Retail's Holiday Season Is Happy So Far

On this Market Foolery podcast, host Chris Hill and Motley Fool Total Income's Ron Gross start by taking the pulse of retail, which appears broadly healthy at the moment -- both traditional and e-commerce. News from Costco (COST 1.01%), Gap (GPS 0.77%), Michaels (MIK) and others has been making investors smile. Even the news from Sears Holdings has its stock heading higher, though it probably shouldn't. And speaking of news that investors are cheering more than they perhaps should, Chipotle Mexican Grill's (CMG 1.07%) CEO is stepping down. Naturally, the hope is that Steve Ells' successor will be able to turn things around after he leaves. The problem: Ells isn't going all that far.

A full transcript follows the video.

This video was recorded on Nov. 30, 2017.

Chris Hill: It's Thursday, Nov. 30. Welcome to Market Foolery. I'm Chris Hill. Joining me in the studio today, from Total Income, Ron Gross.

Ron Gross: Hey!

Hill: Happy Dow 24,000.

Gross: Wow. The stock market doesn't want to go down.

Hill: I don't think it's ever going to go down.

Gross: Everything seems perfectly rosy in the world, so I don't see a problem.

Hill: [laughs] Exactly. I feel like we should have party hats. 

Gross: That's a sign of a top. If you bring a party hat, I'm selling short.

Hill: I saw Art Cashin, who's CNBC all the time, and I don't know how old Art Cashin is --

Gross: Older than us.

Hill: He's older than us. I think he's going to his 70s. And I enjoy him when I see him on TV. And I saw two photos of him on Twitter today, and he was wearing a Dow 23,000 hat, and then a photo today where he had the Dow 24,000 hat.

All right, now that we've got the Dow 24,000 stuff out of the way, let's talk about retail, because Cyber Monday, Black Friday, those are in the rearview mirror. It seems, I don't want to jinx us, but it seems like things are shaping up pretty well for the retail industry. Or am I being overly optimistic?

Gross: No, I think that's fair. You didn't say amazing, or that things are going to be gangbusters. I think things are shaping up relatively well. Of course, when we're here back sometime in January, we will revisit and see whether or not we were right. Coming off Black Friday and Cyber Monday, things were clearly strong. Even the department stores fared well. Some of the funnier metrics were things like traffic was down less than it usually is, which I guess is positive. But for sure, online sales continue to be the story, with Amazon really picking up about half of Cyber Monday's sales, which is an amazing metric.

But in general, people are shopping more, people are feeling relatively good from an economic standpoint. And as we mentioned, the high stock market certainly doesn't hurt. Relatively strong GDP doesn't hurt; relatively low unemployment is good. So that bodes well for a good holiday season. Holiday retail sales are expected to be up somewhere around 3.5%-4%. We'll see if that holds true. Again, the online retailers will be the beneficiary of most of that growth. But when you blend in online and brick-and-mortar, you should see something that looks relatively healthy.

Hill: You mentioned the traffic being not quite as low as expected, which brings us very nicely to Sears. Sears' third-quarter loss was north of $550 million, and yet somehow, inexplicably, shares are up 4%-5%, because last year's third-quarter loss was $750 million.

Gross: If you're buying the stock, could you raise your hand? Who's buying the stock?

Hill: Who's buying this stock?

Gross: Same-store sales are down 15%. You don't have a healthy business. You could be a value investor -- I'm the biggest value investor around, and I love a good, cheap stock. But when a business is deteriorating, time and time again, the sales have declined for six years. Eddie Lampert has engineered this company into the ground, in my opinion.

You don't want to be an owner. You could be a trader of the stock, I guess. We're not traders at the Fool. We like to own companies for the long term that we think are healthy and vibrant and being run well, and Sears just does not fit that bill. They have debt problems; their balance sheet is shaky; Eddie Lampert has tried to monetize their real estate assets, and he has to some extent. In years past, he's bought back billions and billions of dollars in stock, now leaving the company with not enough cash, in my opinion. They underinvested in the stores. One would think, even if they invested in the stores, is Sears still a vibrant enough brand and destination that the world really needs a Sears? It's just a mess. I would imagine it it's traders that are pushing the stock higher. I hope it's not your everyday Foolish-type investor.

Hill: Eddie Lampert is coming up on his fifth anniversary as CEO of this company, and as you said, it has just been, every successive year is more dismal than the last. In addition to trying to monetize the real estate, he's also sold off some of their signature brands.

Gross: Spun off Lands' End.

Hill: Spun of Lands' End, sold off the Kenmore brand, I'm blanking on the tool brand that they had --

Gross: Kenmore.

Hill: No, Kenmore was the appliances. Was it Toolmaster? They had decent brands and they sold those off. Everything this guy touches turns to dirt. It's not gold; it's the anti-Midas touch.

Gross: Yeah. He is a relatively successful hedge fund guy. They aren't all winners, and you're seeing that right here. Which actually reminds me, a hedge fund guy I really respect, I very prominent value investor, Bruce Berkowitz, who has somewhat been struggling lately in his portfolio, resigned from the Sears board relatively recently, and I think that's a good indication --

Hill: Like, I just can't take it anymore?

Gross: -- seeing a really prominent value guy no longer seeing value.

Hill: And for whatever success Eddie Lampert may have had and has in the hedge fund industry, as the CEO of an once-major retailer, he's terrible.

Gross: Not a merchant. Clearly not a merchant.

Hill: Not a merchant. Sticking with retail, Costco shares up 3% today hitting a new high. This is not earnings. This is same-store-sales numbers. Is that it?

Gross: Yeah, that's it. But they're incredibly impressive. I think people are kind of fatigued on Costco, because Amazon is the big story that everyone wants to talk about nowadays, and even Wal-Mart more recently coming up around the bend, coming up fast. But net sales overall up 13% for Costco for November. Comp sales up 10.8%. That's the biggest monthly comp in over six years, which is really impressive, and it looks like growth is spread across most categories. We don't have a very large press release here giving us too much detail. Looks like e-commerce was up about 39%, real strong there as well. So don't count Costco out yet.

Hill: Do you have any guesses as to why -- I mean, to have monthly same-store sales come in at a six-year high, that's --

Gross: The only thing I'll say negatively is that the calendar juiced their numbers a little bit.

Hill: OK, that's what I was wondering.

Gross: Black Friday and the holiday weekend fell in this time period, where it didn't last time. But they said that only counted for about 1.5% of the pop. So even if you exclude that, it's still really strong numbers.

Hill: You look at some of the other retailers, smaller and niche retailers -- Michaels had their third-quarter report this morning. That stock is up 11%. Gap got a downgrade from Citi, but shares of Gap up 40% in the last three months.

Gross: It's this low-expectations game that's going on here. Retail has just been so tough, and Gap has made so many bad steps over the years that expectations were just so low. And if they put up better-than-expected results or if they make good comments about the future, the stock gets bid up a bit because it was just so low that nobody wanted to touch it. I was in a Gap for the first time in years over the weekend, I just happened to stumble into one. [laughs] And I was actually pretty impressed.

Hill: Did you buy anything?

Gross: I bought some things for my son, not for myself. But I was relatively impressed, and I was like, "Oh, I remember now why I used to shop at Gap. There's some stuff here." But low expectations is the name of the game.

Hill: I think it's low expectations, but also, we've been doing this podcast for seven years, and in any given year -- and I'm just going to focus on apparel retailers for this -- one of the apparel retailers has had a good year. Now, if you buy a basket of all however many apparel retailers seven years ago when we started doing this podcast, six of those seven years, not so great. But we've seen where Abercrombie & Fitch has had a good six- to 12-month run. Obviously, Gap has had a good three-month run. Even American Eagle back in the day had a good stretch here or there. Which just makes me want to avoid apparel retail stocks altogether, because I can't imagine trying to time it like that.

Gross: Right. To give them --

Hill: Credit?

Gross: Credit. I don't know what the word is. It's a really tough business to get consistently right year after year after year, because you have to be on trend; you have to know what the next thing is to stock inventory, stock the shelves with. And you can do that for certain periods of time, but to do it time and time again is even more difficult. So, what happens is, you do a nice job, you stumble, you have to put everything on sale, you have to get promotional, your gross margins get hit, your profitability gets hit, and then you either come back to fight another day and you get it right again as the cycle turns, or you are Aeropostale and you kind of don't.

Hill: [laughs] Poor Aeropostale. So. we're taping this podcast. We're also doing a Facebook live feed while we're doing this. By the way, for anyone who's on Facebook, if you want to join the Motley Fool podcast group, please join us. We have a couple pf thousand people in there. Dozens of listeners, couple of thousand people in the podcast group. Thank you to Vicky and Michael, who pointed out that Craftsman was the tool brand that Sears sold off.

Gross: Oh, yes, thank you.

Hill: Eddie Lampert, the hits just keep on coming.

Gross: Do you have any thoughts on Chipotle?

Hill: So, Chipotle.

Gross: Yeah, I knew you would have some thoughts.

Hill: Yes. In fact, I got emails and tweets from listeners --

Gross: I'm sure you did. 

Hill: -- yesterday when the news broke that Steve Ells was going to be stepping down. Like, "What do you think," and all those sorts of things. Mac hosted yesterday. I just wanted to share a couple of thoughts, one of which is that Sarah Halzik, and I don't know Sarah Halzik, but she writes for Bloomberg. I thought she nailed it yesterday with a column she wrote. She said the key question -- and this really is important, because I think, for people who want to have the gut reaction of Steve Ells is the founder of the company; he's had a couple of years to really get things straight, and he hasn't done it, so any new CEO is going to be an upgrade. As Sarah pointed out, no, the key question here is, what kind of chairman is Steve Ells going to be?

Gross: That was my thought exactly.

Hill: Is the next CEO, whoever that person is, are they going to have the latitude to do whatever they want? Or is he going to be constantly looking over their shoulder?

Gross: I wrote that down, that exact thing. See?

Hill: Yeah. And you know who I thought of, and this is not someone who is in contention to be the next CEO of Chipotle, John Flannery at General Electric (NYSE: GE). I don't know if anything he's doing at GE is going to work. Here's what I do know -- that dude is 100% in charge of that company. He is executing his vision. He has come in and said --

Gross: Yeah. I think it's time for an operational guy.

Hill: Or gal.

Gross: Or gal. It's not time for a visionary; it's not time for an ex-chef -- Ells is a trained chef. There's nothing wrong with chefs. But I'm saying it's time for a real operational guy to come in and get things done. Otherwise, this is going to continue to go down, and they're either going to end up being an acquisition candidate or they're going to just flounder.

Hill: Right, and that's the thing to see. Who is this next CEO, and what kind of latitude do they have?

Gross: And it can't be someone from inside the company.

Hill: No.

Gross: They have to hire from outside. I hope.

Hill: And partly because I think it would work, and partly because I think it would be fun to watch -- it would be great if Sally Smith said, "I'll take this job for five years."

Gross: That would be so good. "No money. Give me stock."

Hill: "No money, give me stock, and the first thing I'm going to do is breakfast."

Gross: Boom. 

Hill: And just start nailing it that way. I'm very curious to see who it's going to be. In fact, I know there are a couple of people on the board who are heading up the search committee, and I'm not saying Sally Smith is necessarily the person for the job, but they should absolutely talk to her and find out who she thinks they should be talking to.

Gross: I'm sure they're talking to lots of folks, for sure.

Hill: Exactly. Before we wrap up, a couple of housekeeping notes. We have a bonus episode of Market Foolery coming tomorrow.

Gross: Wow. No one told me.

Hill: You're not on it. 

Gross: There we go.

Hill: But because tomorrow is Dec. 1, this kicks off the holiday music, our third year in a row of doing the holiday music. And our man behind the glass, Dan Boyd, very excited to crank out some holiday tunes that honestly, you're not hearing on the radio, and that's a good thing.

Gross: A musician in his own right.

Hill: Yes, a talented musician in his own right. I don't know if we're going to get some original holiday music from Dan Boyd and one of his bands.

Gross: Nothing says holiday like a good bass solo.

Hill: You know what? Compared to "Rockin' Around the Christmas Tree" every 90 minutes on the radio? Yeah, I'll totally take that. Speaking of the holidays, this weekend on Motley Fool Money, our guest is Chris Byrne, also known as the toy guy. He is a 30-year industry expert on the toy industry, and I love talking to Chris Byrne. It's all about what's hot.

Gross: Yeah, what's hot, I wonder.

Hill: Spoiler alert. You know what one of the hot toys is this year? You'll appreciate this: Teddy Ruxpin.

Gross: Back again?

Hill: Yeah, back from 1983. Teddy Ruxpin.

Gross: I saw a guy on the sidewalk the other day riding one of those scooters. Looked like a skateboard, but it's this way, not that way. I was like, where did that thing go? Once they banned them from going on airplanes, they seem to have gone away.

Hill: The new and improved Teddy Ruxpin is just one of the hot new toys. So check that out this weekend.

Speaking of Motley Fool Money -- and you are involved in this, unlike the bonus episode of Market Foolery -- Friday, Dec. 8, and this is for anyone who lives in the D.C. area or anyone who's going to be in the D.C. area on Friday, Dec. 8, we're going to be taping Motley Fool Money at Chatter in Washington, D.C. Chatter is a restaurant in Northwest D.C. that is owned by several people, one of whom is Tony Kornheiser of Pardon the Interruption fame on ESPN. Chatter is located at 5247 Wisconsin Ave. -- that's at the corner of Wisconsin Avenue and Jennifer Street, just inside the line of the District of Columbia.

Gross: It's going to be a good time.

Hill: Yeah. Friday, Dec. 8, 11:30 a.m., we're going to start taping the show, and we're going to be hanging out afterwards -- although you have to hit the road afterwards.

Gross: I do, I have to go to a soccer tournament for my boy.

Hill: All right, so, the rest of us will be hanging out after we take Motley Fool Money. So, Friday, Dec. 8, if you're in the D.C. area, please come join us. Ron Gross from Total Income, thanks for being here!

Gross: My pleasure. 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 next week.