On this episode of Market Foolery, Chris Hill welcomes Motley Fool analyst Bill Barker to the show to break down several quarterly reports, none of which managed to please investors.
There were only a few bright spots for Kohl's (NYSE:KSS) in a weak quarter, but venerable department store chain Macy's (NYSE:M) missed badly. Whole Foods (NASDAQ:WFM) managed to stay in line with expectations, while Snap's (NYSE:SNAP) first report as a public company did not paint a pretty picture.
A full transcript follows the video.
This video was recorded on May 11, 2017.
Chris Hill: It's Thursday, May 11th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Motley Fool Funds, Bill Barker. Thanks for being here.
Bill Barker: Thanks for having me.
Hill: Thank you for braving the torrential downpour out there. It is torrential.
Barker: I was able to make it up from inside the office to inside the office without getting wet. What route do you take to get from the first floor to the fourth floor? Do you go outside? Are you Spider-Man?
Hill: You know what, I don't talk about that. I'm not supposed to talk about that. The other Avengers told me, they're like, "Just keep it quiet."
Barker: Just take the elevator, the elevator works. I know you have a fear of them, many people do. There's nothing to be ashamed of, but I'm telling you, it works and it keeps you dry.
Hill: Fair enough. We have a bunch of things to get to. There's a big shake up at Whole Foods. Oh, we're definitely going to talk about Snapchat's first quarterly report. But we're going to start with retail. Macy's and Kohl's both reporting first-quarter results. Macy's, wow did they miss big on profits and revenue, and their same-store sales were down more than 4.5%. Kohl's, a couple of bright spots with Kohl's. They're discounting less, this is something we saw last week with Coach. That's helping a little bit in the case of Kohl's, it's helping with customer traffic, which was a little higher, so that's good. But their comps were still down, their revenue was light, and both these stocks are down today, although Kohl's down about 5% to 6%, Macy's down 13% to 14%. Macy's is just having a brutal 2017.
Barker: Yeah, it's pretty fine, the differences between the two reports. Really, it has more to do with expectations and a comparison of Kohl's first quarter last year, which was really weak. So it was a relatively easy thing to improve upon. Macy's is shedding sales. You have 3% to 5% fewer same-store sales at your store, you're closing stores, and the margins are going down because they are still discounting. There's no good number, there is no good number in the Macy's report.
Hill: I mean, if a year from now, one of these companies was up for sale -- I can't believe I'm asking this -- is it Macy's? Because it wasn't all that long ago that Macy's was really doing pretty well in part because they managed their store footprint so well. Now, Macy's, in the S&P 500, only Signet Jewelers is having a worse 2017 than Macy's in terms of the stock performance. Macy's is 499th out of the S&P 500 in terms of year-to-date performance. Is Macy's more likely to be sold than Kohl's?
Barker: I suppose it might be, although I don't know why I should speculate on something I don't have any insight on, between two of those getting sold. I think they're both going to decrease their footprint, they're going to keep selling stores if they're smart. I think Macy's has slightly more debt, so I'd be a little bit more worried about that. Debt is very cheap right now, of course. You would prefer to be taking on debt and buying back shares. But if you're Macy's and you've already got a dividend of 5%, a yield of 5%, they're paying out a lot of the profits that they do have in the form of dividends. It's tough to cut the dividend. If you cut the dividend, you're going to see your stock price get hammered. So even though it's possible that somebody in management might think, "We should buy back our shares because they're about the same price they were 20 years ago, why not take advantage of that," they can't, I don't think.
Hill: You just went in the direction of what was going to be my next question about the dividends. It does seem like, that's a move we've seen with other companies, but even in cases where a company has cut their dividend significantly, 50%, 75%, they suspend it, even in situations where companies have telegraphed that move, you always see the sell off. And I'm just wondering, in the case of Macy's, is that just going to be a bridge too far for many investors, particularly on the institutional side?
Barker: It's close to a last resort, I think, for the company. It's a known flag, that if you can't pay your dividend, there are big problems. I'm sure they wish their dividend was not as high as it is. Although, they can keep selling property. The most important thing for Macy's right now other than getting fashion right, which is constantly an issue for them, is to manage their real estate well, and by that, include making the right sales. They don't want to get into the position -- and, there are a lot of other sellers out there, between J.C. Penney, Sears, you have a lot of property coming on the market. You don't want to be throwing yours in there at the wrong time. So you need a fair amount of expertise as to where you can get value for your earnings. And that might help them keep paying the dividend. They're able to pay it with their current earnings, but the trend is pretty bad for where earnings are going, for Macy's and Kohl's. Kohl's is not particularly better off, it's just been following up on a slightly weaker last year, so they have slightly easier comps. But, their yield is also about 5%. Some investors might look at that and say, "A 5% yield is pretty good, I'd like to get 5% on stock." But this looks more like a value trap to me.
Hill: Let's move on to Whole Foods. Second quarter results were about as expected in terms of profit and revenue. The big story with Whole Foods is the shake up. And it's a pretty big one. Five new independent directors are going to be on the board. There's a new chair, Gabrielle Sulzberger, who comes from the world of private equity, a new CFO. I think all of these things taken together are what have shares of Whole Foods market up 1% to 2% today. John Mackey is on our board of directors here at the Motley Fool, we always point that up for purposes of disclosure. I'm a shareholder of this company. That there was a shake up --
Barker: Are you?
Hill: Yes. That there was a shake up was not necessarily a surprise to me. That it was this big did surprise me. Just when you think about the scope in terms of operations and a new chair. And I have to say, I'm happy about the fact that one of the new people on the board of directors is Ron Shaich from Panera Bread. I think any business that deals with selling food of any kind, if you have Ron Shaich on your board, your board just got better.
Barker: Yeah, he's impressive. I've seen him at conferences. He gives good conference. He also has done an outstanding job with Panera. To focus on him, I'll do that because I know his body of work better than the other new directors. He's just been involved in selling Panera to JB.
Hill: And he couldn't have looked happier.
Barker: And there's so many rumors out about who might be interested in buying Whole Foods. You have Jana, who has taken a stake and is agitating for big shake ups. They've shaken up the board, maybe not in the way that Jana is trying to dictate. But, that's playing a little bit of a defense. But they're also, by getting Shaich on, and somebody who has a private equity background, playing some offense as well, in terms of positioning themselves to react responsibly to all of these rumors of who might be interested in buying Whole Foods, including [Amazon.com], that's actually why the stock is as elevated as it is right now. You only have to go back a month and a half ago before that rumor came out, to find Whole Foods trading at about $30 a share, it's $36 today, it's a stronger performance today than the market generally but not up that much.
Hill: Let me get into the weeds a little bit here with Jana Partners. For those who don't know, Jana Partners, private equity firm, took a stake in Whole Foods. Part of the story of the shake up is people trying to figure out -- I think this is largely seen as, as you said, a responsible response to all of the legitimate business questions about Whole Foods Market. But it's also seen as, "You know what's going to keep Jana Partners at bay at least for a little while? If we bring in not just a little fresh blood but a lot of fresh blood."
Barker: Yeah. Going back to Shaich, I think, the Panera experience is a reasonably good overlap for Whole Foods. Panera has the advantage of moving toward more healthy ingredients in their food and having the time to do it, announcing, "We're going to get rid of cage-fed proteins and also move toward getting out of antibiotics," and various things, and having time to do that, rather than starting from where Whole Foods is, at a sort of a purity. It's harder to get to the place where people want to go, which is buying Frosted Flakes, from the purity side, which is where Whole Foods is. So adding some of the things that people -- by "people", I mean mostly me -- would like to buy at Whole Foods and can't find there. And I think they're boxed in a little bit. Panera had the advantage of getting healthier at a time when people are gradually, or enough of them, are gradually improving their diets, rather than being in a spot where Whole Foods is, where taking steps to improve its selection in terms of the breadth of people who would like to shop there means that it's taking a step away from its core mission.
Hill: It would be nice, once in awhile -- at Costco, there's the whole surprise aspect, and I know this from Mac Greer, who loves to shop at Costco, and talks about, "Oh, the treasure hunt, if you go there, there's always a surprise or two." That would be nice, if every once in awhile you walked into Whole Foods and it's like, "Look, Captain Crunch! It's on the shelf! I'm totally buying that just because it's here!"
Barker: They can have the guilty pleasures aisle.
Barker: Right? They could just say, "Alright, this is bad for you. You know it, we know it. But come on, everyone has their guilty pleasures." And that would be the most crowded aisle in the store.
Hill: When you go on a diet, I've heard, there's a cheat day. Yeah, that's like the cheat aisle, a guilty pleasures aisle, I like that.
Barker: You should be on the board. You're a shareholder. You have all these great ideas.
Hill: "To counteract all the wisdom and experience of Ron Shaich, we brought in this dope." You mentioned the 365 concept, and I'm curious where you think that goes.
Barker: I didn't mention that.
Hill: You did, briefly.
Barker: When? Last time I was on the show?
Hill: A couple years ago, the big story with Whole Foods was, "OK, they're going to roll out these smaller-footprint 365 stores." A year from now, where do you think that is? Is that completely shelved? Is that gone now that you have all these people? Because it kind of seems like it would be really easy to just put that whole notion aside. I don't think you bring in Ron Shaich and a new chair and all these other independent directors and just tell them, "No, we just want you to nod and smile at the plans we've had in place for a couple years."
Barker: Yeah, I think that Whole Foods is better off focusing on massive fine-tuning. The affinity program is getting the data on its customers through loyalty programs and that sort of thing. The thing that they're so far behind the competition, rather than taking on new ventures, they have their hands full. It's not that they've been making lots of mistakes so much as competition has appeared, it is well-financed, it knows how to do groceries, and it has seen Whole Foods turf and the profitability that's available if you do organic right. And everybody's getting in and giving them competition. So they have a lot to fend off, and are better off protecting what they have, rather than pursuing grand new ventures.
Hill: Snap, parent company of Snapchat, issued its first quarterly report as a public company, and frankly, it's hard to imagine it going much worse than it did. The loss was bigger than expected, the revenue fell short. The user growth was weaker than expected. Stop me if there's a silver lining out there. No one was expecting them to turn a profit. They're in growth mode. I get all of that. But this was pretty bad. And the conference call, which we'll get to in a second, only made it worse.
Barker: They are in growth mode, and I think that's worth ... OK, so year over year, what was their revenue increase? 12 months, 2016 to 2017 for the first quarter, percentage-wise, how much do you think they grew?
Barker: Almost 4x. They're up 286%. So, when you say, "I don't see how it could have been much worse," I would say, not everybody grows at 286% year over year. And it is true that that was not enough to match the market expectations, and they put in a lot of growth, spruced up their numbers, before going public a little bit less than a quarter ago. Daily active users didn't quite meet expectations, but still grew to 166 million from 122 million. So, that's 36% growth in daily active users. Only slowing down 5% over the last quarter. So, if you're looking for a silver lining, I would say this -- hyper growth is hard, hard to measure. And it is almost always wrong in one direction or another. They underperformed the hyper growth expectations. Market was pricing in better. After today's report, they're back down to a little bit, 10% above, where they IPO'd at.
Hill: Can we get to the conference call?
Barker: We can get to the conference call. It was challenging to come up with anything positive about it. They're growing, they're not growing profitably, and that's a big problem. A lot of investors are going to say, "I don't really care about the growth. I want to see the profits growing, not just top-line growth." And you're not doing that. And you paid yourself a lot in stock options last quarter. And there is a net loss of $2.2 billion, most of that was stock-based. But that's a real expense.
Hill: And one more thing people would be excited about on Wall Street is if the user number was growing at some exponential rate, to go from 158 million to 166 million, that's what we like to call tepid, in terms of quarter over quarter growth. It's perfectly reasonable to me that the stock is down more than 20% today. In addition to all of these numbers -- and, again, the quarterly report is backward looking, as it is for any public company -- but Evan Spiegel the CEO, gets on the conference call, doesn't really give any sort of specific guidance in terms of what they have in the pipeline, and tries to play it cool like, "Oh, we want to continue to surprise people." It's like, you know what? Surprises in the world of investing are great if it's a surprise on the upside. Surprising on the downside is never a welcome thing.
And the money quote from the conference call is when he was asked about Facebook, and was asked point-blank, "Are you scared of Facebook? Why or why not?" And he laughed and talked about, "Well, we're a creative company, we're focused on creativity," and then took a shot at Facebook by saying, and I'm quoting here, "Just because Yahoo has a search box, it doesn't mean they're Google." Which I think bags the follow-up question, "Did you just compare yourself to Google? And, by the way, did you just compare Facebook to Yahoo? Because neither of those things are even close." And I think, it points to a big red flag that has been out there for a long time about Snap, which is Evan Spiegel. Does he have a Sheryl Sandberg in the way that Mark Zuckerberg does? Does he have a team? He's a creative guy, but I'm not sure he should be running this business. And three months from now, if they put up another quarter like this, then you really have to bang the drum for what we like to call adult supervision.
Barker: Yeah, that's possible. I imagine you will hear that if they don't produce better numbers, or numbers more in line with what people are expecting. Also, if he doesn't do a better job on the PR. Because this is not the kind of attention that he needs on challenging ... I mean, they're in a fight with Facebook.
Hill: They're absolutely in a fight with Facebook.
Barker: They're absolutely in a fight, so it probably doesn't actually change anything. They're not going to wake Facebook up. Facebook is quite awake and copying everything they do.
Hill: Right. Facebook was awake the second Mark Zuckerberg offered Evan Spiegel $3 billion in cash a few years ago, and Spiegel said no, and then Zuckerberg went to his team and said, "Alright, build me something that's going to take them out."
Barker: Yeah. So, right now, the market cap is about $21 billion for Snap, so I would say that was a good turndown of that offer.
Hill: At the moment.
Barker: At the moment. It may, if everything goes wrong -- actually, they have more than $3 billion on their balance sheet in cash, so it would take a lot of cash burn to end up being worth less than $3 billion. I don't foresee that. But they've got a very tough competitor, and they'd better be better at the game than Yahoo was, which seems like more of the right comparison for them, with Facebook being the Google.
Hill: A couple housekeeping notes before we wrap up. This weekend, on Motley Fool Money, our guest is going to be documentary filmmaker Steve James. You may remember a little film he did called Hoop Dreams.
Barker: I do remember that. You can't call that a little film. That may be the longest film I've ever seen.
Hill: Really? I mean, it's a long film.
Barker: It's a long film. I don't know. It's longer than Gone with the Wind, isn't it?
Hill: No it's not.
Hill: No, I don't think so. You go ahead and look that up. But, no. It's certainly one of the longest. I think the longest films I've seen, that, Gandhi, and The Right Stuff.
Barker: The Right Stuff isn't nearly as long.
Hill: All great movies, by the way.
Barker: How about Reds?
Hill: Never saw it. So yeah, Steve James, new documentary film out called Abacus.
Barker: 2 hrs and 50 minutes for Hoop Dreams. I thought it was longer.
Hill: Yeah, that's not Gone with the Wind. Last week on Market Foolery, Simon Erickson was on, one of the things we talked about was Motley Fool Explorer. I mentioned we'd share some more details about that. Here are the details. If you want more, you can go to explorerradio.fool.com. A bunch of investing videos that Simon and the team have put together that you can check out. And, last, on a personal note, in late June, I'm doing a family vacation in London and Ireland, going to Dublin, maybe Cork. So, if you have any advice, any tips, hit me up on Twitter, or please drop an email to firstname.lastname@example.org. I know you have London advice for me. We'll get to that after the show.
Barker: After the show?
Hill: Yeah. I need tips.
Barker: You need a lot of advice.
Hill: I need a lot of advice. All advice for London --
Barker: Secret Cinema.
Hill: -- and Dublin is welcome. Secret Cinema?
Barker: Secret Cinema, that's my vote.
Hill: Alright. We're going to wrap up and talk more about it.
Barker: And a little thing called Wimbledon will overlap with your time there.
Hill: Uh ... yeah ... If it were just me, if it were just me --
Barker: You played a little tennis back in your high school days.
Hill: I did, and if it were just me --
Barker: That was not the sport at which you were state champ, though, is it?
Hill: Yes it is.
Barker: It is? I thought basketball was your state champ.
Hill: Both. When I was a senior --
Barker: Check you out, two state championships?
Hill: Let me be very clear. On the tennis, that was like, yes, I was on the team, I was second doubles.
Barker: Maine is a big state.
Hill: Geographically, I suppose. There's not a ton of tennis teams. But 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. If you want to read more from Bill Barker and his team, go to foolfunds.com, check out Declarations, the free monthly newsletter. Thanks for being here, man.
Barker: Thank you.
Hill: 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 will see you next week!