In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss a trio of retail earnings reports, an advertising giant's woes, and the bitter end to one of Wall Street's more notorious billionaire-vs.-billionaire battles.
Best Buy (NYSE:BBY) and Kohl's (NYSE:KSS) both turned in great holiday quarters, while poor L Brands is continuing to hunt for a solution to the troubles of being mired in the middle of malls. Meanwhile, WPP, the world's largest ad agency, revealed that the fourth quarter was its worst since the financial crisis -- and that it expects more of the same in 2018. And finally, Bill Ackman of Pershing Square Capital has given up his years-long attempt to convince the world that Herbalife (NYSE:HLF) is a con -- or he's at least given up the enormous and expensive short bets he's made on that effort.
A full transcript follows the video.
This video was recorded on March 1, 2018.
Chris Hill: It's Thursday, March 1st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, it's not Joe Magyer, I know I said that yesterday. We'll get to that in a second. It's Bill Barker from Motley Fool Asset Management. Thanks for being here!
Bill Barker: It's a big disappointment to your audience.
Hill: [laughs] I don't know that it's a huge disappointment, but I did make something of, like, "Wednesday and Thursday is Australia Week," with Scott Phillips yesterday, and Joe Magyer. Let's just chalk it up to scheduling issues, because that's actually what it was.
Barker: Yeah? Joe was too busy?
Hill: Joe's a busy man. But here's the good news: Joe Magyer will be our guest on Motley Fool Money this week, so you will get your full complement of Uncle Joe Magyer.
Barker: Full hour?
Hill: No. [laughs] We're not giving the full hour to Joe. I mean, I love Joe, but we're not giving him the full hour. No, no, no. But you'll get your fill of Joe Magyer on Motley Fool Money this weekend. But you know what? Let's get to some news. We have retail news, we have some disappointing news depending on which companies you own shares of. We'll get into the Academy Awards a little bit. But let's start with the retail.
Best Buy and Kohl's put up -- help me understand this -- they both put up strong fourth quarters, they both put up numbers that were better than expected, but in terms of the stocks, Best Buy is having a good day, Kohl's is down. And I know that Kohl's has had a pretty decent run of late, so maybe Kohl's was just overheated as a stock. But, these were good holidays for these two companies.
Barker: Yeah. I think you did point out, when you're looking at the one-day movement of a stock, you need to at least know what happened before today in terms of stock price. I think Kohl's is up 60% over the last year, some 20% going into today. And there were good numbers, you're right. The portion that the market is probably most reacting to from a negative light is the forward guidance, because although the holidays were kind and provided 6% comps, I think, the forward guidance is more around 2% for the year in terms of comps and in terms of total sales. -2% to 2%, so call it flat. That's different than I think people were expecting going into the report.
Hill: You look at Best Buy, their same-store sales, much higher than expected, and the stock doing well there. I know that we've talked throughout the length of this show starting back in January 2011 about Sears being an incredibly troubled brick-and-mortar traditional retailer, and it remains that today. But I would say, other than the fact that Sears is still technically in business, one of the most surprising things in retail to me is the turnaround of Best Buy and the fact that it continues to thrive.
Barker: Yeah, they've done a very good job. Regarding the portion that's a more mall-based business, they did announce today that they are closing 250 of their small mobile phone stores. Those are the, not quite kiosk size, but they're small mall-based things, not like the significantly larger full service Best Buys, which are around 40,000 square feet. These are more on the 1,000-1,500 square feet. So, they're getting out of that business in part, I think, because of mall traffic, which is a theme which has come up many, many times in the last year particularly, and is going to be a theme, I think. Their stand-alone stores are doing better. They have done, just from management directive on down, a much better job than one would have feared would be the case.
Hill: Not a great holiday for every retailer, particularly mall-based retailers, when you look at L Brands today, which is the parent company of Victoria's Secret and Bath & Body Works. Shares down about 11%. I don't know where they go. I don't know to what extent they can completely exit malls. Although, on the surface, if that's not an idea that they're considering strongly, maybe it should be, to the extent that they can really pushed an online presence, particularly with Bath & Body Works.
Barker: Yeah. It's been tough. For the last couple of years, when one thinks back to the departure a couple of years ago of Sharen Jester Turney, I believe, was the CEO of the Victoria's Secret brand, not the whole company, but, she left just about two years ago. I've mentioned before on this program that if I were provided one superpower, it would be the ability to leave at the right time. You could leave conversation, a party, a stock --
Hill: A podcast.
Barker: -- a podcast, a job --
Hill: Just stop listening.
Barker: Anybody still listening now lacks that superpower or they would have stopped listening to the podcast by now.
Barker: But she seems to have it, because she left two years ago. The stock has been cut in half since then. It was basically at an all-time high when her departure was announced. And it has been, either she saw much of what was coming, or something else, but, she left for the proverbial spend time with the family. And I'm sure she's enjoyed her time with her family more than she would have enjoyed these last two years.
Hill: What do you think the move is for this company? They have several brands under the umbrella, and there's some amount of value there, I'm just not sure entirely what it is. They also own PINK, which is, I think, youth apparel?
Barker: Yeah. It's still profitable. It's still a very profitable business. You have very significant brand power. They can continue to increase their online sales. But they are largely going to be controlled by mall traffic. And, in terms of their profitability, they're roughly the same profitability today that they were five or six years ago. They announced today, in part what brought the stock down was the announcement that they are going to increase wages, which is something that's also affecting a lot of retailers. While the traffic is declining, people in this job market are able to demand higher wages and are doing so. And Victoria's Secret, I think, has put $100 million behind what they say they're going to do. But even with a very significant tax cut, they are going to be less profitable this year than they were last year and the year before.
Hill: Bath & Body Works, I just went to the website, and on the main page, one of the candles that they're promoting, the scent is Blue Citrus. What do you think is going on there? I mean, I get the Citrus part. Are there any blue citrus fruits? I don't think there are.
Barker: Not but I'm aware of. The only blue flavor comes in water ice or Slurpee's or something, Blue Flavor. Powerade and Gatorade now come in Blue Flavor as well.
Hill: Really? That's the name of the flavor on the bottle? Blue?
Barker: You know that's what the flavor is. You know the taste of Blue Flavor. It's not blueberry. It's Blue Flavor.
Hill: Yeah, no, that's true.
Barker: It tastes slightly of chemical.
Hill: [laughs] Which, maybe they tested that. Maybe they tested "Slightly of Chemical," and it didn't test well at all. Whereas blue, people like the color blue, so we're going to slap that on the label.
Barker: Get a blue snow cone, that's good eating.
Hill: And when you're a kid, among other things, you get the benefit of your tongue turning blue, and that's always fun.
Barker: That's great.
Hill: That's fun, I think, even when you're an adult. Less so, but still a little bit fun. Here's a large, dominant company that we rarely talk about, and that's WPP, which is the largest advertising agency in the world. It's smaller today because of their fourth quarter results, which were the worst that this behemoth has had since the financial crisis. And WPP's management came out and said, "Just to be clear, 2018 isn't going to be that great, either." They basically said, "We're expecting things to be flat this year."
My first thought right out of the gate is, this is an ad agency that's too big. When you look at some of their competition and what their competitors are forecasting for 2018, they're not dealing with the same type of troubles that WPP is. And I get that there are a lot of different challenges in the advertising industry, with all the different mediums that companies can place ads on. But isn't the obvious move here for them to get smaller?
Barker: Well, for them to get smaller in what we might call traditional advertising. I think that meaning TV ads, to a large extent. Which, for the first time, last year, I believe, were topped by digital spend across all markets. And digital is going to be more than 50% of all ad spending within two years, if you are reading your industry projections.
And where WPP's strength is, of course, they've been around forever, and they've gobbled up hundreds of names around the world. This is largely entities that have been around, are masters of the old model, and they have far less of a competitive advantage, if any, in terms of digital advertising. This is an industry that you know much better than I do, where it is going and why and what you expect out of it. Podcast advertising, for instance, it's tens of thousands of dollars to get a spot on your show, right?
Hill: [laughs] Not that much, no.
Barker: It should be. With an audience like yours?
Hill: I mean, with dozens of listeners? Yeah, you're going to pay a little bit of money. Let me put it this way: it's cheaper to advertise on Motley Fool podcasts than it is to buy a 30 second ad on any, absolutely any, broadcast television primetime network show. But, this is interesting, because this comes against a backdrop of, I think it was NBC who came out and said that one of the things that they're going to be testing is reducing their ad load in primetime television. Basically saying, "We're going to reduce the number of ad minutes across our primetime lineup." When I was up in New York last fall for the podcast Upfronts, which was put on by the IAB, the International Advertising Bureau, I think. That sounds right. Let's go with that.
Barker: You can make up whatever you want right now. The audience and I are just nodding.
Hill: One of the data points that came out of that was, the audience is made up of 350-400 people who are in the advertising world and media buyers and that sort of thing. And some of them were already involved in podcasts and some of them were not. So, everyone gets up on stage, every podcast network gets up, gets maybe 20 minutes of time to make a pitch. And all the pitches are basically the same. And this happens in the television industry in July for a whole week, where the networks get three or four hours. And whether it's the television Upfronts or the podcast Upfronts, they all go like this: "This is our network. This is who we are. This is what we do. Here's our programming. Here's why we love our programming. Here's our new programming that we're excited about. Here's the old programming that we're bringing back. And here's why audiences love our shows." And everybody goes through that.
And one of the data points that came out of the podcast Upfronts had to do with ad load, which is simply, in a given hour of programming, how many minutes of ads are there? And when it comes to radio, just think about turning on the radio in your car, to the extent that people are still spending lots of time listening to commercial radio in their car, it's anywhere from 12 to 15 minutes ads.
Barker: It's unbearable. Once you get used to satellite or podcasts, terrestrial radio is just completely unbearable.
Hill: I'm not going to disagree with that.
Barker: I'm not trying to hype your product. Although we could. I could hype yours and you could hype mine.
Hill: OK, we'll do that a little bit later.
Barker: Your podcast is great, especially today. Even without Joe.
Hill: Even without Joe.
Barker: We're bringing it down now. Think of what it could have been.
Hill: Oh, we've totally lost people now.
Barker: You had a point?
Hill: The point was, in television, in a given hour of broadcast television programming, there's about 16 minutes of ads. So, why are people who listen to podcasts more engaged in the ads? It's in part because there are far fewer ads. In an hour of podcasts, there's about three minutes of ads. So, they're more memorable.
So, I think WPP is in for a really tough year, and I'll just go ahead and lump 2019 in there as well, just to bring it back to the stock at hand here. They not only have to figure out what they're going to be doing in digital, they have to deal with what has been their bread and butter for decades -- television advertising -- and, if you think NBC is going to be the only network to test, "Let's go with fewer ads just to see how that works, let's see if we can get more people watching our network, and we'll do it with fewer ads," there are absolutely going to be other networks testing this.
Barker: Yeah. I think you're right. And I think it's a challenge, particularly as the money goes online where, I think, the margins for an entity like WPP are significantly lower. The dollars are going there. You could say, "Let's put all of our effort there." But, I don't think they can make the same margin on that placement.
Barker: And why is that, exactly?
Hill: Why are digital ads ...
Barker: Why is the value that WPP has, and I assume it has some entity that works on podcasts, somewhere, out of its hundreds of different agencies.
Barker: Maybe -- probably -- well, who knows? We should know, since we brought it up. Can we get our intern to check on that?
Hill: We don't have an intern.
Barker: Oh, no!
Hill: You know, it's interesting, because --
Barker: It's just so much more affordable -- not to hype this, but it's more affordable right now, at this moment, anyway, to put your product on a podcast, and therefore third parties can't make as much money. And yeah, first of all, you're putting your ad in, ultimately, a smaller but more focused audience. So, when you're putting Tide out there on network TV, it's a relevant ad for millions of people. It's always nice to be getting very small bits off of a large audience, which is more of the TV model. You have lots of people who are looking at the product, whereas fewer people are listening to products on podcasts, but the audience is much more likely to be more narrowly tailored to what the content is around that product.
Hill: Absolutely. And regardless of the medium, advertising has always been, first and foremost, about the size of the audience. How many people am I going to reach with this ad? And if you're in the business of selling advertising, you get to go to Tide or a local car dealership or whoever and say, "If you advertise on our radio station, this is how many ads it'll run, here's the reach that you're going to have," and that sort of thing. Part of it is also the comfort of the people that you're selling it to. There's a comfort with the familiarity of television and terrestrial radio -- even though, as you call it, it's unbearable.
Barker: And Tide doesn't care, for instance, that your audience may be, I don't know that it is, higher net worth, because everyone uses the same amount of laundry detergent, more or less, regardless of whether they're in the top 1% or not. Their medium needs to be the mass audience. And this is going away. A lot of the consumer brands are cutting back on their ads. And we all know from watching TV, you see a lot of consumer brand products, whether it's Frosted Flakes or Tide or things like that. They are suffering in competition to the generic, or private label, nobody calls it generic anymore, but the private label store brands. And that's impacting WPP and the networks, of course.
Hill: Do you remember when generics were literally white labels with just the word of the product on it in a grocery store?
Hill: You'd be going down the vegetable aisle and you would see Del Monte and then there would literally be a white label that says Green Beans.
Barker: Canned Vegetables. They couldn't spring for any color or good font. Now you have fonts, the Safeway brand whatever, and they throw whatever the name of their Safeway brand is. And it's right next to the other thing, it looks pretty similar and it's cheaper, why don't I get some of that this time? We'll try that.
Hill: And with Comic Sans, everybody's favorite font. The Academy Awards are on Sunday night. I've talked before about the documentary, which did not get nominated for Best Documentary, although I thought it had an outside shot, that came out last year called Betting on Zero, which is available, I think, both on Netflix and Amazon Prime, for anyone who's interested. I think it's a pretty fascinating documentary about Herbalife.
And it's probably just as well that it was not nominated for an Academy Award because of the timing of today's news, which is that Bill Ackman, activist hedge fund billionaire, has completely exited his short of Herbalife. The reason I say that's good timing for the makers of that movie is because now, I think it's difficult to watch that movie, knowing that Bill Ackman, who comes off in that film like a white knight in shining armor, because that's how despicable the people at Herbalife are and how predatory they are with trying to get people involved in their business. If you didn't know anything about Bill Ackman before watching that film, you'd watch it and think, "Oh,my gosh! This guy's fantastic!" And now comes the news that he's just out.
Barker: Yeah. I'm not going to kick Bill Ackman in the teeth while he's already on the ground.
Hill: [laughs] Is that what I just did?
Barker: No. Other people enjoy doing it, though. And I think there's a lot of schadenfreude out there. I won't comment on whether he's deserving of that or not. But in terms of Herbalife, I will say, I've been at some conferences and Herbalife has presented. I've never seen their 20-minute PowerPoint and then take questions from the audience and investors type of thing, but there are often tables of swag or products out there. Herbalife stuff, in my experience, either they have brought 10-15 times as much of it as everybody else does, or people just don't want it.
Hill: Does it come in the flavor Blue?
Barker: I have no idea. What is it even that they supposedly sell?
Hill: Health supplements, I think? They had to change their business model because the United States federal government stopped just short of saying, "Yeah, you guys are totally a pyramid scheme." They stopped short of that. They didn't say that.
Barker: No, I think their stuff is more in green packaging and it looks healthy, or something. Right? So, the Blue flavor, which is more fun and popular than organic stuff is probably not part of that. That's a market they could get into next.
Hill: Are you going to be watching the Academy Awards? Anything you're rooting for? I've said before on this show, we're in the tank in the best documentary category for Abacus. Steve James, who did Hoop Dreams, directed the film Abacus, and that's nominated for best documentary. So, that's who I'm rooting for, and Coco, of course, because we've had Steve May from Pixar on. Of course we're going to root for that.
Barker: Am I watching? It's on Sunday night, right?
Barker: No, that's my birthday, so I assume --
Hill: Sunday night is your birthday?! Well, Sunday.
Barker: -- there'll probably be a surprise party for me. This is all just throwing me off the scent, isn't it?
Hill: Wow. Yes, it is. It's all just throwing you off the scent. Happy birthday in advance!
Barker: Thank you!
Hill: Do you want to say how old you're going to turn on Sunday? Assuming you make it to Sunday?
Barker: Not really. Do most want to go into that? After the age of 15 or so?
Hill: It's starts with a 5, and you look fantastic! Happy birthday! That's great! A couple of quick things before we wrap up. We -- and by "we" I mean me and producer Dan Boyd, not you, sorry -- we are going to be going to Austin, Texas for South by Southwest.
Barker: I never get to go on the fun trips.
Hill: We're going to get to your fun trip and a second, believe me. You have a fun trip coming up. We're going to be in Austin, Texas for South by Southwest, and we're having a listener meet up on Monday, March 12th. So, if you're in the Austin, Texas area, drop an email to firstname.lastname@example.org. We will send you all the details. Monday, March 12th, listener meetup happy hour in Austin, Texas. You're going to be going to Hong Kong. Motley Fool Asset Management, in their infinite wisdom, have said, "You know what? Let's send this guy out to do some research, and we'll send him to Hong Kong." When is this taking place?
Barker: This is in May, I believe, is the CFA Annual Conference. Which is going to be in Hong Kong this year.
Hill: Do you go every year?
Barker: No. But I can combine it with another conference that's worth going to in Singapore, which is just down the street from Hong Kong.
Hill: I don't know, there might be some water there.
Barker: Well, but I'll be close. [laughs] Close-ish. I'm also trying to line something up in Tokyo and Shanghai while I'm there, to get some work done there. But, yeah, if anybody's out there in the CFA world and is going to be hitting the Hong Kong conference, it'd be great to meet up, because I don't know everybody there yet.
Hill: Not yet.
Barker: Not yet.
Hill: But CFA is going to Hong Kong. You can also drop an email to email@example.com, and we'll forward --
Barker: And, we have the new Hong Kong office.
Hill: Yes. Fool Hong Kong.
Barker: Fool Hong Kong.
Hill: Are you going to stop by there?
Barker: Why not?
Hill: I don't know how busy your agenda is.
Barker: It's not so busy that I can't stop by Fool Hong Kong.
Hill: Well, that's good.
Barker: And Fool Singapore. I mean, I should, right? It's absolutely worthwhile.
Barker: You should do a couple of shows out there.
Hill: I don't know that we have the budget for that.
Barker: You have the budget to go to Austin.
Hill: Yeah, Austin is a hell of a lot closer than Hong Kong and Singapore.
Barker: But you know what? They're not necessarily more expensive to get to.
Hill: It is absolutely more expensive to go to Hong Kong --
Barker: No, it depends on getting the right ticket. What's your ticket? Do you know?
Hill: We're not going --
Barker: No, you didn't even bother to check.
Hill: I farmed that out to the intern, the non-existent --
Barker: Flying business?
Hill: [laughs] Flying business class? No, I am not flying business class.
Barker: I flew to Dubai a couple of months ago for $650. And that was not business, I'll guarantee you that.
Hill: I'm flying to Austin, Texas for less than that.
Barker: Well. I bet, if you really work it, you can get out to Hong Kong for less than $800.
Hill: You know what? It's a damn good thing that you're a CFA and that you work in the mutual fund industry and not in the travel industry, because Bill Barker Travel Agency is going out of business in a heartbeat.
Barker: I'm selling you an affordable time, for your devoted fans in Hong Kong who would make the trip worth it right there.
Hill: Let's see how Austin goes, and then we'll see if we can --
Barker: About how many people meet up with you in Austin? You've done this before.
Hill: Dan? We did this last year, and I think we had maybe, what, 10 or so listeners showed up in Austin? Do I have that about right?
Dan Boyd: Yeah, 10 or 15.
Hill: And it was myself, Dan, Dylan Lewis from Industry Focus was there, Simon Erickson was there last year. And actually, I think Simon is going to be there again this year.
Barker: There are only dozens of listeners, so a good chunk of them were there. That's one dozen out of ...
Hill: But a couple of them brought friends and plus-ones, that kind of thing. It was like, "Hey, I'm going to meet up with some people from this podcast I listen to," and I'm sure their friends were like, "I'm not interested." And then, probably, the follow-up was, "Oh, but it's at this taco bar that sells food and alcohol," and then their friends were like, "Oh, OK, I'll be up for that."
Barker: Yeah. Will you be handing out any of the world-famous Podcast Shop materials? Raffling anything off?
Hill: I don't know that we're going to be raffling stuff off.
Barker: Come on. Bring one thing for one lucky listener.
Hill: Won't that make the other two listeners who show up there a little bitter?
Barker: It'll be a competition of some sort. Like, whoever has the most vowels in their last name wins. Something that, you're not really choosing, you're just randomly rewarding.
Hill: Dan, do you want to jump in on this?
Barker: Coffee mug for that?
Boyd: Why are you making this so complicated?
Hill: Because one of Bill's favorite moves is to create contests and promise prizes that he has nothing to do with.
Barker: I'll tell you what, I'll bring you an MFAM T-shirt to bring out there and you could do whatever you want with it. You can wear it, you can hand it out to a lucky or unlucky listener. I'll give you some swag.
Hill: Motley Fool Asset Management? Is that what you're saying?
Barker: You know what? I think we may have some Chapstick, too, some MFAM Chapstick. We have some weird tchotchkes from our going to convention days, things you throw out on the table.
Hill: If I go to foolfunds.com, will I find these T-shirts and branded Chapstick?
Hill: It's limited edition?
Barker: You can't buy this stuff.
Hill: Now I'm interested!
Barker: Come on down. Denise will help us out.
Hill: Alright. You can go to foolfunds.com and sign up for Declarations, though. It's the free monthly newsletter that you can get from Bill Barker and Bryan Hinmon and the entire crew at Motley Fool Asset Management. It's great stuff, and it's free. And it's once a month, by the way. It's once a month. That's one of the things I like about Declarations. You're not spamming me every day with, "Here's what we think about the market today." No, it's quality stuff. I appreciate it. Thanks for being here!
Barker: Thank you!
Hill: Remember, Joe Magyer on Motley Fool Money this weekend. 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 on Monday!