In this Market Foolery podcast, Chris Hill and Bill Barker from Motley Fool Asset Management discuss how retail behemoth Wal-Mart (WMT 1.68%) managed to pop a whopping 8% on its third-quarter report; why J.M. Smucker (SJM 1.42%) saw a 10% pop this week, coming off a 40% rise this year, and why investors might want to take another look at the beaten-down food company; why Papa John's (PZZA 1.49%) has already come out with a public amendment to its comments about the NFL protests, and what this probably means for the company's next quarter; and why L Brands (LB 0.94%), parent company of Bath & Body Works, is seeing some bad luck this quarter.
A full transcript follows the video.
This video was recorded on Nov. 16, 2017.
Chris Hill: It's Thursday, Nov. 16. Welcome to Market Foolery. I'm Chris Hill. Joining me and studio today, all the way from Dubai from Motley Fool Asset Management, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: You had quite a travel day yesterday.
Barker: I did. It was a long day coming home.
Hill: [laughs] Thanks for making the effort.
Barker: I wouldn't miss it.
Hill: And I think it's safe to say, given your messed-up body clock, at any moment, this thing could just completely go off the rails.
Barker: I assume I'll be falling asleep during one of your questions.
Hill: This is going to be great. It's just going to be great. We have earnings news, we have retail, we have food earnings. We're going to dip into The Fool mailbag. We have to start with Wal-Mart, though. Holy cow, shares of Wal-Mart up 8%! This is like a small-cap stock. It's hitting an all-time high off of their third quarter results. E-commerce sales were up 50%. This is the 13th straight quarter of positive same-store sales. Doug McMillon is getting it done at Wal-Mart.
Barker: Yeah, I think you've highlighted what is the possible explanation for the stock price being up 8%, that 50% increase in online sales is by far the most interesting number that's out there. The rest of the story is positive. Continues to be positive. But it's in the range of 2-3% moves, the kind of things you would expect from a massive company. Comp sales were up 2.7%, it's a little bit better than inflation. Nothing really amazing there. But, that 50% online. If that online shopping ever takes off, I think they'll be in good shape.
Hill: Yeah, they just need that trend to continue.
Barker: If people would just wake up and start buying things online, they might be in the right place.
Hill: It's interesting. For a long time, they had their own e-commerce operation, and they would frequently report double-digit increases in online sales. And what you would hear all the time was, "Well, that's off of a really small base." And Doug McMillon went out and bought Jet.com, and apparently, he's making that work really well, because it's no longer off of a small base. And 50% is an enormous number.
Barker: Yeah. As he pointed out, McMillon in the conference call following the release of the earnings, that most of the 50% increase was through Wal-Mart.com rather than jet.com. Jet.com is also doing well, but it's the Wal-Mart.com side of things that's fueling growth right now, which is good news. They have about 70 million things they sell there.
Hill: About that.
Barker: Which seems kind of comprehensive. They are in a position to survive. One of the few in retail that seem to be thriving these days, other than Amazon (AMZN 1.72%).
Hill: Amazon shares are up about 51% year to date. Shares of Wal-Mart, with this rise today, they're up 41% year-to-date, and I'm wondering what you see when you in you look at the stock in terms of how expensive it may or may not be. One of the things that always gets said about Amazon is, e-commerce as a percentage of overall commerce is still very small, maybe about 10% globally, so Amazon still has a long way to go. A lot of runway. And by that rationale, doesn't Wal-Mart as well?
Barker: Yeah, certainly in the online space, to be able to compete at all with Amazon puts them ahead of so many others out there. Of course, given the great logistics operations that they've always had, they're in a better position to do it profitably rather than just throw money at survival. So, in terms of valuation today, going for about 21X next year's profits, it's no bargain, but what is in today's market? It's not excessively priced given its position. But, up 40% so far this year, 21X forward earnings, I think it's had a great year, and that's already being appreciated and appreciated further by the market.
Hill: J.M. Smuckers' second quarter profits rose 10%, and that's basically what shares of Smuckers are doing today as well. That's a hell of a pop for a food company.
Barker: It's a pop. But this is a time when it's worth remembering, why is the stock price where it is? This is not hitting an all-time high like Wal-Mart. It's up 10% today, but this is just not even getting it close to its all-time highs, which way back around the middle of last year, it was trading for $155 a share. Got down to multi-year lows earlier this month at about $100 per share. It's now about $115. So, yeah, what is in the numbers today that's fueling that? It's not that they weren't profitable, it's just that they were slightly more profitable than people were fearing. It's a consumer staple company, largest coffee seller in the world, better known for its jams and jellies, which the company is named after. But it's a huge coffee and pet food company as well.
Hill: Do you think they need to go the route of a Procter & Gamble and start to get smaller? Would it make sense for them to shed some of their brands? Or have they just hit a rough patch where, you're saying that they just need to ride it out?
Barker: Everybody in consumer staples has hit a rough patch. That's one part of the story. They have been an acquisitive company, and they've done a good job at it. They're fairly insular. They're still run by the Smucker family. Over the long-term, this has been a very good performing company. But it has been a tough year for consumer staples of all sorts, they're still down for the year, really haven't returned much in the way of stock performance in the last three years. But, packaged foods -- the market has been up 10% a year over the last five years, packaged foods are up 5%. Smuckers just a little bit under that. They're not differentiating themselves from the greater trend, is one way to look at it.
Hill: Did you know that they have a store? They have their own branded Smuckers store in Ohio, which is, I'm assuming, where the company was founded.
Barker: Is it in Orrville?
Hill: It's in Orrville, Ohio. Is that where they're headquartered?
Barker: Yeah.
Hill: I'm assuming that's the only reason they would have a store. And I say this as a consumer of their products. There's no real need to roll out more than one of those things.
Barker: No, I did not know that. I assume it's the home of the original business more or less, and that's why they're still corporately located in Orrville, and they have a store there. It really wasn't a great quarter, it was just better than expected as of earlier this month. Net sales are up 1%, that's not even keeping up with inflation. Food costs have, in many categories, gone down. So, that's limiting the amount that you can charge, the price increases that can be taken. But, as I said, they're a good company operating in a space that has not been favored by macroeconomic trends.
Hill: So, this is not like the RV industry.
Barker: No. No, food, very different from RVs. For those who are confused about the two, don't go out eating RVs, is my advice, or trying to drive peanut butter. Neither will serve you well.
Hill: You're not getting insights like that on Bloomberg. You're only getting them here. No, where I was going with that was, you've studied the RV industry, and you've been to Elkhart, Indiana, which is the home of the RV industry, home of the RV Hall of Fame. I'm just wondering, if at any point, your travels as a working portfolio manager and analysts are going to take you somewhere close to Orrville, Ohio, because a little boots-on-the-ground research about what they're offering at the cafe would be great.
Barker: One can only hope that my travels will one day take me to Orrville, Ohio. But, I don't know when that will be. The domestic fund we run is called the Great America Fund. How many brands are there that scream out Great America more than Smuckers. This is an American, iconic brand.
Hill: It is. And they make legitimately good stuff.
Barker: Yeah, that everybody should be eating. Their favorite product of yours, I assume, is Dunkin Donuts coffee.
Hill: I'm always partial to the Dunkin Donuts coffee, but I just go straight to the source.
Barker: Well, you're not helping Smuckers out when you do that, because they only get the slice of the brand if you go to the grocery store. Do you ever make your own coffee?
Hill: I do. For whatever reason, the Dunkin Donuts hot coffee, not as popular with the person in my home to whom I am related by marriage.
Barker: Really?
Hill: Yeah. So, I have to leave the house --
Barker: Is that an issue?
Hill: It's not an issue, because as we've talked about before, there are battles that you're willing to have in your relationships, and then there are ones where you go, I'm going to let that go.
Barker: So, what brand of packaged coffee are you having at home?
Hill: Sometimes it's Starbucks, sometimes it's Pete's.
Barker: Smuckers does Folgers as well.
Hill: Not doing that.
Barker: Little too classy for that?
Hill: But I'm a loyal customer of their jam. Love the jam.
Barker: Jiff?
Hill: Sure.
Barker: If you had pets, would you buy some of their branded pet foods?
Hill: Are they paying you to try to drum up business for them? Because that's where this conversation is going right now.
We talked about Wal-Mart and their results and their stock pop, but that pales in comparison to the retail behemoth that is RH (RH +0.21%). And I don't know when Restoration Hardware formally changed the name of the parent company to RH, but it's now RH. They raised their guidance. I guess they didn't report earnings results. Shares of RH are up 23%. How much did they raise their guidance? And how well is this membership model working? Because that appears to be working much better than a lot of skeptics, myself included, thought it would.
Barker: So, what's going on today is, they are having an investor day in Palm Beach. In order to roll out the story that they are going to present in more detail, they have chosen to release the good news of the quarter they're currently in. They're increasing their fiscal guidance, so they're just going to be able to roll out a show that's all positive. And it's been a bumpy ride for Restoration Hardware and/or RH shareholders over the last several years, but not this year. It's quadrupled. It's up 25% today. Nice, but it's now a $100 stock. At the start of the year, $25, when it was knocking on death's door.
Hill: That's amazing.
Barker: Right. So, what they're talking about today is, a lot of it has to do not just with growth, which they are talking about and they are enjoying currently, but also a much more efficiently run business. Their press release is loaded with mentions of how much efficiency they are implementing in their operations. They're buying back shares and they're raising their guidance and they're raising their comp guidance. Everything is a good story for them today.
Hill: Do you remember when they changed their name? Because I remember Coach changing their name to Tapestry. But, as we were talking about earlier today, they were probably due for a name, change because if you've ever actually been into a Restoration Hardware, the name itself is not really lend itself to what is happening inside that store.
Barker: No, there's not a lot of hardware going on. If you go in there and say, "I'd like a hammer or a chainsaw," whatever --
Hill: Wrenches.
Barker: Paint, pliers.
Hill: You go to Ace Hardware, they have a lot of hardware.
Barker: "I'm going to need some nails today."
Hill: "Sorry, we don't have that."
Barker: RH is like, "Look at the name, we're RH."
Hill: And also, not a lot of restoration happening.
Barker: Like, why are there all of these leather couches here when all I want is some plumbing equipment?
Hill: I have my grandmother's chest of drawers, can you restore that for me? "No, we don't do that."
Barker: "No. We don't do anything that has anything to do with our name." And enough of these occurred, and people said, "Why don't you just change your name to something sensible, like RH?" And eventually management cratered. We don't sell any fools here.
Hill: You're saying we need a name change?
Barker: [laughs] I'm just saying, we're in that category of companies that, I don't know. Amazon doesn't take you down to the Amazon.
Hill: Not yet.
Barker: Not yet. But, getting back to the story of what's going on here, they are continuing to open stores in some pretty high-profile locations, and they're doing one of the things that you like best, they're adding hospitality, food and beverage into their stores.
Hill: I love it when retailers do that.
Barker: Yeah, like the Urban Outfitters thing, and now RH. Instead of going in and just buying a sofa, you can get a beverage, or some food, I guess.
Hill: You know what? Their stock is up today, and they're having a great year.
Barker: Yeah, they're taking a victory lap today.
Hill: It is not like L Brands, which also reported, the parent company of Victoria's Secret and Bath & Body Works. Among other things, L Brands continues to struggle with the fact that they are largely anchored to malls. And traffic at malls is down, therefore, not surprisingly, same-store sales at Victoria's Secret are falling 4%.
Barker: Yeah. It is continuing to be tough times for Victoria's Secret. Part of that decline is explained by their elimination of swimwear and clothing from their offerings. They're focusing more strictly on the lingerie. So, down 4%, about 2% of that is explained by the categories that they eliminated. But, down 4% comps, which is a little bit better that how the first two quarters of the year went. But year to date, they're down 11% for the whole year. Last quarter is a little bit better, but it's been a tough year.
Hill: And Bath & Body Works --
Barker: Getting it done.
Hill: Are they?
Barker: Bath & Body Works, 4% increase. So, people are buying more and more of the candles and whatever else they sell there.
Hill: Here's the thing. If you're Bath & Body Works, and you're selling candles, which, last time I looked, that technology really hasn't changed in the last few hundred years, other than the scented candles, and they've clearly doubled down on that, tripled down. But, when you're selling candles at $27 a pop, you damn well better have some great profit margins, because I can't imagine that they're selling those things at a loss.
Barker: You're appalled by their candle selection. We've talked about this.
Hill: Much like Mondelez and be running rampant with Oreo flavors, whoever is heading up the candle section at Bath & Body Works clearly had some level of success, must have amazing gross margins, and therefore said, "You know what? I get to do whatever I want. You can't mess with me because I have the best margins in this entire business. So, I'm just going to make whatever scent I want, it doesn't even have to make sense." And that's absolutely what's going on when you look at Peppered Suede.
Barker: Peppered Suede makes no sense to you. You claim.
Hill: [laughs] Does that makes sense to you? Again, this is an actual sent. There's a scented candle on the Bath and Body Works website that somebody can go buy if they, apparently, hate money and just want to light it on fire, for $27, you can get something that is called "Peppered Suede."
Barker: You've never been in the position of finding some suede and thinking, "What this needs is a little pepper on it?"
Hill: Yes.
Barker: Well, see, you are apparently not their customer. I would bet, if you really took the time, the hours necessary to scroll through all the candles that they have, I bet it's not even one of their top three most illogical scents.
Hill: I'm going to go top five, in terms of insane, "what is this?" It's one thing to be like, vanilla, OK. And then they match vanilla with something, like, oh, it's vanilla cherry, at least I know what that is. Peppered Suede, are you kidding me? Again, it's just power run amok at Bath & Body Works. Power unchecked.
Barker: How about Bourbon Butterscotch? Would you allow that to be lit in your house?
Hill: I might have to buy one.
Barker: See? They've got something for everybody.
Hill: A little bit, yeah. Before we get to the mailbag, I have to say one thing about Papa John's, which is back in the news. I think the last time you were in the studio, we were talking about Papa John's.
Barker: How about this. Frozen Lake?
Hill: Oh, god! Again! At least have one of the words in the scent make sense. Frozen Lake?
Barker: Frozen Lake. It makes no sense, because, you set a frozen lake on fire, first of all, it's not going to burn very well.
Hill: Not for very long.
Barker: You just have some lukewarm water at that point, and who wants to smell that?
Hill: Yeah, that's no good. Last time you were here, we talked about Papa John's and their quarterly earnings, where John Schnatter, who's the CEO, right out of the gate blamed the NFL for Papa John's bad quarter. I'm guessing there's been a little bit of blowback over the last couple of weeks, because he came out the other day and apologized for being divisive. That was his word. He apologized for being divisive over the NFL protests, and saying, of course players have the right to protest. I just sort of looked at that, and here's what went through my mind -- well, a couple of went through my mind. One was, wow, you must have had a really bad two weeks of business. There must have been serious blowback, and they must have done a bunch of channel checks in terms of, "How are things going?" and got some really bad news. Because, he strikes me as a pretty confident business leader, so I don't think he comes out, necessarily, and makes this apology unless sales since they reported earnings have taken a significant dip. But the other thing is, whatever you think of the NFL protests, and I've heard very intelligent people that I respect on both sides of that issue, whatever you think of that, that to me is separate from the investing standpoint. Regardless of what you think of the NFL protest issue, the fact of the matter is, for investors, he came out and blamed the NFL and their leadership for a bad quarter. And among other things, that's just stupid.
Barker: Yeah.
Hill: And inconsistent. I can't recall Papa John's ever reporting a blowout quarter and saying, "Well, right out of the gate we have to get all the credit in the world to Roger Goodell and the people at the NFL, because there's a reason our pizza sales are through the roof."
Barker: Yeah, I think that's fair. I think it's a series of bad messaging moments for the company, which culminated in their being anointed the pizza of the alt right. The benign version of this is, they had quarterly results to report and guidance to give, and they say, "We need to bring down our guidance, we've dedicated a lot of money and the marketing to the NFL and the ratings are down, and that's going to hurt the guidance that we can provide." And they didn't provide that narrative in a very effective way, by getting hostile to the NFL and blaming the NFL rather than saying, "This is a cyclical thing, sometimes your ads are in the right place where the eyeballs are and sometimes they're not, we'll fine tune it and get it right," rather than saying, "I blame the NFL for failing to squash this controversy." Having seemed to learn that the consequences of looking like you're siding with those who want the players to just shut up and play ball and stop whining, that crowd, what the rewards for that were the alt-right coming out and saying, "Papa John's is now the pizza that we endorse." Which is not endorsement that I think you want. And that is at least as much as getting ahead of that and squashing that narrative before it gets any legs, because that is not what you want your brand associated with.
Hill: No, absolutely. And they tweeted out, "We're looking to continue this conversation, and we'll take advice from anyone," and this is directly from their quote, "except for Neo Nazis." But, again, I look at the last two weeks and what has transpired, and one of my thoughts from the investing standpoint is, if there were a roulette table and I could take my chips and put them on a couple of squares to bet on, here's what I'm betting on. Their next earnings report is early 2018, I'm taking half my tips and putting them on the square that says, at some point, before that earnings report, they're going to cut guidance. And I'm taking the rest of my chips and putting them on the square that says, they're going to report falling comps. And I feel pretty confident about winning one or both of those spins.
Barker: Yeah. I think they'll go out and spend their money in some other places which are less controversial. I'm sure they didn't expect advertising on the NFL to be controversial. But, there are plenty of other sports that are willing to take their dollars. I think this will turn out to be a blip, because they've been a pretty well-run company, pretty efficiently managed, and they've done a very good job at extending their online operations to increase the comps, make it more efficient, easier for people, one-touch ordering a pizza. That, over the long-term, is going to be more meaningful, I think, than today's controversy, as long as they play their cards better than they have.
Hill: And, just, over the last few years, there are great examples in this exact industry of CEOs coming out and messaging in a really confident, positive way -- and I'm thinking about Patrick Doyle at Domino's when he took over, coming out and saying, "Do you know why people aren't buying our pizza? Our pizza isn't very good. We've heard what you said, and we're going to work on making it better." And Shaich at Panera, a few years back, when he said, "We've looked around, and we've come to realize that the experience inside our Panera locations is like a mosh pit, and we're going to do what we can to make that better."
Anyway. Our email address, [email protected]. From Greg Potts in Worcester, Massachusetts. He sent a link to a story about Oreo-flavored candy canes which are now hitting stores just in time for the holidays. Greg simply wrote, "I hope this is fake news." So, do I, but it appears to be yet another money grab by the people at Mondelez who just said, "Sure, we'll license the Oreo name and likeness, it doesn't matter how terrible these candy canes taste."
Barker: Well, that's one interpretation. Another is, they're responding to the pent-up demand for candy canes that taste like Oreos, which seems equally plausible.
Hill: We are, I'm going to say six to 12 months away from a Peppered Suede Oreo.
Barker: Your kids have never come home and said, "Dad, when are you going to bring home some candy canes that taste like Oreos?"
Hill: No. [laughs]
Barker: "Why are you depriving us of the joys that other kids get to experience?"
Hill: My kids are used to me disappointing them.
Barker: Now, this may be off-topic, but in going through the Bath & Body Works candles, I found that they have both Frankincense and Myrrh.
Hill: Really?
Barker: Yes. So, if you've always wondered what those things smell like, and I'm pretty sure you have, now is the time that you can set fire to them and find out what it smells like.
Hill: Well, Myrrh is a bitter perfume. Or so the song goes. So, I don't know that that's necessarily going to smell all that great. But, the Frankincense, I'm intrigued.
Barker: Yeah?
Hill: Yeah.
Barker: Well, now you can --
Hill: I can shell out $54 to buy those candles? [laughs] Speaking of the holidays, as we were, off topic, another bonus episode of Market Foolery is coming, and it will have a holiday theme to it. The last episode, for those who missed it, you can still go back on iTunes or Stitcher or marketfoolery.com. September 30th was the date of the bonus episode that Bill and Roger Friedman and I did. If you've got an hour and five minutes to completely kill, and you don't necessarily care what you do with that time, then, yeah, you can listen to that episode. But, we got enough positive encouragement off of that, a lot of nice emails and tweets about it, so we're going to be doing another one. It will not be Roger back in the studio with us. We'll save who it is, but it's another longtime Fool.
Barker: An all-star.
Hill: An absolute all-star Fool. Who, when you and I were talking like, "We should do another one, just before the end of the year, maybe we'll talk holidays," because in the years past, we've talked about holiday TV specials that come up. And we thought, "If we're going to do a holiday episode, there's just one person we need to bring in the studio," and we immediately agreed, and then we proceeded to not tell him for about a month or so. But, finally told him last week, "Oh, we've been talking about bringing you in the studio to do this." And he agreed immediately, which was great.
Barker: What'd you have to offer him? This guy is in high demand.
Hill: He is in high demand. Amazingly, I was prepared to offer him something, but I didn't have to. Which was great, because I didn't have anything particularly great to offer him. But, I just thought, maybe I could bribe him with some coffee or something like that.
Barker: You know what you could offer him? A Blue Cypress and Vetiver scented candle.
Hill: One of those words sounds completely made up.
Barker: [laughs] That's what I was thinking.
Hill: Vetiver?
Barker: Vetiver.
Hill: Is there a description for what that is?
Barker: No. It's a mystery candle.
Hill: [groans] You know, I've been bashing the drunk-with-power leadership at Mondelez in the Oreo division, and I think it might come in second place to whatever is happening at the leadership of Bath & Body Works.
Barker: Well, before you close the books on that, another one is called, But First, Coffee!
Hill: Isn't that just a coffee-scented candle?
Barker: We don't know yet, do we?
Hill: Again, people, go to the Bath & Body Works website, and if you have $27 you would like to light on fire, any one of these candles can be yours. Bill Barker from Motley Fool Asset Management, thanks for being here!
Barker: Thank you!
Hill: Drop us an email, [email protected], you can send in your stock questions. Or, if you have suggestions for the holiday bonus episode of Market Foolery, [email protected]. 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 on Monday!
