Priceline Powers Ahead; Papa John's Gets Burned

In this MarketFoolery podcast, host Chris Hill is joined by Scott Phillips, The Motley Fool's director of research in Australia, to chat about the Company Formerly Known as Priceline -- now Booking Holdings (BKNG -0.40%) -- and its strong finish to 2017. They also delve into the troubles of Papa John's (PZZA 0.66%), which missed estimates again in the fourth quarter and, worse yet, reported same-store sales that were down almost 4%. They also talk Australian rules for both football and Foolish investing.

A full transcript follows the video.

This video was recorded on Feb. 28, 2018.

Chris Hill: It's Wednesday, February 28th. Welcome to MarketFoolery! I'm Chris Hill. I promised you, Australia Week begins today. With me in studio is Mr. Australia himself, Scott Phillips. Thanks for being here!

Scott Phillips: Thank you, Chris! Good to be with you!

Hill: I say Mr. Australia.

Phillips: It sounds more impressive than it is, doesn't it?

Hill: Well, let's face it, Mr. Australia sounds like a bodybuilding contest winner.

Phillips: [laughs] If only this was just audio, people could believe you. Unfortunately for those people watching at home, I'm not going to quite carry that off.

Hill: But maybe in your younger days.

Phillips: Under the shirt.

Hill: But, Scott, for those who are unfamiliar, Scott is the general manager of Motley Fool Australia. This gives me a nice opportunity to remind people, because most of our listeners, most of the dozens, are here in the United States -- The Motley Fool has operations in Germany, Canada, Singapore, the U.K., later this year, Japan, and a very nice operation going on in Australia that you're heading up.

Phillips: Things are good.

Hill: And also the host of Motley Fool Money Australia, which we'll get to. But we have news to get to. The Earningspalooza continues to roll on. Let's start with, and bear with me, people, because if you've been listening for the last couple of years, you know that I haven't really made the switch from Google to Alphabet, so it's going to take me even longer to make the switch from Priceline to their brand-new name, Booking Holdings.

Phillips: They didn't get the marketers involved with that, Chris. What should we call this thing?

Hill: We'll get to that in a second.

Phillips: Alright.

Hill: We're going to see if we can help them.

Phillips: A bit of Australian flair.

Hill: Exactly. Fourth quarter revenue for Priceline/Booking Holdings came in higher than expected. They wrapped up another great year. The stock is up 9%. I mean, this thing, I kid that we're going to help them. Maybe the one thing we could help them with is their name, because when it comes to running their business, these people are fantastic.

Phillips: They're doing a spectacular job. Interestingly enough, it was partly a case of low expectations. Revenue is up, margins are still down because of their concerns around how much commission they can get from the bookings they're passing through. So, they're still in that weird situation of, top line is growing, that's good. Margins, kind of falling away. I think they'll be OK. And I think there's an Australian operation, Flight Centre, who most of your listeners won't now, who've been exactly through this thing. When you're getting top line growth, you're struggling on the bottom line a little bit because of some one-off changes, for most investors, that's a good chance to get invested, because when the growth returns, which it will, from a one-off change, then you're off to the races.

Hill: But it seems like this is a situation where, in any given quarter, they can have those margin pressures. But this is such a behemoth that it seems like, if you are a hotel, if you're anything involved with travel, I'm not saying you bend over backwards to do whatever you can to be involved with Booking Holdings, but you want to be on their platform.

Phillips: And here's the story: $2.3 billion in sales in the fourth quarter of last year, $2.8 billion this year. There was a whole lot more people using this platform. And when you're the go-to place, you can pretty much call the tune. If you're more relevant to more people over a longer period of time, that's absolutely the recipe. And Priceline, or Booking, as we have to now call them, is getting it done.

Hill: We were talking right before we started taping about companies that have made name changes. And in this form, I mean, I mentioned Alphabet and Google, and I suppose that applies as well. What we were talking about was Tapestry (TPR 0.03%), which is a name that I don't think either of us particularly loves, but it's the parent company of Coach and Kate Spade and Stuart Weitzman. And I understand the reasoning in a couple of ways. One is, if you're Tapestry, or in this case, if you're Booking Holdings, you have multiple parts of your business, and you don't necessarily want Wall Street analysts focusing on the namesake. In the case of Booking Holdings, yes, they own Priceline, but they also own booking.com, which is a more significant part of their business. Same thing with Coach, and probably even more relevant in the case of Coach, because there were quarters where Stuart Weitzman was doing well, Kate Spade was doing well, but the namesake brand was not, and they got, maybe, overly punished as a result of that. And then there's the internal, where if you work at booking.com, you might have some level of resentment. "We're bigger than Priceline, why is the company named after Priceline?"

Phillips: I think that's right, Chris. I have to say, when you go from $2.3 billion to $2.8 billion in revenue, the last thing you should be worrying about is what your corporate name is. If Wall Street can't cope with the fact that you've grown your revenue by $500 million year on year -- yes, the companies will manage the share price, yes, they manage the Street. Your listeners know well that's frankly a short-term and pretty stupid thing to bother with, but companies do. It's going to make a lot more money next year and the year after and the year after that. You'd be wasting time changing your name to try and get some sort of relevance. The business is the business is the business. You can call it something entirely different if you want to, like Tapestry. To change it from one brand to another is kind of crazy. What happens when the other brand gets bigger? Do they change it again? What is the company if it's not the business you're working for?

Hill: That's where I feel like we could help them. Say what you want about Tapestry, and goodness knows we did, but at least they took a flyer on a brand new name, and it's creative. If anyone has suggestions, you can tweet @MarketFoolery or email [email protected]. We'd like to come up with something better. Maybe it's Global Travel something. I'm not sure.

Phillips: I bet we can just go through the Carole King discography and pick another album. There's plenty there.

Hill: Exactly. Tapestry worked. [laughs] 

Phillips: It worked for them.

Hill: Let's move on from online travel to something a bit more pedestrian but also a bit more delicious, and that's pizza. Papa John's wrapping up a tough fiscal year. Their fourth quarter profits came in lower than expected, their same-store sales falling nearly 4%. I get that the stock was up a little bit today, but over the past 12 months, this stock is down around 25%.

Phillips: Yeah, this is bad. They're not only lower-than-expected, but lower than last year, as well, which makes it worse. Sometimes, too bullish an expectation is one thing. This is a business that's in decline. Same-store sales are down, earnings are down from an adjusted $0.69 to $0.65. That's the reverse of Booking Holdings. You have more people coming through the door, that's a good thing. You deal with a margin in the short-term. When you have fewer people coming through the door, and people saying, "No thank you, I'd rather go somewhere else, I'll have something else," that's a tough business to be in. And on a chain basis ... think about retail stores, we talk about unit profitability. If you have same-store sales falling, that really starts to hurt the bottom line pretty badly. I think they've probably done some work to keep the bottom line in decent shape this year. If they have the same problem next year, you're going to see even more losses, I think, from the top line.

Hill: And I think at least a little bit of what we're seeing with Papa John's stock today is, maybe, some optimism that, "We're putting this year in the books. That's done. Among other things, we'll have slightly easier comps in the current fiscal year, in the next 12 months. And, we have a new CEO, so maybe that works." Although, the earnings for Papa John's are taking a backseat in terms of the headlines, because the headlines of Papa John's today is the ending of their relationship with the NFL, or, as the official sponsor of the NFL. And Pizza Hut, which is owned by Yum! Brands, stepped right in and said, "We're happy to be the official sponsor of the NFL."

Phillips: Of course Papa John's should cancel it. The NFL with the entire reason for Papa John's weaknesses. We've heard that from the CEO. He's come out and said, "You know what? Our business would be fine except for that football league over there that's really costing us money." If only it wasn't for the NFL, Chris, we wouldn't be talking about Papa John's today.

Hill: Again, I think a little bit of the outcome with this stock is the founder and now-former CEO John Schnatter stepping aside. I think either he realized pretty quickly, or people around him realized pretty quickly, he made a big mistake by blaming the NFL ratings for falling pizza sales.

Phillips: It wasn't like people ate less dinners because the NFL ratings are down, right?

Hill: That's true. I'm curious, since I don't know a lot about sports in Australia, other than Australian rules football. I've talked before on the podcast about how, when I was a kid way back in the 1980s and first got ESPN, ESPN was a very young cable network, did not have a lot of money to buy the rights to major U.S. sports programming. One of the rights that they were able to buy was Australian rules football. Which one of my brothers and I watched and were fascinated by, because it seemed like sort of a hybrid of American football and rugby. It was very exciting, and very fun to watch. That's a big sport?

Phillips: Yeah. I'm going to offend whatever portion of the dozens are Australian, or at least half of those guys, by saying, the detractors for Australian rules football call it aerial ping-pong. It's kind of nice. If you think about it, that's kind of what the game is. Those who love it will be throwing things at their podcast machine right now. Yeah, it's the biggest winter sport in Australia. We also play rugby league, rugby union, plenty of ball sports. Not a lot of soccer, but a little bit. It's a different sport.

Hill: Let's go back to Papa John's and the NFL. What's the relationship between commercial entities and the professional sports leagues? All kidding aside, it was a very big deal for Papa John's for many years that they were the official pizza of the NFL. I think Pizza Hut is going to make as much hay as possible out of the fact that they are now. Is it similar in that regard in Australia, where companies are looking to align their brands with sports leagues?

Phillips: Yeah, definitely. Watching the NFL, watching some American sport, where you have reasonably untouched jerseys, except for maybe a clothing logo in the top right hand or left-hand corner of a jersey ... by contrast, Australian jerseys are walking billboards. You have the front of the jersey, the back of the jersey, the top and the bottom, there's branding all over these things. I think it's partly the fact that we don't have the same size and scope of companies you do here. So, being the official pizza of the NFL is something, and it's a lot. In Australia, you have little local advertising, local businesses advertising on the backs of sports jerseys. It's very much a smaller business story. So, to get value for money, they're putting logos everywhere -- on the grounds, on the billboards, on the players themselves, heaps of that.

And, gambling is a big thing in Australia. We joke that we'd bid on two flies crawling up a wall. That's probably pretty true. Gambling is everywhere. Gambling sponsorship is all over the place -- again, jerseys, clubs, painted on the ground quite literally. Plenty of sponsorship. It's all on the jerseys, on the players, not as much reserved as the official food/ beverage/ beer/ whatever it is of the sport.

Hill: This is interesting to me. Gambling and sports, Matt Argersinger made the point recently that whatever money is spent legally in Las Vegas on sports betting is dwarfed by the amount of illegal betting that goes on. We're getting ready to kick off the college basketball tournament, which is, a massive amount of money will be bet illegally on the college basketball games.

Phillips: Surely.

Hill: People who are pushing against legalized sports betting in the United States, one of the arguments they make is the influence it will have on the game itself. To what extent, if any, has that played out in Australian rules football, rugby, cricket, anything?

Phillips: There actually has been allegations of what they call spot-fixing. I don't know if you guys are familiar with the term. That's where you don't fix the outright result of the game, but you might fix an over of cricket, or a kicked goal, or a penalty --

Hill: Point-shaving.

Phillips: Exactly, right, that sort of thing. And there's been allegations and investigations by police and others of certain games of football, certain games of cricket, where that has been alleged to have happened. We don't yet know whether it's actually happened. But, that's around the place. I don't know that sponsorship is a direct result of that, it's more the fact that the gambling outfits, legal or illegal, are still going to have that. The fact that I can put my $5 down with a bookie to bet on the result of a football game is not going to change the result. The hundreds of thousands of dollars being bet offshore, someone makes a phone call and gets a player to do X, Y, or Z, that's the biggest story. So, I don't know if betting directly impacts it. What people do complain about in Australia is the televised nature of gambling promotion. There's five year old and seven year old kids watching football and seeing ads from a betting agency or an alcohol company. There's more of that impact on the viewers, rather than the game itself.

Hill: Interesting. Before we wrap up, I mentioned this at the top, for those unfamiliar -- I get this question, I would say, at least once a month or so from listeners outside the United States, and they ask, "Do you have podcasts in the other parts of the world?" And I always point them to your version of Motley Fool Money, which you --

Phillips: Stole.

Hill: What's that?

Phillips: We stole it. We stole the name. [laughs] 

Hill: You're more than welcome to the name.

Phillips: Thank you!

Hill: You and Andrew Page host it. This is available everywhere you find podcasts. If you just go onto Apple Podcasts or Stitcher and type in Motley Fool Money, if two shows pop up, one is the one that I host, and one is the one that Andrew and Scott do. You guys do a great job. For anyone who's looking for insight into not just investing in Australia, but also the Australian investor's view of the rest of the world, I think you can't do better than that.

Phillips: And Chris, you have dozens of listeners. We have self-proclaimed listener No. 4, so we're coming for you. [laughs] 

Hill: [laughs] Fantastic. Before we wrap up, I have to mention the website, because this is another way people can get insight into the markets in Australia. It's fool.com.au. Like The Motley Fool in the U.S., you run investing services. We talked about -- it's still hard to say -- we talked about Booking Holdings earlier, which has been recommended in Motley Fool U.S. services. It's a multi-bagger many times over. You've had similar bagger success with Share Advisor and Pro, yes?

Phillips: Yeah, we've had some nice wins recently. Corporate Travel Management, another travel company, is a 10-bagger for us, which has done really, really nice there over the last four and a half-five years. In the Pro service, Altium is a software company that designs software for designing printed circuit boards, so, the bits that go into your computer. They had a spiffy pop, as David Gardner would call it, a stock that went up in a single day more than the cost base for Motley Fool Pro and their members. So, yeah, had some good success.

And, you know what? This is kind of, we're now far enough on our journey, Share Advisor is now six and a half years old, give or take, when the value of that long-term investing really starts to come home. David Gardner's 300-bagger on Amazon, that takes years to get to, but you get there if you find great companies and you hold them for long enough. So, what I love about it is it's giving us a chance to tell Australian audiences about the power of long-term Foolish investing. And it's starting to come through. We've now been around for long enough, the services have had picks for long enough, that we're really delivering some of those great returns for members.

Hill: Give me the names of those two stocks again, and the tickers, if you don't mind.

Phillips: Yes. Corporate Travel Management, that's ASX: CTD, and Altium is ASX: ALU.

Hill: Scott Phillips, who you can hear every week along with Andrew Page on Motley Fool Money Australia. And it actually publishes before Motley Fool Money in the U.S. You can get their Motley Fool Money before you get our Motley Fool Money. Always good to talk to you, my friend!

Phillips: Thank you, Chris! Good to be with 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!