On this MarketFoolery podcast, host Chris Hill and Motley Fool Funds' Bill Barker discuss a couple of retailers' earnings reports, neither of which was unequivocally good -- which should come as no shock given the e-commerce tidal wave that continues to sweep across most of the sector.
Target (NYSE:TGT) broke its year-long string of same-store sales declines and posted a comps gain -- but not much of one. And Urban Outfitters (NASDAQ:URBN) brought in a comp drop of 5%, but other parts of its report still gave the market enough enthusiasm about its prospects to power shares upward by double-digit percentages. Outside of earnings season, the guys answer an interesting listener query: Is owning a bunch of ETFs a good way to get diversity or is it redundant?
A full transcript follows the video.
This video was recorded on Aug. 16, 2017.
Chris Hill: It's Wednesday, August 16th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today from Motley Fool Funds, Bill Barker. Happy Wednesday!
Bill Barker: Thank you!
Hill: More retail. We're past the peak of Earnings-Palooza, but we do have some more retail earnings.
Barker: Yes, because retail reports late, usually.
Hill: Why is that?
Barker: Because they get the January month in, because a lot of the sales occur after Christmas. So to get a better picture of the whole quarter, you need to include January along with December.
Hill: So it's not that retailers as a group are divas, and they're like, "We just want the spotlight on us."
Barker: That too.
Hill: OK. We'll dip into The Fool mailbag, too. But let's start with Target. Second quarter profits look good, and probably more importantly for Target, same-store sales on the rise, and that comes after four straight quarters of falling comps. So, if you're a Target shareholder, you have to be happy about that.
Barker: Yeah, it's better. The same-store sales are as close to flat in the positive category as you can get, really. Up 1.3% for the quarter, and the guidance is around 1% flat, plus or minus 1% going forward. So, not even really keeping up with the pace of inflation. So, it's better than a negative number, but this is what passes for good news in retail these days.
Hill: Do you think Target might be sandbagging just slightly? Because if the most important time of the year for retailers like Target is the holidays at the end of the year, the second most important time is back to school. And that's the current quarter. Whether they think they're going to beat it or not, it's absolutely in Target's interest and every retailer's interest to sandbag for the current quarter.
Barker: Well, it's generally a good way to go about giving your news, to be on the cautious side, so that when you beat, people are happy rather than disappointed. It keeps shareholders a little bit happier when you know what you're going to do and outperform it to some degree. The company really hasn't grown its earnings at all over the last decade. So caution is, I think, a good path for them to take.
Hill: Do you think, in hindsight, the decision to sell the pharmacy business to CVS was a mistake? Because at the time, it was seen, among other things, as, they're getting an infusion of cash, obviously, from CVS Health, and two, it enables them to focus more on their bread and butter. Brian Cornell, the CEO, one of the things he talked about at the time was, "This is going to enable us to focus on, among other things, clothing."
Barker: Yeah, I think there's a lot of sense in maintaining focus for something that has had as many operational problems as Target has had, to have one fewer headache and get a cash infusion on the way, which has allowed them to buy back some shares. And that's pretty much the story for Target, more or less over the last decade. Roughly the same amount of EBITDA, of earnings. If you go back to 2008. Not a great year on the whole, net income was $2.8 billion; over the last 12 months, $2.7 billion, a decade later in a better economy. So, really, that's the short story. The longer version is, they have taken down their share count from about $850 million to about $560. So, they've been buying back shares all along the way, rather than just trying to -- or, I'm sure they were trying to grow sales. Of course, spinning off the pharmacy business impacts that equation. But, really, what they've done is have a roughly stable business and bought back shares with a lot of the money.
Hill: By the way, shares of Target up about 3%, so there is some optimism about the latest results, and certainly their cautious guidance for the rest of the year. But let's move on to Urban Outfitters. Their second quarter profits and overall sales came in higher than expected. Their comps were down 5%. So the fact that, at one point, this morning, shares of Urban Outfitters were up 23% -- it settled down a little bit, now it's up about 17% -- that still seems amazingly high for a retailer that has comps that are going in the wrong direction.
Barker: Right. The majority of the business is going in the wrong direction. That is, the existing U.S. stores. Now, that's a problem, and that problem has been reflected in the share price, which has gone down from around $50 to $16 going into today. That's not all just this year. This has been an ongoing story for a while. But, the bright side is, European stores are doing better. They have positive comps, in fact, reasonably strong positive comps. The wholesale business is doing better, and the direct-to-consumer online is doing better. So, a little bit of bright news out there. But they have a lot of stores and they've admitted they've basically taken Urban Outfitters and Anthropologie as far as they're going to go. They're not really growing in the U.S. There's a lot of room outside of the U.S. to grow. In fact, they're growing one store, are you familiar with the Bethesda, Maryland at all?
Barker: My hometown.
Hill: [laughs] That's not your hometown. That's where you live now.
Barker: It's not my hometown, it's my children's hometown.
Hill: I'm familiar with Bethesda, yes.
Barker: You're familiar with the Barnes & Noble there?
Barker: There is, if you can believe it, a Barnes & Noble there, although it's going out of business. So, there's a huge Barnes & Noble-sized Barnes & Noble, two or three floors. Anthropologie & Company is taking it over. Anthropologie is one of the brands for Urban Outfitters. They're going to have all the eclectic things that Urban Outfitters does under this one roof. Anthropologie, BHLDN, the furniture store, and some dining. So, that's like a mini department store. It's not that mini. It's a department store, but not with the breadth of a Target, by any means.
Hill: But it's going to be all Urban Outfitter-owned properties, so there will be an Urban Outfitters on one section, there will be an Anthropologie in another, that sort of thing? And pizza, because they bought that pizza restaurant?
Barker: Vetri, right. There's going to be clothing, accessories. Anthropologie is basically, I don't know if there's going to be an Urban Outfitters within it, but there's going to be the cafe, which is branded under Terrain rather than Vetri, because that's another thing you have to think about. But, this is one of the things they're trying. They've done it one or two other places. I guess this is something to try.
Hill: Here's something else they can try. And let me pull a quote from one analyst, and this, I think, zeroes in on a particular challenge for Urban Outfitters and goes toward something you had said about how, they've grown in the U.S. all they're going to grow. One analyst said, "Urban Outfitters' collections look like an art installation rather than saleable merchandise." Why don't they just try and focus on actually selling clothing? Why don't they actually do that, instead of creating the experience that they've created?
Barker: It's loud in there, too.
Hill: It's really loud.
Barker: Well, we're not the target audience, are we?
Hill: We're not. But, every apparel retailer that we've talked about in the now seven years that we've been doing this show, every single one of them has had at least a six-month stretch of time when they were doing really well. American Eagle, Abercrombie & Fitch, take your pick across the board. They've all had short periods of time where they were doing really well in terms of, we've got the merchandise that young people want to buy, and we're doing a good job of managing our inventory. Urban Outfitters seems completely uninterested in attempting that.
Barker: Yeah. Well, that would be too simple. Better to try to run some restaurants and slide some restaurants into your establishments. Or not, I think they're still trying to figure that out. Anthropologie has done pretty well over the years. It's actually now bigger by about 10% in terms of sales than Urban Outfitters. Free People, that's the third brand out there, and that's still growing. Urban Outfitters itself is contracting. I'm sure we've seen the best days for Urban Outfitters. But, it's a concept that they can take internationally. That's not really what they're focused on in terms of the size of the business, it's only about 10% of their sales, but that's the better opportunity than opening any more of these things in the U.S.
Hill: Our email address is email@example.com. From Steven Coe, and I'm going to summarize Steven's email, because it's lengthy, but there's a lot of good information. Essentially, it was Steven's experience first trying to invest in REITs, real estate investment trusts, and that did not work out well. So then he started clicking around fool.com and found that we have Motley Fool Germany and Motley Fool Australia and Singapore, and this led him to a series of ETFs. He sent an email specifically for you, by the way, saying, "I wanted to get Bill's opinion on using multiple ETFs to diversify even further, or is it a little redundant to own multiple ETFs? P.S. I'm hoping that you and Bill Barker can answer this and then go on a random tangent." Pretty safe bet on Steven's part.
Barker: That we can answer it?
Hill: No, I thought, on the random tangent.
Barker: You're moving right to the tangent. What would you like to talk about?
Hill: [laughs] We can talk Elvis Presley in a little bit, because it's the 40th anniversary of the death of Elvis.
Barker: I don't know if that even counts as a tangent, because it's not really related to what we were just talking about.
Hill: Well, then why don't you try and answer the question?
Barker: Really, it's addressed to you.
Hill: [laughs] Again, "I wanted to get your and hopefully Bill's opinion on using multiple... "
Barker: "Your," see? He's just hoping for something from me, but he's kind of demanding a response from you. So?
Hill: I feel like diversification is a little bit like hydration. Too much is not good for you. That's the whole thing. At some point, you're just drinking too much water. At some point, you just don't need the diversification.
Barker: What point is that?
Hill: Well, every person needs to figure it out for themselves. But, as we have said before, if you have a chunk of your portfolio in a simple S&P 500 index fund, there's your diversification right there. You've got pieces of 500 large companies in the United States.
Barker: Yeah. There are a couple things here. Two of the Vanguard REIT ETFs, both the U.S. and the ex-U.S. one, VNQ and VNQI, are the ones that are mentioned here. It's been a good run for both of those as real estate has rebounded after 2007 and 2008. It's had nine years of positive returns since then, each of them. But I think that Vanguard ETFs are a great way to go. The problem with ETFs and getting into sector-specific ones is only if you're doing it because you think it's the hot thing and, when the heat goes away, then you look for the next hot thing. Money that is chasing what has already worked, and seems to still be working, this is, in general, a great problem for investors. The problem for investors is not being too diversified. The problem for investors is chasing the hot sector, and then chasing the next hot sector, selling in and out of things at the wrong time. If you're going to spend five, ten, 15, 20 years in a REIT ETF that is managed by Vanguard, you're going to do well. You're going to keep your costs low, and you're going to be invested in something which has good historical returns and provides some diversification, that is the REIT sector outside of the S&P 500. But if you've already got numerous full-market ETFs, this will give you a little bit more concentration in the REIT space, but you do already own real estate through your S&P 500.
Hill: We talked Vanguard. Of course, that always brings to mind.
Barker: I don't know how you're going to tie all this into that answer.
Hill: Oh, I'm getting there, don't worry.
Barker: I'm listening.
Hill: Vanguard, of course, always brings to mind John Bogle, the founder of Vanguard. Like you, a proud son of Pennsylvania.
Barker: I once talked to him about his daughter, who was the same year as me at a rival school. She was at one of the all-girl schools.
Hill: Did you take a swing at you?
Barker: No, it was over the phone. [laughs]
Hill: He probably wanted to. He's a spry guy. John Bogle is 88 years old, and I think there's a decent chance he's going to outlive both of us.
Barker: [laughs] He'll just get a new heart again if he needs one.
Hill: Have you met Bogle in person before?
Barker: Yeah. But not in a long time.
Hill: What were the circumstances?
Barker: I think I was at an investor conference in Philadelphia, where Tom and David Gardner were speaking. I think maybe they were opening it and Bogle was closing it, or vice versa, and they were co-headlining. So, this was '98 or '99.
Hill: That was the one time I met Bogle, I was with David and Tom, we were in Los Angeles, and it was, the Los Angeles Times was having an investment conference. Same situation, where they were one set of keynote speakers, Bogle was another keynote speaker, and literally they passed one another in the hallway and he recognized them and stopped. For someone who's much older than me and much smaller than me, I just thought, "Boy, that guy's got a hell of a grip." [laughs] Just a strong, strong dude. I don't really have a great segue into looping all this here. But I didn't notice, right before we started taping, today's the 40th anniversary of Elvis Presley dying. You've been to Graceland.
Barker: I have been to Graceland. You have not been.
Hill: I have not.
Barker: What's wrong with you?
Hill: That's going to be my question, I've heard from some people that it's one of those must-visit places, and I don't feel like I can just go to Memphis with that being the sole purpose of my trip. I feel like if I was going to Memphis for other reasons --
Barker: Barbecue? The Drake Hotel?
Hill: OK. Is the Drake Hotel not in Chicago anymore?
Barker: Maybe I'm getting it wrong. It's the hotel in Memphis where they have these ducks that go on parade at 4 o'clock every day, they cross the street and get something to eat and then come back and traffic stops.
Hill: They're trained ducks?
Hill: In Memphis?
Barker: Yes. It is the big thing to see after Graceland and ...
Hill: The music scene?
Barker: The Memphis blues, the music scene and the barbecue scene.
Hill: So, here's a little thing I just learned about Bruce Springsteen as it relates to Elvis.
Barker: It's the Peabody Hotel. I'm coming up Drake because that's the type of duck. I'm just misrepresenting Memphis entirely, which probably has 75 things about which it is more proud than ducks.
Hill: Yeah, we're probably going to get an email from someone in Memphis who says, "Here's why you want to come to Memphis, and the ducks are 19th on that list."
Barker: Yeah, address it to Chris. I'm just encouraging him to go to Memphis. I'm the one who went there. Also, you follow the whole route down Mississippi, there's a great place just outside of Memphis, I'm going to come up with the name while you go into your tangent.
Hill: I just learned about Bruce Springsteen, the song Fire that he wrote, I just learned that he wrote that song for Elvis Presley and sent it to Elvis, and I think Elvis never got it. What I heard was, he wrote it just before Elvis died, which means that he wrote it 40 years and a few days ago. And if you think about it, that's an Elvis-sounding tune, as far as Springsteen goes.
Barker: So, you go to The Hollywood, I believe, outside of Memphis. That's noted, as are many other things, in the Marc Cohn song, Walking in Memphis, if you've ever wondered.
Hill: Oh, yeah! That's a good song!
Barker: He talks about The Jungle Room, which is at Graceland.
Hill: There's a pretty little thing waiting for the king down in The Jungle Room.
Barker: That's right. The experience, if you're like myself, not a fan of Elvis, he never played a major role in your life, that's where I am, to go to Graceland and find people weeping at the Eternal Flame and all that, that's a little thing that stays with you, that he had that much effect on so many people's lives.
Hill: Yeah, in a pretty short amount of time.
Barker: Yeah, he died at 42, unfortunately.
Hill: Which leads to this comment from long time listener Tom Smith, "Can you guys start a weekly podcast with just Chris and Bill Barker? Just start up the recorder and stop it after 30 minutes, no editing, just publish it. Podcast gold." First of all, thank you Tom. Second of all, we're not going to do that, but we do have a little something we're kicking around, I'll get to it in a second. I just love the, "no editing, just publish it." That describes most episodes of Market Foolery. No editing, just publishing.
Barker: Yeah. I thought about going into that, but it seemed like, for me to say there's no editing is unfair to Dan Boyd and others who work on the show and do things on the production side and make it sound like nothing is being done. But what is not being done is editing out, as people know, all the worthless parts. That's not done.
Hill: Yeah, if you've ever listen to an episode with Bill Barker --
Barker: Today, for instance.
Hill: Yeah. Then you know that the worthless parts are always included. Which is why --
Barker: Why don't you edit all the worthless parts out?
Hill: Because we're Motley. We're not Bloomberg.
Barker: The Motley means a bunch of different things.
Hill: Right. And in this case, some of the different things that we include on this podcast are worthless. [laughs] How else are we going to differentiate ourselves from the Bloombergs of the world?
Barker: There's lots of worthless stuff out there. What are you talking about?
Hill: Here's what we are going to do. We're going to have a bonus episode of Market Foolery at some point in the next month or so. It's not going to interfere with the normal flow, the normal Monday through Thursday flow. We're going to publish this probably in the weekend sometime. We're going to get one of our colleagues, we're not going to name, but I will simply say --
Barker: A colleague to be named later.
Hill: A colleague to be named later, a colleague who has never appeared on Market Foolery before in our seven year history.
Barker: Is this the colleague that I was mentioning?
Hill: This is.
Barker: Has he signed on? He or she. Not to give anybody any clues about this unknown person?
Hill: This person is on board. But we're going to need a little help. We'll come up with our own tangential topics, but it would be great if we could get some questions that you'd like to hear us kick around. If they have zero connection to business whatsoever, that's fine, that's probably all the better. That will go to the motleyness of the episode. And just to get people started, in terms of a frame of thinking, there's a question that I don't think we've ever talked about on the show before, but it's a question that I think has been batted around the Fool Funds team for a number of years, and that's who would win a fight between a tiger and a shark?
Barker: Do you want to cover that now?
Hill: No, we don't have to cover that now. But that's a debate we've engaged in on a few different occasions.
Barker: I think what people should be thinking about, this is in terms of what I think on our tangents what we're doing, if you've watched the movie Diner lately, it should just be that sort of level of whatever the topics are that they're talking about.
Hill: Great movie!
Barker: Great movie.
Hill: And a lot of the scenes in Diner are, a lot of the dialogue in the Diner is improvised. And it's four guys in their 20s, they're trying to figure out what adult life is supposed to be. It's set in 1959 in Baltimore. One of the great plot lines is young Steve Guttenberg, they're all young in the movie, is engaged to be married and he is such a die-hard Baltimore Colts fan that he's making his fiancé pass a test about the Baltimore Colts. And if she does not pass the test, he says he will not marry her. And that's one of the plot lines in the movie. The gathering of the friends is because of the impending nuptials.
Barker: Right, to the degree that there is any plot in the movie. There's a great Vanity Fair article about this some years back which talks about the way in which Diner changed storytelling and movie making and TV shows, that it was the first sort of movie that was about nothing, and that it was hard to sell because it's just a timepiece and it's about the way guys talked to each other. And it's not really about any more than that. The fiancé is never seen in the movie. She's literally never seen.
Hill: She's not? Wait a minute, now I'm thinking, because I've seen this movie a bunch of times. No, she's not, because you hear her voice, they're in the basement, and they're on one side of the basement when she's taking the test about the Baltimore Colts. So, you hear her voice, but no, you're right, you never see her. Not even -- well, I don't want to spoil anything, but you never see her.
Barker: And one of the other things that happens in the movie, and that we could certainly talk about, because we talk about this, at one point, they stop for coffee on their way to getting coffee. And there's a little bit about that. A lot of little bits, because it's not really about this guy getting married. That's the culmination of the movie, but you don't even see the bride. It's not really about anything. Which is what, I think, this show that you're talking about, is also about.
Hill: It's going to be the Diner of Market Foolery episodes, is what you're saying. We'll see. But if you want to kick off a little question to help get us moving in the right direction, please email us, firstname.lastname@example.org.
Barker: If you have strong feelings about tigers vs sharks. You have strong feelings about that.
Hill: I do. It's shark, all the way.
Barker: It's not shark all the way.
Hill: Maybe we'll talk about that later. 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!