In today's episode of the MarketFoolery podcast, Chris Hill talks with Bill Barker from Motley Fool Asset Management about the day's market news. Hasbro (HAS 2.32%) is up 4% today for no discernible reason, but whispers of a merger with Mattel (MAT +0.76%) are getting stronger by the day. Meanwhile, Casey's General Stores (CASY 2.15%) is down a whopping 11% on lame quarterly results. This holiday season looks promising for retailers, but there are bound to be some losers, and investors will want to watch next quarter's earnings reports carefully.
A full transcript follows the video.
This video was recorded on Dec. 13, 2017.
Chris Hill: It's Wednesday, December 13th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Happy Wednesday!
Bill Barker: Thank you!
Hill: This is one of those days where -- every now and then, I say, it would be nice if we had a window, it'd be really nice if we had a window, because it's so nice outside, and this is not one of those days.
Barker: No. We went outside to get coffee earlier, and you ran across the street as fast as you could. You left me.
Hill: Well, I wasn't wearing a coat, because I'm an idiot. So that's why I was running across the street. It's 20 degrees and windy. It had nothing to do with you personally. It was really just about self-preservation.
Barker: Can't L.L.Bean outfit you with something for the winter?
Hill: I don't think L.L.Bean does that.
Barker: They don't make winter clothing?
Hill: No, they make winter clothing. Also, they probably do for the Winter Olympics or something like that. Someone has some kind of an apparel deal with NBC.
Barker: Could they sponsor you? Could they be the official clothing company of The Motley Fool podcasts? Or this one?
Hill: Absolutely they could. If they want to email [email protected], someone in the marketing department, I'm happy to have that conversation.
Barker: How many people would they have to outfit? Just you, really.
Hill: Several.
Barker: Everybody else is just a guest. You and Mac. All the hosts are willing to wear L.L.Bean at all times while they're podcasting, if L.L.Bean would just show up and sponsor you.
Hill: I think that's true. Although, if I were L.L. Bean and I were in the marketing department, my first question would be something along the lines of, let me get this straight, this is an audio podcast, right? People aren't going to be able to see how the clothing looks? It's an audio podcast? And I'd say yeah, and they'd say, OK, thanks, and hang up.
Barker: But you would describe the clothing, and how warm and comfortable it was.
Hill: That might be even more boring than the conversation you and I have been having for the last 90 seconds.
Barker: What about Periscoping that Moser does?
Hill: That's good.
Barker: That's good.
Hill: Let's get to the news.
Barker: It's a slow news day.
Hill: As people probably figured out. And yes, there's still some news. We got some retail news, and we have more retail news. Let's start with Hasbro, which is up 4% this morning, and I'm wondering what the news is. I'm wondering if it just dawned on some group of investors that, A, Hasbro makes toys, B, Hasbro has licensing deals with Star Wars, and C, the new Star Wars movie comes out this Friday.
Barker: So, you said we had news, and now you're asking me if there is any news.
Hill: I can't do all the work. [laughs]
Barker: No, you can't. I think we've proven that. There's no news, really, out there. Speculation, possibly, as you've raised, that Star Wars, this was a little-known thing.
Hill: That Star Wars comes out on Friday?
Barker: Yeah. Disney is springing this out on people, and Hasbro is moving in sympathy with that, possibly. I think possibly, there's new whispers out there about the proposed merger with Mattel having another life. Mattel has rejected it up to the point, but it would make a lot of sense for Mattel to get out of the way of itself and let Hasbro do the work of running their business. The only thing in the news is they've got a proposal to move their headquarters to Providence, or to take out what is currently known as the Superman building in Providence, which has been empty for a couple of years now.
Hill: Historic building in Downtown Providence, Rhode Island, as you said, referred to as the Superman building, because it bears some resemblance to the Daily Planet, the newspaper that Clark Kent works at, in the television show from the 50s, which you watched growing up. [laughs] But, it actually does show up as well in the show Family Guy.
Barker: I did not know that.
Hill: Yes. Seth MacFarlane is from Connecticut but went to the Rhode Island School of Design, and Family Guy is set in a fictional town in Rhode Island, so that's one of his homages to his adopted state. Hasbro is based in Rhode Island.
Barker: They're based in Rhode Island, but I think they're spread out a bit. I think they're in Pawtucket, that's at least one of their major, if not main, office. So, this would be a proposal to get all the Rhode Island employees there at one main headquarters in Providence.
Hill: I don't know why they're not doing that right now. I don't want to be too critical of Hasbro management, because certainly, if you are a shareholder of Hasbro, you've been rewarded quite nicely over the last decade or so. And yet, we're talking about Rhode Island. This isn't, "We're based in California and he have the Sacramento office, we have the San Diego office." It's Rhode Island. They could carpet that state if they wanted to.
Barker: Yeah, they could. Of course, we're not nearly as big as Hasbro, and we've managed to be in more than one office at numerous times in the history of this company. Currently in the one office here. But, sometimes you just need to grow, don't have a long-term plan settled on yet. And it looks like they're putting together a long-term plan to get everybody into the one building if they can pull it off.
Hill: Hasbro, as you said, has made overtures to Mattel that Mattel has resisted to this point. A year from now, do you think this deal has gone through? And I don't have a dog in this fight, but I'm not sure if I should be rooting for this merger or not. Presumably, if the price is right, that works out well for Mattel shareholders. But, I don't know, I kind of like that there's the competition out there, and I also like to see new CEOs get a chance to turn a company around, and that's the case at Mattel. The CEO has been there less than a year, and I feel like she should have a chance to implement her vision for what success looks like at Mattel.
Barker: Mattel, just the other day, a day ago, reported that it is anticipating a disappointing holiday season. As one might imagine, the holiday season is kind of important for toy makers. Hasbro has made no such announcement. I think this is another in an ongoing series of disappointing announcements from Mattel. I think when you ask, can I speculate, will this be done in a year from today, Hasbro is a well-run company, they're not going to overpay. They've made an offer and Mattel has rejected it. But if Mattel thinks they're going to get more money, they may be right, but if they think they're going to get more money than they're worth, I think they're wrong. I think their value as a company has been declining for a while. Maybe their best play is to sell sooner rather than later. If they follow the pattern that they have established over the last few years, they're in the process of destroying value, not creating it. And in that scenario, they're going to get a better price. This was $16 billion company at the end of 2013. It's $6 billion today. So, there was a time when they were a significantly bigger company than Hasbro. And maybe in their minds, they still are. They're a $5 billion company today by market cap, Hasbro is $10 billion, and maybe it's a pride thing. But sooner or later, math wins out. I don't know whether it's going to be the case for Mattel soon, but share price down the way it's been, the stock price has been cut in half over the last year.
Hill: Shares of Casey's General Store down 11% this week. Second quarter earnings came out yesterday. Not great. One of the advantages that Casey's General Stores have had historically is there prepared food division, because they're not just a convenience store and a place that you can get gas, they also have prepared food. And reportedly, the pizza is very good. I've not yet had it. As I think we've talked about before, the closest Casey's General Store to where you and I are sitting right now is roughly 400 miles away.
Barker: That's a road trip.
Hill: That's on the bucket list for 2018 and beyond. But, their same-store sales on prepared foods, only up 2%. How much is this company struggling right now?
Barker: They're not really struggling, but they did underperform. The stock price was down quite a bit yesterday when they reported these numbers. One of the numbers that I think surprised the most was regarding the prepared foods, they got off to a good start, they had good August numbers, but by October, they were off by quite a bit. And one wonders, in the pizza world, and this impacted the margins, too, and now they've had to get promotional, as are a number of other pizza makers -- and, of course, the biggest story in pizza this quarter has been Papa John's. One wonders whether Casey's also, they certainly didn't bring out the NFL as a whipping boy for their poor quarter the way Papa John's did to their detriment, but October is when the prepared food numbers started really declining. And they sell 50-60% of their pizza on the weekends. There's college football, and there's the NFL, and there's other sporting events and there are other things going on on the weekend as well, so it's not all one thing. And the numbers didn't fall off a cliff, but I have to wonder whether NFL viewership has also impacted, to a lesser degree, but in the same category, Casey's.
Hill: That's possible, although when you look at broadcast television and cable television viewership overall, it's down roughly the same amount. So, it's not like the drop in NFL ratings is dramatically greater than the drop in all of television. So, I can see where anyone who's tied to the NFL would see a slight decline in their business. But as we've talked about before, the extent to which Papa John's is blaming the NFL is just nuts.
Barker: It's the possibility that this is where Casey's was advertising their pizza, and they need to move to a place where there are different eyeballs. But on the whole, it wasn't a bad quarter. This is a well-run company. They have about 2,000 stores. They're going through remodeling. They've taken on some expenses because of a number of new stores and remodels. I think this bodes well for their future. But, their prepared food margins were off by about 1%. They're getting nearly 63% gross margin. That's awfully good. In gas, they get about $0.19 per gallon, so, they're getting less than 10% margin, and that's pretty consistent with convenience store margins for gas. What you're hoping is, that's the thing that brings people to their location, and then they make the sales inside the store. They weren't doing that as much over the quarter. And now you have Wawa coming.
Hill: Hold that thought, because we will get to Wawa. Before we get to Wawa, you mentioned Casey's General Store is getting promotional. And it sparked this thought that I wanted to get your two cents on. It seems like we're in pretty good shape, and by we, I mean the retail industry, the way the majority of numbers are going for a variety of retailers this holiday season, it looks like we're in for a good holiday retail season. And yet, I cannot help but notice the television ads, in particular from Macy's and Kohl's, which, I don't know who does their ads, but they do a good job. They're informative, they're fun. But they're not cheap. So, I'm wondering if one of the things investors should be looking at in January is not just how did retailers do in the holiday season but, is this one of those times when you want to dig a little deeper as an investor and look at, oh, by the way, what was your marketing spend? What was your promotional spend? Because again, Kohl's and Macy's might be playing it right. These are good ads. But if it doesn't translate into sales, I think they're in even more trouble.
Barker: I think there are plenty of retailers that are going to be exposed by the end of the holiday season as having a limited future as online shopping becomes more and more important. You have the ones that are succeeding, they're getting more and more of their business from online. And I don't know if that's the case with Macy's. But, if they have a reasonable website, one of the things they will get from increased commercials is people sitting at home and going to macys.com right away. I imagine that's their hope. That's certainly the case, that Nordstrom's (JWN +0.00%), and many of the places that are relatively succeeding, have done so by becoming more attached to a greater proportion of their sales online. I don't think that those who don't have the money to advertise are going to see the best holiday season. We'll see.
Hill: Tomorrow, December 14th, the first Wawa in Washington D.C. will open its doors. Are you speaking at the ribbon cutting? As a dignitary from the Commonwealth of Pennsylvania, I'm assuming you're on the stage, I just didn't know if you had a speaking part.
Barker: I imagine it's going to impact those first day Star Wars tickets sales tomorrow night, that Wawa is opening here. Locally. I don't know how far people will be traveling, because they shouldn't have to travel far to get to a Wawa, right?
Hill: That's true. On the Market Foolery Twitter feed, which, you can follow us on Twitter if you're on Twitter, @MarketFoolery is the show's handle, I actually tweeted at Wawa right before the show saying, is the new location in D.C. going to have seating?
Barker: Have they gotten back to you?
Hill: They've haven't gotten back to me yet.
Barker: They're pretty good at getting back to people. They have a big Twitter presence, as you know.
Hill: Yes, you pointed that out to me. That's how I know that. I don't follow them on Twitter like you do. But, typically, do Wawas have seating? I've only been to a couple in my life, and I didn't notice any seating. Obviously, where I'm going with this is, we're not going to road trip 400 miles to do a show at Casey's General Store, but a new Wawa in downtown D.C., if they have seating, maybe we pack up Dan Boyd and some equipment and we go tape a show.
Barker: You're willing to do a podcast there?
Hill: Absolutely.
Barker: Well, for the first several months, it's going to be too crowded.
Hill: You think so?
Barker: There's going to be no space. This is the first Wawa in D.C. we're talking about. Some people aren't aware of just how important Wawa is, and how beloved it is in the Greater Philadelphia area. The Greater Philadelphia area has now expanded to D.C. Philadelphia is beginning to take over the East Coast, one feels, with Wawa finally arriving.
Hill: There are some business leaders and business evangelists that believe that the proper tone to strike in any situation is to underpromise and overdeliver. And it sounds like you're looking at that and saying, let's flip it around, let's talk about how huge this is going to be. Lines out the door for months to come at the D.C. Wawa.
Barker: I think to say that Wawa is the best convenience store is underpromising, because it might be the best store, period, anywhere.
Hill: Wow. Really?
Barker: So, if you just limit it to convenience stores, you're really limiting the praise that you're making. What do you have in Maine? We've gone over this, there's nothing.
Hill: What do we have in Maine for stores?
Barker: Yeah, a great convenience store.
Hill: Oh, in the convenience store category?
Barker: It's, like, 7-11.
Hill: I don't know that we have anything that is native to the state. I don't think. But, to your last point, it sounds like you think there's a decent chance that Jeff Bezos lies awake at night and asks himself, how can we make Amazon (AMZN +0.29%) more like Wawa? We're good, we've had pretty good success to this point over the last 20 years, but what's going to get us to the next level on the retail side of the business? Forget Amazon Web Services, what can we do to be more like Wawa?
Barker: Joking aside, what I was thinking of in terms of Casey's and their numbers, the convenience stores are not really as impacted by Amazon as so many other stores. The mall-based stores we were talking about a moment ago, Macy's and what's happened to them, you're going there, this store that's opening tomorrow is not going to be gas. It's downtown D.C. But, a lot of Wawa locations have gas. Casey's, of course. And if you're selling pizza and convenience things that you pick up at the last minute while you're getting gas, these are not the businesses that are threatened in the same way by Amazon. I think they, thankfully, don't have to lie awake at night thinking, how are we going to survive the next five to 10 years? Which I think Macy's executives are probably thinking about 24 hours. What are we going to look like in 10 years if we don't succeed online? How many people are going to be going to malls? It's possible that an autonomous vehicle, electric vehicle model would impact that portion of Wawa that's selling gas. Still a ways away. But I think there will be effects from that within 10 years.
Hill: And one more point to add to that, which is something that every retailer cares about, and that's throughput. My own limited experience at Wawa has been that they do a very good job of throughput, of getting people in and out and getting them what they want and getting them out the door.
Barker: By very good, you mean great.
Hill: Again --
Barker: I'm just translating.
Hill: It's 3AM. Bezos can't sleep, tossing and turning, and finally it's so bad that he gets out of bed and he's just pacing in his living room, thinking, how can we be more like Wawa?
Barker: What he's thinking is why aren't there any Wawa locations out here on the West Coast? That's what's keeping him up at night. How can we attract them to come out here?
Hill: He does spend a little bit of time in Washington D.C.
Barker: Probably a little bit more now.
Hill: [laughs] Bill Barker from Motley Fool Asset Management. If you want to read more from Bill and his colleagues, you can go to foolfunds.com. 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 Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
[The Raveonettes -- The Christmas Song]
