bad forecasting year with Brexit and the U.S. election, but I gotta say, Matt and I were talking about this before the show. It just seems like Under Armour missed the forecasting mark pretty dramatically here. I think we've been thinking about this retail shift that's been going on and I just think that's just, when I think of Under Armour in this kind of quarter, especially around the holiday sales, and what they're looking out for 2017. They did miss the mark and I was just wondering if it's a consumer shift or if it's really just a forecasting miss on their part.
Argersinger: Right, back in October, so this is October, this is right before getting into the holiday season and they were confident with their guidance, they thought they were gonna have a good holiday season, certainly guiding to 20% growth, and we were kinda also talking about the show, maybe this is why the CFO suddenly is leaving. Maybe there was some, just sort of missing the picture, like you said about what the retail environment really looks like.
Greer: And taking a longer view, guys, Under Armour is a Motley Fool recommendation. They've delivered 26 straight quarters of 20% or higher sales growth up until this most recent quarter. And shares have been a really market crusher over the past five and ten years, right?
Cross: From a growth investing perspective, the 20% sales, 20% revenue, those are beauty and usually, typically, the market underestimates those. So you think about investors, typically, Peter Lynch has written about this, underestimate those true growers as long-standing growth players. It's just that, when it sours and when it goes south, investors tend to flee the ship pretty quickly and dramatically.
Greer: And we got a couple of questions on Twitter from some longtime listeners. Brendan asking whether this is a overreaction or a real concern and Sam asking whether this is a buying opportunity.
Argersinger: Those are two great questions. I can't call it an overreaction, because this is a pretty dramatic slow-down. We talked about consistent 20% growth, now we're in the low double digits. Cross, you had an interesting number I think. The $2 billion in market value that Under Armour's losing this morning or today is equivalent to what, you said five years worth of operating profits?
Cross: Yeah, maybe like $400 million in operating profits on $4 billion of sales, so yeah, you're looking at about five years of operating profits out the window in less than a day.
Argersinger: But you also have to say, if you were an investor and you were looking for this company to grow at a 20% rate for the next several years, it's a totally different trajectory today going forward. And the question is, can they get back to that growth? They must, if they want to justify the valuation on the stock, which is still, which was high going in and it's still actually relatively high, even after losing 20% to 25% in the stock today. So I don't think it's an overreaction. I don't feel like this is an opportunity where you say I'm backing up the truck on this company. I think you have to be a little cautious. Maybe if you had a small position you were looking at, this might be a great time, but I wouldn't be the person who says I gotta go in 10% of my portfolio in Under Armour today on this miss.
Cross: You know, also part of this, Matt, is I think is Kevin Plank was very honest about the assessment, but when you look at what happened with FitBit earlier this week, I mean the whole idea of consumerables and the amount of investments that Under Armour has made into the wearable market, they've spent $700 million in the past couple years I think, in kind of buying and going into the technology field. But concerns about the athletic market, what is the real growth potential behind that?
Greer: Connected fitness, Andy.
Cross: Connected fitness, but is it more of a trend? So I think investors are pairing these all together and thinking about the retail space, as well as the athletic space that Under Armour and Nike play into and wondering is the growth days, especially in North America, have they kind of slowed down?
Greer: Well let's talk about that as we wrap up this conversation. Matt, Under Armour right now has a market cap of around $9 billion and falling. Nike has a market cap of around $90 billion, so we've got $9 billion and $90 billion. If I'm an investor in Under Armour or if I'm looking at this as a potential investment, should I be thinking of Under Armour as just an early stage Nike or is that really kind of an apples and oranges comparison?
Argersinger: That's a great question. I like the comparison. In fact, my team in MDP, when we were looking at Under Armour, the past several months, we've compared it to Nike, looking at Nike as a public company over the last three decades, roughly. And it's interesting, if you look at Nike's history, Nike would have periods where its, year on and year end the growth is 25%, 30%. And all of a sudden, they'll have a year where growth slows down to 10% or even falls, revenue even falls. And you can go back and understand the explanation for it, but in reality, what you have is an interesting picture of a company that, over the last 20 years, has done exceptionally well for investors, Nike has. It's followed a very volatile trajectory, it's had years like this where all of a sudden 25% growth turned into 12% growth.
And so if you're a long-term shareholder in Under Armour, I think you can take confidence in that and say you know what, maybe this is a company that's just going through some early growing pains, it can still be on that sort of $90 billion future market cap trajectory like Nike.
Cross: And let's not forget Nike does most of their sales internationally, Under Armour does almost all, as Argersinger says, 85% of the sales domestically, so Under Armour has a lot of potential around the globe, which is that the margins there aren't quite as strong as they are in the US.
Greer: Well let's switch to another retailer, Andy. Coach reporting better than expected earnings, shares up on the news. North American same-store sales for Coach rising 3%. Is this still all about handbags?
Cross: Woo-hoo, 3%! It's like yay, great. But compared to where they were a few years ago, as Coach goes through their turnaround, the stock really has dramatically underperformed, sadly, over the last few years and this is an investment we have on stock advisor and watch carefully. I'm encouraged. I think we're seeing the turnaround come, Matt and Mac.
3% does not sound like a lot, and yes, Mac, it is mostly handbags, but Stuart Vevers, who's the new creative director, not new, he came in a couple years ago, and Victor Luis who's the CEO as of a few years ago, as longtime CEO Lew Frankfort stepped down, I really like what they're trying to do differently than what we're seeing in Under Armor. They're actually really pulling back on some of the discounting, they're trying to get that under control, they're trying to really rebrand and rebuild the brand of Coach. Stuart Vevers, from the creative side, really trying to bring back the sex appeal to what Coach may be, a little bit Mac, and we're starting to see it play out in the financials and so while 3% doesn't sound phenomenal compared to where they were, it's actually impressive. And importantly, it's the third consecutive quarter of comp growth, which is what you really want to see from Coach.
Argersinger: I like that point because if you go back to Under Armour for a second, Kevin Plank on the conference call said we really, as Under Armour, we want to be perceived as a premium full-priced brand. We don't want to be lumped into all the discounted brands that are our competitors and compete on that level and I think that's what you want to see from Coach. I think for years, they probably found themselves falling into that, we've gotta discount these to move the inventory and things like that. And that does some long-term damage to the customer perception of the brand. And so if Coach can rekindle that, that's a good first step.
Cross: There's a very interesting parallel, Matt, with Coach and Under Armour, not to draw too much to it, but Coach really invented the kind of handbag market that could serve at a higher price point than what you may find elsewhere, but not nearly as high as what some women were paying for like Louis Vuitton or for Prada, so they really kind of, especially in Japan, which is where they really had a lot of success early on, Lew Frankfort built this, and they ran that up and then they started seeing some of the pricing points. Michael Kors came in and started offering some very fierce competition, and then you started to see them get into the discounting game, and started to see their discount stores take on more of a share than their high-end stores. And I don't know if Under Armour is kind of in that spot right now, 'cause they basically created that performance . . .
Greer: Athleisure wear.
Cross: Well, performance gear, really. That was their heart and soul.
Cross: There are a little bit of parallels, it's taken Coach a long time to get back to where they were and it was some tough sledding for shareholders for many years. And now, from where Coach is, at a little bit of a baseline, and at 16 times earnings, I think your opportunity to make money in Coach over the next few years is much better than what it has been over the last couple years.
Greer: What about the fashion market is so, so fickle? And you were talking about their rebranding, Andy. One thing that Coach has done recently is they have signed Selena Gomez, she's a pop singer, and they're really going after a younger market. Do you think Coach can pull that off?
Cross: I think they can. I think they couldn't before. But with the fresh thinking that Stuart Vevers has brought in, the creative director, as I mentioned, and Victor Luis, I think that they are bringing a perspective, the new 1941 handbags they launched last year are starting to have some appeal, they're playing across higher price points that I mentioned, but also not foregoing the lower price points.
There are rumors swirling around about Kate Spade on the market and whether Michael Kors or Coach will be bidding on Kate Spade. They also bought Stuart Weitzman shoes last year for $700 million, I believe. And that line was actually up 26% last quarter, so you're starting to see Coach really take some little bit more risks. They've moved away from what I think, if you looked at Coach four or five years ago, the kind of Coach bags they had there, I think just lost a little bit of their luster, a little bit of their appeal to the consumer and they're starting to get more into those traditional lines and a little bit more hip with Stuart and I like that.
Greer: And I was doing some research on their website this morning. They have actually some nice men's wallets from $100 to $200 and I compare that to my binder clips, which I use for my wallet. And you can get a box of 100 heavy duty binder clips for around $4.
Cross: Yeah. Are you in the market?
Greer: I'm gonna stick with the binder clips for right now. Do you go wallet? Or what's your . . .
Argersinger: I have a business card holder that has become my wallet.
Argersinger: So I don't know if that qualifies as a wallet.
Greer: Front pocket, back pocket?
Argersinger: Back pocket.
Greer: Really? And you're sitting on it? George Costanza style?
Argersinger: No, I take it off, I take it off.
Greer: That just seems uncomfortable.
Argersinger: I never have much cash anymore.
Cross: Dude, my brother pulled out his wallet the other night and it was like George Costanza. I was like what do you got in there? He started pulling out his glasses, put 'em on ...
Greer: Cross, what are you doin'?
Argersinger: Starbucks receipt from five years ago.
Cross: I was not, but my wife bought me a wallet that has my initials on it so I feel like I'm obligated to use it, it's one of those thin ones. And I rotate between the front and the back, I gotta say in the front, it's not quite as . . . it looks a little, not as attractive.
Greer: Give the binder clip a shot. That's all I'm saying. It's better than the money clip. Money clips get stretched. You can buy these in bulk. 100 for four bucks.
Argersinger: Four bucks. Four cents a binder clip probably lasts for years.
Greer: But something tells me I'm not Coach's target market. You think that's fair?
Cross: Yeah, I think that's fair. I think that's fair, but I think as we'll find out in the next segment, I don't know if we'll be carrying money clips either in the next few years.
Greer: Well that is a good segway to our final story. Mastercard reporting better than expected earnings. Share is dipping a little on Tuesday. Matt, this stock, when you look at the one-year chart, the five-year chart, the 10-year chart . . .
Argersinger: Doesn't matter.
Greer: It just crushes the market, it's like they're just throwing all sorts of money at investors. And it's up around 20% over the past year.
Argersinger: Right. We've actually had Mastercard on our watch list in MDP for I think almost since the beginning, or for a couple years since my team took over MDP. We should have bought it, it was stupid for us not to because we're always waiting for a good price or what we think is a good price in Mastercard, but there really is never a bad time to buy it. It just produces dramatic cash flows, consistent growth, and it's a story, as Cross alluded to, the story away from cash. The trend away from cash, to cashless transactions, to credit card use, especially outside of the United States. It's just unrelenting.
And you've got Mastercard, Visa, American Express, of course the big brands. Visa's bigger than Mastercard, but Mastercard's growing a little faster. I think the results were as solid as usual, I think the stock's down a little bit because the strong U.S. dollar, which we've seen over the last few months, is hurting them a little bit 'cause they're seeing more of their growth outside of the U.S. and so when you see the euro and the pound just getting smashed the last three months or so, that's gonna hurt the results a little bit. But otherwise, this is a machine, I really don't know why you wouldn't buy at any price.
Cross: I mean it's a business that's growing at least two times faster than global GDP, two or three times on the top line and their so little reinvestment needs. They generate $5 billion in operating, $4 or $5 billion in operating cash flow every year, and they spend $300 to $400 million on capital expenditures and software and the rest, they just buy back stocks. They bought back three and a half billion last year and they bought back $1.1 billion last quarter. So it's just one of those compounding machines that continues to hum along into a market that is shifting and I think dramatically, I think we've seen a little bit of the S curve come and we're gonna start seeing more and more adoption. Four out of five transactions around the globe are still in cash, so as the adoption grows, the more electronic commerce. And Mastercard takes a little nibble of all those transactions.
Last year, Mac, they did almost $5 trillion of gross dollar transactions across their platforms. That's about a third the size of the U.S. GDP.
Greer: That's a lot. That sounds like a lot.
Cross: And they just take a little nibble of that, and that network, Visa's network, they're extremely stable and they're hard to break into. Now you do find some regulatory concerns around the globe when you have that amount of market share and that locked in cost and whether the pricing is a little too high and even 1% or 2% of the transactions, they start sometimes facing some concerns about regulatory concerns, but really, Mac, it's a machine and the stock is not expensive and you're going to find consistent growth and investors like that like us.
Greer: And how often do you guys use cash these days, 'cause I very rarely use cash. I can carry the same $20 for like a week or two.
Argersinger: I was thinking before the show, when we were talking about it, I think the only time I pay cash is when I go to my barber. I have a barber in my neighborhood that I go to and it's because he takes credit cards, but he prefers cash, so I just give him cash, but that's literally the only time I ever go to the ATM.
Cross: Me too. I went to 7-Eleven instead of Starbucks this morning and I paid for my coffee with cash. It was just such an odd experience. I pulled out the cash from my wallet and I gave it, and the guy dug through his cash register and gave me change and I was like, I don't know. It was just like . . .
Greer: And then what do you do with the change?
Cross: Right, exactly. I look for something to like donate it, into like, they donate to animals or whatever it might be, some kid's fund, and they didn't have it, so I just stuck it in my pocket, I'm like what am I gonna do with this? My daughter will find it and probably swallow it.
Argersinger: That's the point about Mastercard sort of growing overseas and the point that four out of five transactions globally are still in cash. I spent the fall in Berlin, where you always use cash. You're expected to use cash and they look at you funny if you're at a restaurant and you say I want to pay with credit card, you have to tell them, because they have to go get a special machine, and bring it over to the table. It's a crazy phenomenon, but it's amazing how accustomed we are, in the U.S., to not using cash. Yet in Europe, of all places, where you think it's just as advanced as we are, nope. They're still using cash, probably 90% of the time.
Cross: Yeah, I mean mobile payments, as we've talked about many times before, is a growth market. There are a lot of players in there. Mastercard and Visa, tied to it certainly, but obviously Apple Pay and PayPal all players in there. It is just going to be a growth market. Very interesting to see how BitCoin plays all into this and the Blockchain technology when it comes to transactions. But I think Mastercard and Visa too, both recommendations of ours, will continue to do well in that space for many years to come.
Greer: Okay, well we will end it there. Matt and Andy, thanks for joining us.
Cross: Thanks Mac.
Argersinger: Thanks Greer. Great job.
Greer: As always, people on the program may have interest 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 Market Foolery. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, and we will see you tomorrow.
Andy Cross owns shares of Mastercard, Starbucks, Under Armour (A Shares), and Under Armour (C Shares). Matthew Argersinger owns shares of American Express, Apple, Starbucks, Twitter, and Under Armour (C Shares). Matthew Argersinger has the following options: long January 2018 $25 calls on Twitter. Mac Greer owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Coach, Fitbit, Mastercard, Nike, PayPal Holdings, Starbucks, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Visa. The Motley Fool owns shares of Michael Kors Holdings and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.