On this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker put Nike's (NYSE:NKE) bad quarter into context (because it could be worse); consider what Macy's (NYSE:M) new loyalty program says about the retailer's overall strategy; and ask why Chipotle Mexican Grill (NYSE:CMG) just hired a celebrity chef to bring life to ... its hamburgers? They also take a detour into the realm of asset allocation to discuss what sorts of stocks are best for retirees' portfolios.
A full transcript follows the video.
This video was recorded on Sept. 27, 2017.
Chris Hill: It's Wednesday, September 27th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker in the house. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: We're both caffeinated, we both have our coffee in front of us, and that's a good thing because we do have news. We have Nike's latest quarterly report, we have Macy's trying their darndest to get more customers through the door. I'm going to get to both of those, maybe a tangent or two, because long time listeners know to expect a tangent or two when Bill Barker is in the studio.
Barker: National Coffee Day on Friday?
Hill: It is? This Friday?
Hill: Well, I think, as we probably say every year, every day is National Coffee Day for people like you and me.
Barker: Yeah, but some people will be throwing some free coffee your way.
Hill: Oh that's right, even better. You know what? We should all be coffee drinkers, even you people out there who are just like, "No, I just drink tea." That's fine. I drink tea from time to time.
Barker: That's fine if you don't care about your health.
Hill: I mean, look, for everyone who talks about the health properties of particularly green tea, that's fine. And, in some ways, that's adorable. But it's completely dominated by the growing mountain of evidence from medical communities all over this vast planet of ours weighing in on just how healthy coffee is for you. I mean, you say Friday is National Coffee Day. Another way to look at it is, Friday is National Take Care Of Your Health Day.
Barker: National Health Day. They should rebrand it.
Hill: They should. Let's get to Nike. First quarter profits fell 24%. Gross margins are going in the wrong direction. And I know they're trying to build out that direct-to-consumer channel, but it seems like for them and others, it's not moving quickly enough. So, I'm curious, when you looked at Nike's latest report, what stood out to you?
Barker: Well, it's doing a better job than a lot of the other companies in this space, which have been obliterated in terms of their stock value, much more so than Nike has over the last year, say, when you look at things like Finish Line, the suppliers, places where people are getting their Nike apparel and shoes when they're not getting it direct. And that business is under a great deal of pressure. It's under a great deal of promotional pressure, which is increasing. So, Nike is wise, and has done a pretty good job of getting the direct-to-consumer operations up and growing much faster than the rest of the space. But, when you've got as much pressure on your main distribution channel as they do have, they had approximately the same level of sales as the quarter 12 months ago, but the profits were way down. Operating profits were down about 10% on the same level of sales. And a few more, go down the net income sheet, the taxes were heavier than they were last year, there were some other things moving, earnings per share were down for more than 10%.
Hill: When you think about the promotional aspect of Nike and how much money they spend on marketing, it really does seem like a delicate balance that, in large part, over the last 10 or 20 years or so, they have pulled off nicely. And by that I mean, when you think about opportunities around big event, whether it's the Olympics or the World Cup, or it was quadrennial events as opposed to, every year in America, there's the World Series, the Super Bowl, the NBA Finals. I think they're playing hockey this year, although I'm not sure. I think the NHL is still doing that. We take every other year off. But, it really does seem like, given --
Barker: Why do you have to troll NHL fans like that?
Hill: Is that not the case? Are they not taking every other year off?
Barker: I'm just asking. On their behalf. I've never met any of them personally, but I understand that they exist and they should be treated equally.
Hill: They should be, but I think most of them live in Canada.
Barker: You're from Canada.
Hill: No, I'm from Maine. It's like South Canada.
Barker: Alright, if you say so. Did you play a lot of hockey growing up?
Hill: None whatsoever. I can't ice skate.
Barker: Wow. No wonder you're down here in Virginia now.
Hill: Yeah, it's one of the reasons the Maine tourism board asked me to leave.
Barker: Get teased a lot?
Hill: No. Well, not for that.
Barker: "Look at Chris! He can't skate!"
Hill: For other reasons I got teased, but not for that.
Barker: Kid would skate by and beat you up with their sticks and stuff.
Hill: No. I wouldn't be near the rings or the frozen ponds.
Barker: I just assumed there was ice everywhere.
Hill: A lot of times, yeah. But, it does seem like that balancing act, there's more pressure around that over the last year or two, specifically because of the ripple effect of Sports Authority going out of business, you mentioned Finish Line, you might as well throw Dick's Sporting Goods in there as well, Foot Locker, the three of them not really taking advantage of Sports Authority no longer being in existence. And I'm wondering if we're going to see Nike pull back on some of that marketing spend over the next year or so, because, again, they've pulled it off in the past, but when you see gross margins getting compressed the way they have been lately, then I think there are absolutely people at the highest levels of Nike and probably Under Armour as well saying, "You know what? I love [insert name of person who heads up marketing], but we have to cut that budget back."
Barker: Well, Nike is operating from a much stronger space in that equation than Under Armour. They are, along with just being bigger and more established, and much better-known in footwear. They're also just much better operators than Under Armour. Which is done, let's give them a great deal of credit for how fast they have grown their company. But, Under Armour has not focused on the bottom line to the extent that Nike has. They just don't have the same margin performance that Nike has. So, Nike can give up a little bit of margin. It's not something you want to see as a shareholder, it's not something that management is going to be happy about, having to promote the way they have. But, they are very strong players, in terms of sourcing and how they operate their business in a way the competition isn't. Now, I don't know how much they can afford to throw at everybody, and I can see in the headlines some trouble for others in the space regarding the way they've thrown their money around colleges, and that's something I'm sure Nike is watching closely and hoping doesn't visit them. It would be rather surprising if this story is as small as it is today.
Hill: You're talking about Adidas and four assistant basketball coaches being accused of funneling money from Adidas representatives to high school athletes.
Barker: Yeah. Adidas has been doing very well in this country, and there's a little bit of a relationship between these two things, but they have now surpassed the Jordan brand, this was getting a lot of press yesterday, that Adidas is now some 13% of the footwear market here. Nike, on the bright side -- good news out of China, which is, as I understand it, a reasonably sized market.
Hill: Pretty big.
Barker: So, that's good. And North America is the problem, and that is their largest location for sales, and it's the one you want to have the largest sales in. But, that's not growing, as we see from everybody else in the space.
Hill: Shares of Nike are close to a two-year low. When you look at where the stock is right now, do you think this represents a screaming buy or at least a good entry point for people who are looking to pick up shares of the dominant player in this space?
Barker: Not a screaming buy, there's just too much competition, too much trouble in retail generally to get super excited right now. Their price-to-earnings is about 21X, five year average is 26X, so a little bit cheaper. But keep in mind that they have taken a year of not growing. Whereas, over the five-year average that I'm referring to where Nike has been priced at 26X earnings on the average, most of those five years, they were showing pretty good growth. And now we're not only looking at flat sales, but decreasing profits. So, a 21X, that's roughly what the market is as well. Nike is a great company and they've had a great past, and they're in a very relevant industry, but retail is just not that exciting.
Hill: Macy's has had 10 straight quarters of declining same-store sales. Next week, Macy's is unveiling a new loyalty reward program aimed at its biggest shoppers. This is people spending at least $1,200 a year. They'll get perks like free shipping and 5% back, although as I understand it, that's as a store credit. And the company says that more perks to this loyalty program are going to be revealed in 2018, and this is just the start of this. But I don't know. I'm not rooting against Macy's, and I'm not a shareholder, but partly because of my age, I'm rooting for Macy's to succeed. This struck me as not a great ... I don't know what specifically I was hoping for when I heard that Macy's was going to be announcing a loyalty program. But I was pretty underwhelmed by this.
Barker: The most interesting part of the Fortune article, which you sent to me that covered what they're doing here, and I'll read this and give them the credit for doing the reporting on this, "The stakes for the loyalty program couldn't be higher. Macy's gets about 50% of its $25 billion in annual sales from the top 10% of its customers, those who spend over $1,200 a year at the chain." They go on to say it's about 10X more expensive to win a new customer than to entice a current one to say, according to experts. So, combining that, this is a company which is trying to stabilize the floor, it's trying to stabilize the number of loyal customers and keep them coming in. From a cost perspective, it sounds like that's much more efficient than going out and looking for new customers. And that makes sense to me, but it doesn't make you particularly hopeful about the future. If they can't bring in new customers, or if bringing in new customers is as expensive as it is, I don't know that what we'll see from Macy's if anything better than playing defense. Because that's what this is.
Hill: Do you think this is enough to get them through this holiday season? I think, whether you're a shareholder or even a prospective shareholder, I think you have to be looking at Macy's, and 2018 is great, but you kind of need a really great holiday in 2017.
Barker: I mean, are they going to get through? Yeah, they're going to be around.
Hill: I should have been more specific.
Barker: Are we going to be more enthusiastic about Macy's after a white Christmas?
Barker: Or, a Green Christmas, as opposed to a Blue Christmas? I don't know. I think it's just going to be more of the same. This is going to help, I suppose, if they are able to roll this out fast enough to get those loyal customers to come into the store and shop. But Amazon is out there all the time, and is a constant threat, and Macy's is about half the market cap today that it was 10 years ago. And that's not good.
Hill: It's surprising, given how well they've done for so long in terms of managing their footprint, managing their store growth. They've always been pretty conservative about that. So, the fact that they're particularly good at that one part, or, historically, they've been very good at that one part of the operations, but still suffer the same inventory woes from time to time that most every retailer seems to, is unfortunate.
Barker: When I say that Macy's is about half the market cap that it was 10 years ago, that doesn't mean that the stock is half the value. You've basically seen flat returns on your investment because they've been buying back shares. So, they haven't aggressively gone out and used the money, the cash flow that they do have to expand operations. They've done a more intelligent job of managing what they do have. They've gone out and acquired bluemercury, which is probably a pretty useful acquisition compared to some of the other choices out there. I think that's been largely successful. But people just aren't going to department stores in the same way that they used to, and if Macy's has some slightly more elevated brand in that space, and believes that it can protect Macy's as a unique shopping experience, that's a high hurdle to have. And that's, I think, what they see themselves as, as unique in some way.
Hill: A couple of things before we wrap up, one is that we're doing a Facebook live at the moment, so for those unfamiliar, about once a week or so at The Motley Fool, we try and do a Facebook live event. Sometimes it's a stand-alone event, as we did earlier this month in the wake of Apple's unveiling of the iPhone X. Sometimes it's just in concert with a taping of Market Foolery. So, if you're on Facebook and part of The Motley Fool group -- if you're not part of The Motley Fool group, we encourage you to join -- again, we try to do this. And one of the things we do is take questions. Usually we take them after we're done taping the podcast, but I'm just going to throw one at you because Dylan Lewis, who's helping us out with this, he heads up our Facebook live initiatives, and Industry Focus listeners are familiar with Dylan because he hosts the Friday Technology episode. He sent me a few questions. I'm just going to pick one that I think you can speak to. It's from Terry, who's asking, "What type of investments do you like for retirees?" You're close to being retired, given your advanced years, and I'm just curious, as someone from Motley Fool Asset Management, what types of investments -- obviously, we don't know Terry's situation, we can't give personal advice. But, generally, what direction should Terry be thinking?
Barker: Inheritance is always a good one.
Hill: [laughs] I mean, we should all be hoping.
Barker: I mean, if you haven't looked into that, I would go ahead and check that one out. So, you're talking about money that you actually have, you've saved, you've been saving your whole life. So, what types? Well, I think equities are an important part of a completely nutritious retirement plan. A lot of people -- you've got your rule of thumb on what the equity and fixed income allocation should be. Take the 100 and subtract your age, and that's what percentage of equities you should have. Some people say 110. The math of that, it's a way to start thinking about it. But in terms of equities, a lot of people like to have a structured portfolio where they have dividend stocks, so they have a little bit more certainty on what their cash flow is going to be. If you've got, take a big round number that a lot of people would like to have, say $1 million, you invest it in equities and you have that invested in dividend-paying stocks, then you're going to be getting, say, 3%. If you're good, you might be able to get more than 3%, in a good portfolio just on dividends, and then you've got a $30,000 stream of income coming in, which is more predictable than what the stock prices are going to be. There are times when dividends are cut by companies. Certainly in '08 and '09 that was the case. But, it's much more predictable than the stock price. So, if you're just solely investing in a stereotypical tech company that has a wildly fluctuating stock price, then you're relying on being able to sell, if you're going to be living off this portfolio, at good times, rather than the stability of them or income-driven portfolio.
Hill: Reminder that this weekend, the first-ever bonus episode of Market Foolery will be dropping on Saturday. And this is, as we've mentioned a couple of times, the non-investing episode. A few listeners have asked for this. It's the tangent episode.
Barker: When you say "a few," how many?
Hill: Literally a few. A few have said, "Hey, you know what would be fun? If you and Bill Barker got in the studio and just opened up the microphones and started talking." And we thought, that might be fun. We don't think that should be a regular episode, because we talk about business news. So, we're going to throw this out as a bonus episode. Which, I can tell you right now, we're going to be taping it tomorrow, it's going to be published on Saturday, so it'll show up in your feed on Saturday. If you're not subscribing to Market Foolery, please do. Just click the subscribe button. It's just one click, and we'll show up there.
Barker: How early would you want to wake up, if you want to be the first listener?
Hill: We're going to publish this really early. I think in the United States, it's going to be dark out when this gets published.
Barker: Set your alarms.
Hill: You know what? This is a little something for the dozens of listeners over in the U.K., in Europe. This is going to be right in their sweet spot, in terms of the morning for them. Market Foolery is normally published in the afternoon or evening for them.
Barker: In Europe, in England, it's OK to have tea instead of coffee.
Hill: Yeah. You know what else is really popular in England? Coffee.
Barker: It's no tea.
Hill: It's not. Again, it's not that tea is bad for you, that we know of.
Barker: No, nobody is going after tea as being actively bad for you.
Hill: No one's going after Big Tea.
Barker: [laughs] It's just not the cure-all, the life extender that coffee is. What's going to be on this show?
Hill: It's going to be you and me and someone who's never been on Market Foolery before, and I thought about mentioning this person's name today, but we're just going to save it for the bonus episode. So, people who actually listened to it will be disappointed. They'll just be like, "Oh, OK."
Barker: "This guy I've never heard of."
Hill: "This person I've never heard of. Alright. Bill and Chris decided he should come on."
Barker: These people should have heard of him. I blame them. These people.
Hill: You're blaming our listeners? Please don't do that.
Barker: Just the ones that you say aren't paying attention to --
Hill: Please don't do that.
Barker: -- to every employee in the company and what they do. He shows up in the podcast feed, on Facebook, in some comments.
Hill: He's part of the Facebook group. And he's a published author. Maybe we'll get into that. Maybe we'll just spring it on him. Because, he doesn't actually listen to Market Foolery, so maybe we can just spring that on him, like, "Hey, let's talk about your book."
Barker: Or his game show appearances.
Hill: Yes, exactly. For anyone who's seen, what was it, Who Wants to Be a Millionaire, right?
Barker: Yeah. He wanted to be a millionaire. He is the answer to the question, Who Wants to Be a Millionaire.
Hill: The guy who's going to be on the bonus episode of Market Foolery with us this weekend. Bill Barker, Motley Fool Asset Management, thanks for being here.
Barker: I thought we were doing this one other story.
Hill: Did you want to hit that real quick?
Barker: Well, the thing is, you came in with a little bit of a bee in your bonnet today, to the studio, before the Facebook cameras started rolling.
Hill: Long time listeners know this is the point in the show when I say, "The investing portion of the episode is over."
Barker: Not true. The story, because you need something to vent about, is this Chipotle news.
Hill: Yeah. To be completely clear, you had said when we were having coffee earlier this morning, not to be confused with the coffee we're having now, this is coffee number two or three, you had said, "I'm going to find another story for us to talk about." And I said, "Oh, that's great." And I walked into the studio and said, "What's the other story we're going to talk about?" And you said, "Oh, I actually haven't found one," and and then you just sort of fumbled about, and you found the Chipotle story, which you can go ahead and share.
Barker: Well, Chipotle is, according to CNBC, which we found this on --
Hill: We trust them.
Barker: They're hiring Richard Blais. Friend of yours?
Hill: Richard Blais, not a friend of mine, but someone I've watched on the show Top Chef. I've seen him before.
Barker: He's been hired to spiff up its burger concept. For those who didn't know, Chipotle has a concept. They don't actually have a burger establishment, but they have a name --
Hill: No, they --
Barker: Do they?
Hill: I think they have a couple of locations.
Barker: Oh, do they?
Hill: Yeah. And by a couple, I mean a couple. So, you shared this news, and as much as I like Richard Blais, at least the reality television version of him, I rooted for him on Top Chef because he seemed like a decent guy and a good chef and talented and all that sort of thing, as a Chipotle shareholder, this is yet another hair-ripping moment. If they're focused on the couple of burger locations that they have and not on the hundreds and hundreds and hundreds and hundreds of namesake Chipotle locations that they have, then they're just wasting everyone's time.
Barker: So, they have one location according to this article. This is Tasty Made. For those who are traveling through Lancaster, Ohio, or live there, or live nearby, they can go there and see what's going on. It's a pretty inventive concept. They've got burgers, fries and shakes.
Hill: Wow. All three?
Barker: All three.
Hill: That's amazing. That's amazing!
Barker: The triple crown.
Hill: That's amazing, for a company that somehow appears to be the only restaurant in America that can't pull off breakfast before creating lunch and dinner. Actually, one of our listeners in Ohio went to that location when it opened up. I remember, there were lines out the door, but the actual burger itself was actually pretty uninspiring, according to this one listener. So, that speaks to why they're bringing in a celebrity chef, to help spiff it up. But, again, this is not even one-tenth of 1% of their overall business. So, you know what? Get Richard Blais in there to maybe work on the namesake menu. Or someone else.
Barker: You're a little bitter about Chipotle, aren't you?
Hill: I just ... yeah. It's time for Steve Ells to go.
Barker: Is it being a shareholder of it?
Hill: That's a big part of it, yeah. I mean, I'm certainly frustrated at other companies and other company management that I don't have any sort of financial stake in. But, yeah, being a shareholder of Chipotle and watching the last two years play out the way they have, it's like, it's fine ... people have heard me vent about this before. [laughs] I could go for another 20 minutes, and I'm not going to do that. But, again, good luck on the Tasty Made. Maybe, if that's a hit, start rolling those out, start expanding those. Maybe that can succeed where ShopHouse didn't.
Barker: No, it was disappointing, what happened with every concept other than the original one. And original one hasn't exactly been firing on all cylinders, either.
Hill: Do you know why ShopHouse didn't succeed?
Barker: I do not know.
Hill: Because no one likes Chinese food.
Hill: Oh, no, wait, that's not true. Everyone loves Chinese food, they just couldn't manage to pull it off. Alright, I'm going to move on now. Now people are really fired up for the bonus episode this weekend.
Barker: It's going to be gentler. Parts of it.
Hill: [laughs] Parts of it are going to be gentler.
Barker: There will be some edge. There will be tigers and sharks fighting each other in zero gravity.
Hill: In zero gravity, in boxing ring on the International Space Station, which, NASA has yet to refute our declaration that it exists. So, I take that as confirmation that it exists.
Barker: Here's what I'm going to throw out. This is the thing that I'm looking forward to in the episode. When we get into what the comedy influences have been in our lives. I'm excited to hear yours. And I'll just say, if anybody can get three out of the four that you're going to come up with -- four, Mount Rushmore of comedy influences, you'll announce them, they're going to unveil them.
Hill: I don't know that I'm going to, no.
Barker: No? Yes, you will.
Barker: If anybody out there gets three out of the four, and this will be the honor system, because you've heard Chris enough to know where his comedy comes from -- I'm talking to the listeners out there, not you.
Hill: Yeah, I know you're not talking to me.
Barker: You can't even come up with three out of the four.
Hill: I came up with one.
Barker: You're going to fail this. You would not get a prize right now.
Hill: I would not. I was thinking about this over the weekend, I came up with one.
Barker: You're the only one who will be on the show who's actually performed in a comedy setting.
Barker: Where tickets were sold. People exchanged money for the opportunity to watch you perform in a comedic setting.
Hill: In fairness, it was not a lot of money. Nor should it have been. 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!
Bill Barker owns shares of Apple. Chris Hill owns shares of Amazon, Chipotle Mexican Grill, and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Chipotle Mexican Grill, Facebook, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.