On this Market Foolery podcast, host Mac Greer is joined by David Kretzmann of Supernova and Rule Breakers and Ron Gross of Motley Fool Total Income to dig into the news from two companies most people know, and one that tens of millions of us use without knowing it.
Ambitious athletic-apparel maker Under Armour (UAA 4.34%) (UA 3.87%) had a decent quarter but faces turbulence ahead, behind-the-scenes e-commerce enabler Shopify (SHOP 4.76%) is still growing at a remarkable clip, and Texas Roadhouse (TXRH 0.35%) is proving that there is still room for a fast-casual restaurant chain to succeed -- it just takes the right formula.
A full transcript follows the video.
This video was recorded on Aug. 1, 2017.
Mac Greer: It's Tuesday, Aug. 1. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio we have Ron Gross from Motley Fool Total Income, and David Kretzmann from Motley Fool Supernova. Gentlemen, welcome!
David Kretzmann: Hey, Mac!
Ron Gross: Happy August!
Greer: Happy August! Can you believe August is here already?
Kretzmann: Eight months in.
Gross: It's such a cliche to say that the summer is going quickly, but the summer is going quickly.
Greer: And we're in the dog days.
Kretzmann: Our interns left.
Greer: Where does that expression come from? The dog days of August?
Gross: I don't know.
Greer: We'll research it after.
Gross: Everyone just clicked off the show.
Greer: Don't click yet, because we're going to talk Texas Roadhouse and we're going to talk Shopify. But let's begin with Under Armour. Woof. Ron!
Gross: [laughs] Is that the technical term? The analytical term?
Greer: That is the technical term. Shares of Under Armour down big on Tuesday. Ron, a narrower-than-expected loss. That sounds good, right?
Gross: I don't know about good. "Good" in quotes?
Greer: "Good" in quotes. Better-than-expected sales. That's good, right? But the company cut its outlook for the full year and cut 2% of its workforce. Ron, what's going on with Under Armour?
Gross: I don't mean to be too harsh here, because it is overall an amazing story and an amazing company. However, what I think we have here is really a busted growth story. Twenty-six-quarter streak of growing sales at 20% or more ended in the fourth quarter of 2016, and we've seen that ending follow through into subsequent quarters. Revenue only up about 9%; guidance is in the 9%-11% range going forward. It's not the same company it used to be. It's struggling.
Certainly Nike is the 10,000-pound gorilla here, at a $98 billion market cap versus Under Armour's measly $7 [billion]-$8 billion. I say "measly" kind of tongue in cheek, but it is quite a bit smaller than Nike, and it is struggling. Their restructuring plan does make sense. They have to trim some cost; they have to get out of some leases that are probably dragging down their earnings. They'll have to pay $100 million or $110 million as a result of this restructuring, partly from these lease terminations, partly from contract terminations and severance payments, but it will lean them out a bit, and maybe that narrower loss will turn the corner into profitability.
Kretzmann: I think in general, this is probably a good thing for Kevin Plank to go through. This will humble him a bit, if that's possible. The company really has to become more disciplined now. I think he recognizes that. They brought on board a new chief operating officer in July, someone who used to be with VF Corp., North Face, Timberland -- so someone who has experience managing global footwear and apparel brands. So I think that will help bring some discipline into the equation.
Then he outlined a lot of different areas where they're trying to pivot now. They're trying to focus more on direct-to-consumer rather than wholesale, trying to focus on women and kids more than just being a men's brand. They're also looking to transition from being primarily an apparel company in the U.S. to a global apparel and footwear accessories company, but that also means you're going head-to-head directly against Nike, whose bread and butter is really footwear. Under Armour's experience with footwear still leaves a lot to be desired.
Gross: They have another Steph Curry shoe coming out, because the first one really knocked the cover off as well.
Kretzmann: [laughs] The amazing thing with footwear here is, Under Armour's footwear revenue was down 2% this quarter to $237 million. The same quarter, Nike's footwear segment was up 8% to $5.5 billion. So Nike is still dominating Under Armour. Under Armour doesn't have anything on Nike at this point. And really, Nike pulled a coup of sorts when Kevin Durant went to the Golden State Warriors. Now he's the face of the franchise. Steph Curry is not the face of the franchise anymore. So now that the Warriors won another title, his shoes really aren't picking up that much weight for Under Armour now.
Greer: David, when we were at CES a couple of years ago, I was remember there was a bunch of hubbub about this connected fitness idea at Under Armour, the idea that Under Armour, in a lot of ways, was almost becoming more of a technology company, and they were harnessing all of this data. What's going on with connected fitness?
Kretzmann: That network overall is still growing. They might even be above 200 million users on those three apps that they acquired. But it's not leading to any direct sales or profitability, and that's a big question mark. When you spend over $700 million on three apps, you go into debt for the first time in your company's history, they now have a net debt of almost $800 million, and they're still producing negative or inconsistent cash flow, that puts them in a pretty precarious financial position, especially now that they don't have that fast growth anymore. So in general, the connected fitness strategy that they have is a still a huge question mark when you have Nike that backed away from that strategy and said we're not going to be as hands-on with that; we're going to focus on our bread and butter.
Gross: I think Under Armour is right smack in the middle of an identity crisis. If you asked the average person, me being one of those average people, a couple of years ago, what were they, it would have been pretty easy to define them as a performance apparel, sports apparel maker. Now they're trying to be more things. It doesn't mean they won't get there, but during the transition, the identity just isn't there, and it's hard to find what they are. Are they an athleisure company? Are they a performance company? Are they Nike? Are they not Nike? So where this comes out, two years-plus, hard for me to predict. But the next few years are going to be a struggle as they try to redefine themselves.
Greer: Ron, we were talking before the show, I was talking about how kids these days, my boys, 9 and 11, and I go to the bus stop, and a lot of those kids are wearing either Under Armour or Under Armour-type athleisure wear. They don't wear jeans anymore, which is amazing to me. It's like heresy. What happened to jeans? Is that a good thing for Under Armour, in the sense that it's becoming this daily, you wear it to school? Or is it a bad thing in the sense that, actually, what they're wearing is the Kirkland version of Under Armour? Or is the idea that the brand has gotten diluted?
Gross: It's kind of both. By being something that you can wear every day to school, and not just the wicking material because you're going out to play a sport, you've brought in the market. But the downside is, now you're competing with everybody else who makes clothing to wear to school, or to wear in your everyday life. And that's a huge market that you're trying to break into and trying to steal share from. It's not easy.
Greer: Let's move on to Shopify. David, shares of Shopify up big on Tuesday on earnings. Shopify builds cloud-based commerce platforms for small business. So more of a behind-the-scenes player here.
Kretzmann: Yeah, behind the scenes. But over the past year, 131 million people have bought a product through a Shopify merchant. You're not going to notice the Shopify brand as a consumer, but you're likely going to interact with one of their merchants. You'll be on a third-party retail website, and you'll buy something, and that whole back-end platform, that e-commerce platform, will be powered by Shopify.
The company is growing incredibly quickly here. Revenue up 75%. They're now serving over half a million merchants in 175 countries, so really just about everywhere around the world. They're growing really quickly. The stock price has more than doubled in the past year, and they're taking advantage of that by issuing more stock and raising more money. They had a secondary offering in May that's coming off another secondary offering in August of last year. With this latest offering, they raised over $500 million in cash. So now, on the balance sheet, they have close to a billion dollars in cash and no debt.
So even though they're unprofitable, they're still burning cash, although they are still technically cash flow-positive. They do have a pretty significant war chest now, and the stock is still close to all-time highs after the report today. All in all, things are going well. There are still question marks. I know Ron has them about -- when does this company become profitable?
Gross: I don't mean to be a stick in the mud, but I enjoy profits.
Kretzmann: Profits do matter at some point. That is still a question mark.
Gross: Did they talk about that?
Kretzmann: Right now they're still in growth mode, so, focusing on the top-line growth. They have, as I said, about 500,000 merchants. When you think about the total worldwide opportunity for small businesses that could potentially use Shopify's platform, that market size is probably close to 40 or 50 million small to mid-size business owners who could use Shopify. I think it makes sense for them to reinvest, to grow that top line.
But I still have questions about Shopify, because there are competitors who are private, so we don't know as much about them and what their numbers look like. But you have BigCommerce, 3dcart, which, as far as I can tell, they offer almost an identical solution that Shopify offers. A few weeks ago, Shopify announced a new "partnership" with eBay where, if you're a Shopify merchant, you can open up an eBay store pretty seamlessly through Shopify and sell your goods on eBay.
But BigCommerce has essentially an identical offering available. So it's not entirely clear to me what sets Shopify apart, longer term. Going forward, we'll want to see how successful they retain customers on that platform. If you have a high churn rate, then bringing on a whole bunch of new merchants doesn't necessarily add a whole lot to the bottom line.
Gross: Do you think this segment of the industry could be ripe for consolidation? If there's more than one player out there doing similar type things all with different customer bases? Do you see Shopify maybe being acquired or merging?
Kretzmann: Yeah, I think either of those could make sense. Even Etsy is doing something similar to these guys. Yeah, I think at some point, you're going to see either an acquisition here, or some consolidation through a merger.
Greer: Guys, shares of Texas Roadhouse bucking the trend. Up on Tuesday on better-than-expected earnings. Ron, I hear all about how fast-casual is dying. It's been tough for restaurants. Texas Roadhouse is not getting the memo. What's going on?
Gross: [laughs] No, they're doing a great job. Them and our favorite man-behind-the-glass restaurant, Olive Garden, another good example of a company that is bucking the trend. Quick service is relatively strong, and fine dining is actually holding on. But as you say, casual dining, really not doing well. But here you go, Texas Roadhouse, really nice numbers. They posted 4% comp sales. Margins were down a bit, largely as a result of wage inflation. But they did benefit from some lower food costs, which helped to offset that margin pressure a little bit.
But EPS are up 11%. They're opening up new restaurants, especially in the Bubba's 33 concept. I must admit I've never been to a Bubba's 33. There aren't that many of them yet. But they're certainly investing in them. They continue to put up good results. They carried through the momentum from Q1. I think there were some doubts about whether that momentum would continue. Good for them.
Kretzmann: Yeah. What's interesting, too, is that their comps were up 4% this quarter, and they mentioned that for the first four weeks of the third quarter, those comps were up even more at 4.6%. So they're maintaining that momentum with same-store-sales growth, which is really impressive when you have such strong headwinds, especially in the casual-dining segment of the overall restaurant space.
Greer: Guys, at the recent Motley Fool member event, the CEO and founder of Texas Roadhouse, Kent Taylor, spoke. At least, speaking for me, he's an incredibly charismatic, winning guy. He's a guy that you root for. And his definition of Texas Roadhouse was "a redneck Outback Steakhouse."
Kretzmann: That's the secret sauce, huh?
Greer: That's the secret sauce, apparently.
Gross: I must admit, I went to look at the menu before we stepped into the studio here, and I was like, mmm, that looks good.
Greer: It looks great. And he talks about how the quality of the food, and their steaks are cut in-house, so, really placing a premium on homemade food and the customer experience. Later in that same interview, he said they hire happy people -- the idea that if you hire happy people, obviously that's infectious, and your customers are going to be much happier. So, really interesting, all the different ways that he emphasized the consumer experience.
Kretzmann: And talking about the menu, what's especially impressive is, when you go back five or 10 years, the menu probably doesn't look all that different than it does today. They don't have these one-off offerings, half off for a certain menu item. They don't have these specialty menu items in the stores for three months to try to drive traffic. They're very consistent with their offerings. They don't try to discount. This quarter, they did bring a couple new menu items onto the menu, but it was really just smaller portion sizes for two entrees. In general, they focus on the basics with the menu, they keep it very consistent, and they manage to keep customers coming back, which really is kind of a contrarian strategy compared to what a lot of other casual diners do.
Gross: Yeah. I think they get some of that menu diversification through the Bubba 33 segment, which is really a pizza, burger, beer kind of place. In fact, that might even be the slogan; don't quote me. But it has a different menu, which gives them that nice, broad diversification.
Greer: As we wrap things up, I'm going to go with a totally arbitrary desert-island question. You've got one of these three stocks to pick, in terms of beating the market over the next five years. Are you going with Under Armour, Shopify, or Texas Roadhouse?
Gross: How dare you? That's tough. I can't go restaurants.
Greer: Why is that?
Gross: It's a tough business. To me, it's like specialty retail. Eventually you hit a bump, and it's just a mess, and an activist investor ends up coming after you for your real estate. [laughs] That's how it ends.
Greer: Even if you're Texas Roadhouse.
Gross: And as a value investor, Shopify gives me the chills.
Kretzmann: Twenty times trailing sales.
Greer: Too rich?
Gross: So I'm going to do the beaten-down stock of Under Armour in the hopes that CEO Plank can get it together.
Greer: Athleisure, I like it.
Kretzmann: I'm going to go with Texas Roadhouse. I think you have a consistent restaurant operator, founder and CEO, Kent Taylor, as we talked about. I actually would be kind of interested to watch him battle against an activist investor. That could be entertaining. But I think they have such a strong concept, and consistent leadership, that over the next five years they beat the market.
Greer: OK. We will keep an eye on it. Guys, thanks for joining me!
Gross: Thanks, Mac!
Kretzmann: Thanks, Mac!
Kretzmann: 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 Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening. We'll see you tomorrow!
