Sometimes, Retailers' Earnings Don't Get the Stock Moves You'd Expect

In this Market Foolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker check in with a couple of major retailers' results. Walmart (WMT -0.08%) delivered earnings growth, and in particular, 23% online sales growth. Home Depot's (HD 0.94%) comps were impressive again, too. But neither got much love from investors. Nor did Rite Aid (RAD -31.13%), which is being purchased by privately held supermarket chain operator Albertsons. So what gives? The guys explain what the market might be thinking. They also take a quick look at what Black Panther and the upcoming movie slate says about the investment thesis for Disney (DIS -0.04%).

A full transcript follows the video.

This video was recorded on Feb. 20, 2018.

Chris Hill: It's Tuesday, Feb. 20. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Baker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: How did you celebrate Presidents Day?

Barker: Olympics.

Hill: Olympics?

Barker: Yeah. Mondo Olympics. All day.

Hill: Did you think about any presidents in particular? Did you think about, "You know what, I'm going to take two minutes and ruminate on Chester A. Arthur, just for a moment, because I never do any other day?"

Barker: No. I think, as I mentioned, I did go through my Twitter account and eliminate everybody that comments on politics. They all had intelligent things to point to and say. I just need a little break. And if we're going to talk about presidents that probably popped into my mind yesterday, the usual one --

Hill: The current one.

Barker: -- would be, unfortunately, in that category.

Hill: And that's why we have the Olympics. Thank goodness! Which, by the way, I don't know if our producer, Dan Boyd, was recording the 10 minutes right before we started recording here, but I think we came up with some really good ideas to improve the Winter Olympics. Or, conversely, we came up with some really bad ideas that would make it so that no one would ever watch the Winter Olympics.

Barker: It was maybe our best material of the year. If you could use that as an outtake? Maybe? At the end of the show? Do you think?

Hill: I don't know.

Barker: I think we were pretty G-rated on that one.

Hill: Oh, no. It wasn't a question of the profanity or lack thereof, it was just, how valid were the ideas we were putting forward about improving the Olympics? Or, again, destroying the potential for any viewing audience for NBC?

Barker: I'm not saying they were valid. They were comedic. We were laughing.

Hill: That's true. We're just delaying the actual news today. There is actual news. Thanks to our listeners who hung in there yesterday, because we were off yesterday. The market was closed. When the stock market is closed, The Motley Fool is closed for business. We follow the market's schedule. Market back with a vengeance today, so we're going to get to Home Depot's earnings, and we're going to get to the huge weekend that the Walt Disney film studios had, and we're going to get to the big deal of the day involving grocery stores and drugstores. 

But we have to start with Walmart. Help me out. Walmart shares are down about 10% this morning. I get that Walmart's fourth-quarter profits came in lower than Wall Street analysts were hoping for. On the surface, this quarter didn't look 10% bad to me. The fact that online sales growth is lower, it's still online sales growth, and we've talked before about how, for a long time, e-commerce for Walmart was working off of a very small base. So, any time they would put up, "E-commerce sales up 20%," well, they're working off a small base. They're not working off a small base anymore. So, I think, shame on any Wall Street analyst who thought that Walmart was going to be putting up these huge e-commerce comps quarter after quarter.

Barker: We commented, I think I was here for last quarter's Walmart earnings, and online was up 50% in the third quarter, and it was up 23% year over year this quarter. Those are two very different numbers. Within the larger picture, third quarter Walmart earnings were good, but the stock reacted very positively, and a lot of it had to do with that 50% online number. Today, down almost 10%. Again, solid numbers all around. But what you have is a small part of the company, the online sales, in comparison to the larger part of the company, and it's still growing faster. 23% growth is pretty significant. But it's hard to value the numbers around 50%, 40%, 30%. They're still guiding for 40%. 

Here's another part of why the stock is weak today: they're guiding for the year for 40% online growth, which is phenomenal. But what they're saying is, that's going to be back later, that's going to be more in the second half of the year. And there's always a certain amount of skepticism from the, "You know what? We're going to do this good work, but more of it in the second half of the year." That never goes over particularly well. Walmart's stock up 50% in the last year, that embeds a lot of good news. Today's news was good, but not great.

Hill: And I'm glad you're touched on the management comments. That was one of the things in the conference call that I think was clarifying, in this regard, that Doug McMillon, the CEO, who has overseen this growth recently, he spearheaded the Jet.com acquisition, he was pretty cagey when pressed by analysts. And I feel like everybody did their job. The analysts did their job in pressing the CEO. "Give us some specifics." And McMillon, I think, did his job in essentially, to use a sports analogy, pulling a Bill Belichick and essentially saying, "No, I'm not going to give you specifics. If you want to trust that we're going to do this, great. If you're not going to trust that we're going to do this and you want to sell off our stock or downgrade our stock, that's certainly in your purview to do that. But I'm not going to give you the specifics that you want."

Barker: Well, if you're not going to do that, and I think you can credit him with choosing not to do it, but the stock was trading up around 25, 27 times earnings. Which is higher than the market generally, and much higher than Walmart specifically has traded over most of its recent past. Over the last five years, it's averaged a 16 multiple of price-to-earnings. So, you've seen, that 55% stock performance in the last year is not reflected of a 55% growth in earnings or profits or anything like that. It's just, this online business is growing very impressively, still is. But that becomes hard to value. And today, down 9%. The stock was up 6% going into today for the year. It's become a little bit less easy to predict what a big, big company like this will do with its numbers than it used to be, so you're seeing a little bit more volatility just because of that online story evolving.

Hill: Let's move on to the home improvement industry and Home Depot's fourth quarter profits. Not surprisingly, came in higher than expected. Overall sales looking good. Same-store sales continue to impress, up 7.5%.

Barker: That's a good number. That's an awfully good number. And the stock is not moving a whole lot in response to that today because it's basically what was expected. They also guided for the year comps of 5% for 2018, and that's awfully good but not really different from what the market was expecting, maybe even a little under what the market analysts had expected. I think they bought back $2 billion and shares over the course of the quarter. They've bumped up their dividend. Home Depot, the equation here is, and has been for a long time, running these stores better and better and better, but not building more stores every year. They're not a store growth story, they're a capital allocation story, where they are reinvesting in themselves by improving the quality and efficiency of their stores, they're attracting more people, they're selling more stuff. But then, they are returning large percentages of that back to shareholders, which relieves them of the obligation of figuring out what else to do with it, be that buying another company or, where is a new location to put up more stores, what international countries should we expand into. No, just, return a lot of the money back, raise our dividend every year, buy back some shares, and keep doing what we're doing, take market share by being better with the store count that we have.

Hill: Do you like this strategy? Clearly it's paying off for shareholders. I'm just wondering if Home Depot does have some room for expansion. It doesn't seem like a business that's in any danger anytime soon in the United States of being over expanded.

Barker: Speaking as a shareholder -- I'm not a shareholder, but my wife holds them in her retirement account, so effectively I'm a shareholder -- I'm very happy with how things have been going. It has a 10-year record of 22% returns. Compound that out for 10 years, and you get a big pile of money at the end of your decade. Now, 10 years ago, 2018, subtract 10 from that, you're in the early part of 2008 and shares were weak then. It all depends, to a degree, on your starting point. But I can't complain about what they've been doing. They're a 20% stock return story year in and year out on average. And that's something that, I don't know, if that's not good enough for shareholders, then they can find riskier growth stories. 

Of course, part of this is, the health of the housing market today, we could look at a lesser-known company, TRI Pointe Homes is another data point for that, that's a stock we own in our mutual fund. They have orders up 17% over the year. This is TRI Pointe, new home deliveries up 23%. Backlog is up 56%. It's still, although interest rates are moving up, and that's a concern, and TRI Pointe plays and a higher price point house, and there's some changes in the deductibility of mortgage, which might affect them. But to date, their numbers are going very well. And that's just, Home Depot is a much bigger example of the same story.

Hill: Do you think we can expect Lowe's (LOW -0.04%) quarterly results tomorrow, do you think they're going to hold serve as they've done for the last two to three years, where Home Depot comes out, puts up their numbers, and Lowe's comes out and their numbers look almost as good as Home Depot's but just not quite?

Barker: Yeah. I mean, until that narrative changes, I think that's what you should expect. I don't know of any reason to expect something different. There was a time when Lowe's was getting the job done better than Home Depot, but that time hasn't been around for the last half-decade.

Hill: I was going to say, I think that coincided with the time that Bob Nardelli was running Home Depot.

Barker: [laughs] Well, Lowe's is an outstanding company as well, and they are enjoying the same macroeconomic tailwinds and doing almost as well for shareholders.

Hill: Oh, absolutely. And in the same way that if you owned shares of Mastercard and Visa over the last 10 years, you've done really well and you almost don't care which one has done better. Same sort of thing with Home Depot and Lowe's. If you've owned both of them, you're quite happy with the returns on both.

Barker: Should we just pre-tape that part of tomorrow's episode right now?

Hill: [laughs] "Lowe's fourth quarter, pretty good, just not quite as good as Home Depot's."

Barker: "Just as we expected." [laughs] 

Hill: Moving on -- I don't know what else we're going to talk about tomorrow. Probably some more Winter Olympics.

Barker: I don't know. Who are you going to have on tomorrow?

Hill: You have to tune in tomorrow to find out.

Barker: You're going to tease that, with a mystery guest?

Hill: Exactly. A total mystery guest.

Barker: Do you take requests?

Hill: On what?

Barker: Mystery guests?

Hill: Sure.

Barker: Folks chime in and say, "Hey, you know who you haven't had on in a while?"

Hill: Yeah, I absolutely --

Barker: How about I offer up somebody from Motley Fool Asset Management for you?

Hill: Here's the thing. I absolutely take requests, I just don't always fulfill them. It's like the old line, does God answer prayers? Sure, God answers prayers. Sometimes the answer is no. But, yeah, I take requests.

Barker: How about a Dave Meier?

Hill: Again --

Barker: How about a Nate Weisshaar?

Hill: [laughs] You can make requests, I'm not necessarily going to fulfill them. Please help me understand what to think about this next story. Albertsons, the grocery chain, is buying Rite Aid, the drugstore. One reaction that appears to be happening on Wall Street is essentially the investing equivalent of yawning, because it's not like shares of Rite Aid are shooting to the moon on this. And Rite Aid has always struck me as one of those businesses without any real compelling thesis for investors, in part because they haven't made the moves that CVS has made over the last four years, in terms of being more focused on health, not just in the way that CVS got rid of selling tobacco, but their move into being more of a healthcare company. When you saw the news, Albertsons buying Rite Aid, what was your first reaction?

Barker: I think we talked about Rite Aid recently in regard to their attempt to sell themselves to Walgreens. They were partially successful. They sold some of their stores, but not all, not as many as they wanted. What was left was, there has to be someone else that's going to acquire this company. They obviously don't want to go it alone any longer, and they're handicapped against CVS and Walgreens in terms of their scope. But, somebody can probably do a better job with what remains. 

And I think Rite Aid tried to sell 4,600 locations to Walgreens in 2015. Ultimately they sold less than half of that, about 1,900. So, what they had left was available to the highest bidder, and Albertsons has been moving around. This is a company that wanted to go public a couple of years ago and failed. They were lined up to do it, but then Kroger had some bad news and then Walmart got into the grocery store space in a better way, and then Amazon acquired Whole Foods, so there never seemed to be a good enough time to reintroduce that IPO. And you still have Albertsons hanging around, owned by Cerberus Capital Management, still trying to figure out what the combination is that's going to interest the market. I think that's the liquidation event that their private equity owners want.

Hill: Is that the best name of any private equity firm?

Barker: Cerberus Capital Management?

Hill: Yeah.

Barker: I don't know. I've never ranked them.

Hill: I just think, when you think about private equity and what private equity companies are capable of, sometimes for good, sometimes not for good, the fact that these folks decided, "We're going to name our private equity firm after the mythological three-headed dog who guards the gates of hell," I feel like they were onto something there.

Barker: Yeah, the three-headed hellhound. I don't know. Does that convey skill at private equity? Or just something to fear?

Hill: Definitely the latter. I don't know their track record well enough to know if they can claim the former. But certainly, they're shooting for the former.

Barker: Well, I think it's a strong one. I don't know that it's worked out especially well for Albertsons so far. It's a mixed record, apparently.

Hill: Well, when you decide to hook up with the company that named their firm after the three-headed hellhound, you kind of get what you signed up for, I think. You kind of knew that going in, or you should have. 

Before we wrap up, huge weekend for the Walt Disney Company at the box office, where Black Panther took in north of $230 million -- granted, the extra day helped, having the four-day weekend certainly helped. But even if you're just counting the traditional Friday, Saturday, Sunday, it came in just shy of $200 million. I went to see it yesterday with my son, and what struck me was not just that it's a great movie, and it is a great movie, highly enjoyable, and all the things you've come to expect and hope for out of a Marvel film -- but, what struck me was the fact that, with the exception of one movie, every other movie that had a preview before Black Panther ran was a Disney movie. There were three Marvel films, Deadpool II, Ant-Man and the Wasp, Venom, there was A Wrinkle in Time, which is a Disney movie, and the Star Wars spin-off movie about Han Solo. And that doesn't even include The Incredibles II, which is coming later this year, or The Avengers: Infinity War, which is coming later this year. Again, I get all the hand-wringing at the Walt Disney Company or around the Walt Disney Company about ESPN and the declining number of people who are watching traditional cable television. But it really does seem like the kitchen is well-stocked when it comes to the Walt Disney Company's movie studios.

Barker: Oh, yeah. It's going to be a huge year, one assumes, if the movies or anywhere in the ballpark of all their predecessors, and most of those things are sequels or prequels or whatever the Solo movie is categorized as. Wrinkle in Time, you looking forward to that one?

Hill: Here's the thing about A Wrinkle in Time. I never really read that book. My memory is, that's a book I started to read. I didn't really get it. I think I was maybe in fifth or sixth grade or something like that. It didn't really grab me, so I just put it down. So, I'm looking at that movie trailer and remembering that about my own childhood, but also trying to think of it in terms of, put aside whether or not I've read the book, because clearly I haven't, is this a movie that is grabbing my attention? And I'm hoping, as a shareholder, it's going to do well. It probably is going to have a big opening weekend. But on the surface, I don't know if that movie is going to work.

Barker: You know the first line from the book?

Hill: No.

Barker: "It was a dark and stormy night."

Hill: Is that... on purpose?

Barker: I believe so. It's an homage to all those who have used that before, including Edward George Bulwer-Lytton, who first coined it. And then Snoopy owned it in the Charlie Brown strips. But, have you ever read the Bulwer-Lytton Fiction Contest entries?

Hill: No.

Barker: You should. It's an annual contest for the first sentence of the worst possible book. It mirrors the original "It was a dark and stormy night," which is not a complete sentence. That's only about one-fifteenth of the first sentence of the book that it originally appeared in, which is not A Wrinkle in Time. Anyway, this is an annual contest that's online, and you can look it up. It's phenomenal stuff, where people come up with these sentences, very complex sentences that bleed into interesting places.

Hill: One more time, the name of the contest?

Barker: The Bulwer-Lytton Fiction Contest.

Hill: Secondly, I think if you're aiming to write a really bad opening sentence, it has to be long, right? It has to be a traditional paragraph in length, doesn't it?

Barker: Well, I can redo the original sentence. This is the standard that this contest asks you to pursue. The original sentence --

Hill: You know what? I can't think of a better way to end this worthless episode, so, by all means.

Barker: OK. "It was a dark and stormy night; the rain fell in torrents -- except at occasional intervals, when it was checked by a violent gust of wind which swept up the streets" -- parenthesis -- "for it is in London that our scene lies" -- close paren -- "rattling along the housetops, and fiercely agitating the scanty flame of the lamps that struggled against the darkness."

Hill: Wow.

Barker: Don't you want to read the rest of that book?

Hill: Not even remotely.

Barker: [laughs] So, A Wrinkle in Time improves greatly on that with its use. But, that's the homage that's there.

Hill: A Wrinkle in Time improves on that, and yet, to bring it back to investing, that sounds like a really easy comp. You can read more from Bill Barker and his colleagues at Motley Fool Asset Management. I promise you, their writing is a whole lot better than that writing. Go to foolfunds.com to read more. 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!