In this episode of Market Foolery, Chris Hill is joined by Bill Barker from Motley Fool Funds to cover some of the latest news and results from Thor Industries (NYSE:THO), Dick's Sporting Goods (NYSE:DKS), and Casey's General Store (NASDAQ:CASY).
What does the future hold for the retailers? For hhgregg (NASDAQOTH:HGGGQ), unfortunately, bankruptcy is the only option.
A full transcript follows the video.
This podcast was recorded on March 7, 2017.
Chris Hill: It's Tuesday, March 7th, welcome to Market Foolery. I'm Chris Hill and joining me in studio today from Motley Fool Funds, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: We have a lot of retail news we have to get to. But before we do that, we're going to start with a topic that is near and dear to your heart, and, I would argue, your circle of competence, and that is recreational vehicles. Second quarter profits for Thor Industries came in a little higher than expected, so did their revenue, and yet shares down 8%. Is this a guidance thing? Is this a valuation thing? Thor Industries has had a heck of a nice run, so I'm wondering if at least part of what we're seeing in the market today is just the fact that the stock was trading at a premium.
Barker: Yeah, it's a valuation thing. It was a good quarter. A couple things -- one, the last three or four quarters, things have been very good in the RV industry, and Thor is the leader. Whereas people think Winnebago is the most known name, Thor has Airstream and a whole bunch of other brands under its roof. Then, Forest River, which is owned by Berkshire Hathaway, is the No. 2 player. It's been a great time for RVs. Gas prices are good. Interest rates, which is what most purchasers need, is good financing rates, they're good. And the job market has been good. So RVs have done very, very well, and Thor has as well. It was up almost 100% last year as a stock. It had a good quarter.
But whereas the last three or four quarters it beat expectations by about $0.20 to $0.25 a share on almost each one of those last couple of quarters, it only beat by $0.01 this time, so I think people were pricing in another blowout quarter. One of the reasons for that is, Thor doesn't really give guidance, so the results tend to have a greater differential against expectations than for most companies which guide pretty narrowly, and by the time earnings are reported, the analysts have been given the guidance on what the actual results are going to be. So, there aren't big surprises.
Hill: So, when you say they don't give guidance, is that even during the quarterly conference call? Or is it just like, "No, we'll do our quarterly report, we'll answer any questions you have, and then you're not going to hear us give any kind of guidance until three months from now?"
Barker: Well, they don't do quarterly conference calls. They provide -- this is how they do it. One of the things they're proud of is they don't provide non-GAAP earnings, they don't provide adjusted earnings. They're like, "Here's what we report: GAAP earnings. That's the only number we're going to give you, is what the earnings are according to GAAP." Then, they give a pretty detailed quarterly write-up. They do take, you can arrange some calls with them individually, but they don't do a published conference call. But they produce, in written form, "Here are the questions we think you're most interested in." They provide a written-out Q&A. So, I think it's a different way of doing it. I think it's worked out very well for investors, as to where their priorities are.
Hill: Now I'm wondering if anyone has done a study on the average return of companies that take this approach to Wall Street analysts, and by that, I mean, not offering guidance. Because the only other company that leaps to mind is Berkshire Hathaway. Berkshire doesn't really do that, they have their annual report and that kind of thing. I mean, they put out their quarterly reports, but they don't really do that. And I'm just wondering if -- on the one hand, you can look at an approach like that and think, maybe they're trying to sweep something under the rug. The other way of interpreting that is, "We don't have time for this. We're busy running our business, and we're not going to hold your hand, Wall Street analysts. Ask whatever you want to ask and we'll get back to you if we want."
Barker: Yeah, the principal reason not to give any guidance is not to be held to managing to the quarter. If you're going to give quarterly guidance, and then there are good reasons to do things that are in the long-term interest of shareholders but are going to cost you in the short-term, it's easier to present that story when you haven't guidance, then missing, which tends to be a pain, and analysts get mad at you and investors get mad at you. It's been good times for Thor, where they've just been able to wallop expectations. It's not a closely followed company. There are only maybe four analysts that are producing any estimates at all. You have a small number of analysts, and you have less guidance from the company, they'll tell you about how much they're going to be spending that year on capital expenditures and things like that. You can tell from industry numbers, what likely sales are going to be. People can follow this without big surprises.
And it's been great times. Total sales were up around 60%. A lot of that had to do with an acquisition they made of Jayco, which was the No. 3 player before they acquired Jayco. So, they have backlog up almost 100% over this time last year. Earnings were up around 50%. Revenues were up more than earnings because of the Jayco operation is still much less efficient than the Thor that has been around, and we're going to see whether Thor management can get the margins of Jayco to where the rest of their operations are. If they can, it's going to be an even more profitable company.
Hill: Let's move on to Dick's Sporting Goods. Fourth quarter profits came in higher than expected. Same store sales were up 5%, which given the retailers that we've talked about over the last few weeks, plenty of retailers would kill to have those kind of comps. This is a good quarter, but shares down, because once again, the guidance trumps the actual results.
Barker: It always does, almost always.
Hill: That's got to be a little frustrating, don't you think? Just a little bit? If you ran a public company, and you put up the kind of quarters that Dick's Sporting Goods just did, and you came out and said, "Look, we're going to be straight with you, here's what our guidance is," and people said, "Ugh, fine, we're out of here." Like, we get nothing?! We get no credit for what we just put up in a really tough retail environment? Did we mention we're a bricks and mortar retailer?
Barker: Yeah, and I think that's something they'd hope to not mention. Investors are kind of poised for any weakness. And as strong as Dick's numbers are, remember that one of the reasons same store sales were up this much this quarter is because Sports Authority and Golfsmith are no longer around. So they have had the benefit of significantly less competition. Dick's is really the only national sports retailer with a full national footprint and an online presence. And yet, they're going to continue to compete against Amazon and probably some more of their competitors, smaller names will continue to go away. You have to balance out, what is the value of being the No. 1 retailer when you're anchored to malls -- in a lot of cases, not all of them for Dick's, but they're in, if not malls, then retail conglomerations. And being the best in that group today is not valued very highly. They're trading at about 11 times forward earnings, which is pretty cheap in this market. But I think there isn't a lot of enthusiasm for, really, anybody in the retail space.
Hill: But if you're Nike, if you're running Nike, if you're running Under Armour, don't you want Dick's Sporting Goods to succeed? Aren't you doing what you can? We saw what happened, certainly, to Under Armour when Sports Authority went down, and the effect that that had on not only their inventory but their bottom line as well.
Barker: Yeah. You do want to. There's only so much you can control. Under Armour is, in its own small way, a competitor because it has its retail stores. Certainly, you want there to be more outlets selling your goods. Dick's is, so far, doing better than all the competition other than Amazon. But there's just less foot traffic. I think they've done a really good job to get the comp numbers they've had. Those are so much better than a lot of the other numbers that you're seeing in retail in the last quarter. But again, that's because there's no Sports Authority to go to in a lot of cases.
Hill: I'm just trying to imagine -- and they're not in the precarious financial position that Sports Authority was -- but if Dick's Sporting Goods just up and goes away, I'm trying to imagine what the retail landscape looks like then, because Nike and Under Armour haven't built up their e-commerce to the point where they can handle that kind of blip.
Barker: Yeah. I don't think we want to imply that that is somewhere that's anywhere on the horizon right now. Dick's has growing sales. Their sales are not going away. They're just not translating into ever-increasing earnings per share for shareholders. They are up to about $3 a share, and they were about $2.75 three years ago. So, earnings per share have gone up about 10% in the last three years. That's pretty good in retail. But that's not the kind of growth that you can find in a lot of other places in the market, 2% to 3% per share growth and a little bit of a dividend, maybe. But I think their sales have gone up more than their profits. And you have to look at that and say, that's got to do with pricing competition, and there's no real brand strength. They're either getting people to come into the store just because they're already at the mall or it's a destination. But they can't really charge more, just like every other retailer, they have to compete against a very competitive Amazon who is not looking to make the highest margin it can on every sale. Not yet, anyway.
Hill: Casey's General Stores. Wow. Third quarter profits much lower than expected, their revenue fell short as well. The shares are down about 4% today. This is one of those under-the-radar type of retailers, because it doesn't have a huge footprint on the East Coast or the West Coast. It's a Midwest chain. One of those places where you can get gasoline and convenience store and pizza and all that sort of thing. Been putting up some good quarters, but this one, definitely a little bit of a speed bump.
Barker: Yeah, it's been a hell of a company for investors to own over the last five to ten years. There are always going to be some speed bumps along the way. But long-term shareholders are pretty happy with what's going on here. What you need to keep in mind about your convenience store retailers is that they do better when gas is lower. Of course, it impacts their total revenues. So their total sales are down over the last two or three years, but their profits are up, because what people do is they spend less money on gas -- and you're not making a lot of money on the gas, you're making about 3% margins, something like that. If you have a little more money left over after paying for your gas, you go into the convenience store --
Hill: Buy some pizza.
Barker: Buy some pizza, buy some food, buy some coffee, whatever it is, and there are much better margins there. So, Casey's, for instance, in fiscal year 2013, operating margins were 2.7%. This is a pretty thin margin business. But, they're up to 5.1% over the last 12 months. When you get that kind of margin expansion, you get a lot more earnings. They have had good increasing earnings, and this was a little bit of a speed bump, as we've said. But convenience stores are doing well these days, unlike your destination malls. You can't really amazon your way out of gas and coffee.
Hill: Right. No one is going to disrupt coffee, the delivery system for coffee, by that, I mean, drinking it.
Barker: Amazon isn't getting into the gas business. I mean, who wants them to? Get somebody to deliver 25 gallons of gas to your door? You don't want that.
Hill: Yeah, you don't want that. Maybe propane gas.
Barker: Can you buy propane on Amazon?
Hill: I don't know if you can.
Barker: I would not want to.
Hill: Yeah. I think I would be a little nervous if I was the propane delivery guy, whether it was for Amazon or anyone else. Now, we were talking earlier this morning, and as I mentioned, Casey's General Store, I don't know what the most eastern location of the Casey's General Store is in the United States, but I have not encountered one in my driving around. But when I mentioned Casey's to you this morning, you immediately went to --
Barker: What could be the best convenience store in America.
Hill: I was going to say, what could be referred to as the Casey's General of the Mid-Atlantic? That's Wawa.
Barker: Wawa is more like the Amazon of convenience stores.
Hill: Really? Is this a Philadelphia-based company, and that's why you're being so strident about it?
Barker: No, it's a small-scale cult in the Philadelphia area for Wawa. Is there anybody in Maine that's any good? That people would ... you leave Maine, and it's like, "God, I really miss X convenience store?"
Hill: No, not really.
Barker: See? Now, Wawa, I tell you, readers --
Hill: Listeners, we have listeners.
Barker: You have listeners? You're saying they can't read? [laughs]
Hill: [laughs] They can read.
Barker: They can write.
Hill: Do you want them to drop an email to firstname.lastname@example.org?
Barker: If they have any love for Wawa. The rant that you had about Oreos got more response than I think anything I've seen, but I bet the love for Wawa out there is right up there. You're not going to find Peeps, Oreos, in Wawa. They're not going to stock that nonsense. They're only going to stock the classics. Tastykakes, of course, because that's a Philadelphia brand.
Hill: Here's my question for you. And I would love it if listeners would drop an email to email@example.com, because while I have not been to Casey's General, what I understand from people who have been there, that the pizza is good pizza. That actually is a differentiator for Casey's General -- one of them, anyway. If you're a Casey's General frequenter, drop us an email to firstname.lastname@example.org and let us know if there's something else besides that. But my question for you on Wawa is, what am I getting at Wawa? Let's say I'm driving down the highway, there's a Wawa, I need to fill up, what is the differentiator for Wawa?
Barker: What aren't you getting? What do you want in a convenience store? Do you want 15 different choices of coffee? Because Wawa gives you that.
Hill: I just want basic coffee.
Barker: Full selection of Tastykakes, they have that. They have everything you need. First of all, it's like Disney World, it's that clean. Very, very clean. And the Hoagies. And the system there, they have touch screens, which they were sort of put in front of, to get sort of a Panera style now. Go into a Panera 2.0, touch screen, "This is what I want on my sandwich," all that, and you do it and you get your food in couple minutes, freshly made, hot and cold sandwiches. That's one of the differentiators. Very, very good fresh sandwiches.
Hill: I think pretty much every convenience store, regardless of brand, is going to have your basic selection of snacks and drinks and that kind of thing, and presumably coffee.
Barker: Yeah, like overheated hot dogs, and in many cases, pizza, put it under a heat lamp forever.
Hill: You're saying Hoagies, though?
Barker: And also, it started as Wawa dairy. It started as a producer and deliverer of milk. So, they have their own milk, their own lemonade, and a lot of other things. Keeps the prices down on a few of those. It's not a public company. But just google Wawa and religion or something like that.
Hill: Really? [laughs]
Barker: A cult. Yeah.
Hill: OK. I will do that once we wrap up. Before we wrap up, this goes under the heading of retail is hard. After more than 60 years in business, hhgregg is riding off into the sunset. This is the consumer electronics and home appliances retailer. This morning, hhgregg filed for chapter 11 bankruptcy. Shares down 30% on the news. And a single share is going for $0.12. We were talking with producer Dan Boyd before we started taping, and Dan said, "I think I saw this coming a few years ago." And we kind of did. In a way, it's kind of amazing that hhgregg has held on as long as it has. The only surprising thing to me here is that hhgregg had 220 locations, last week they came out and said, "We're going to close 88 of them." And when I saw that, I thought to myself, "OK, they're steeling themselves for one more shot at viability." And now, a week later, they come out and say, "You know what? We're out, we're going chapter 11."
Barker: Yeah. Take that one shot, "Maybe if we do this it'll hold off the creditors, and the numbers can line up." But, you're in desperation territory at that point. And I think it's one of those things, as with a number of others, you could probably come up with a list of five or ten retailers that you assume will be bankrupt within the next five years.
Hill: I could come up with that list, although I'll name two that, when we started Market Foolery in 2011, I know we talked about these two companies as being retailers that, in five years, GameStop and Sears are going to be gone. And in fact, those two businesses are still around. GameStop is doing much better than Sears. I feel like I'm right about Sears, I just wasn't right on the timing of that prediction.
Barker: Well, it's a big operation. They have a lot of cuts that they've made, and they still have ones to go. And hhgregg was never as big as Sears, so when things have gone wrong, they've had less of a cushion to fall back on.
Hill: And you've just shown me your laptop where you've pulled up a Google search with articles that have titles like "The Cult of Wawa" and "Why Wawa Is the Greatest Convenience Store of Them All."
Barker: And there's a New York Times article there on the cult of Wawa.
Hill: Convenience cult.
Barker: Many, many examples. You'll get some responses.
Hill: I'm going to do some reading on this, but drop us an email.
Barker: What was there in Maine?
Hill: I don't remember.
Barker: You can't even remember a convenience store?
Hill: Store 24 was and is a New England convenience chain, I think they have some up in Maine? But I grew up in a town where the convenience store was just a local person's store. I grew up in kind of a small town.
Barker: Any chains where you were?
Hill: I don't think there were. When I was a kid, I don't think there were chains of convenience stores.
Barker: Any chains at all?
Hill: Yeah, sure. McDonald's, Burger King, of course, Dunkin' Donuts. I mean, come on. [laughs] We're not savages. We don't live in the woods.
Barker: You did live in the woods.
Hill: We kind of lived in the woods.
Barker: But there were still Dunkin' Donuts.
Hill: You know what we have in the woods? Dunkin' Donuts. Bill Barker, from Motley Fool Funds, thanks for being here!
Barker: Thank you.
Hill: As always, people on the program may have interests in the stocks that 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!
Bill Barker has no position in any stocks mentioned. Chris Hill owns shares of Amazon and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Casey's General Stores, Nike, Panera Bread, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: short April 2017 $28 puts on GameStop. The Motley Fool recommends The New York Times and Thor Industries. The Motley Fool has a disclosure policy.