In this MarketFoolery podcast, host Chris Hill and senior advisor Bill Mann weigh in on the latest on Wall Street. Home-goods retailer Bed Bath & Beyond's (NASDAQ:BBBY) fourth-quarter earnings showed a company in decline, and investors abandoned the stock in droves.
Meanwhile, Walmart (NYSE:WMT) is reportedly close to buying a majority stake in Flipkart, a leader in the nascent Indian e-commerce market. Finally, the two discuss the strange saga of LongFin (NASDAQ:LFIN), whose CEO is alleged by the Securities and Exchange Commission to have made illegal stock sales.
A full transcript follows the video.
This video was recorded on April 12, 2018.
Chris Hill: It's Thursday, April 12th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, it's Bill Mann.
Bill Mann: I am very happy to be here!
Hill: I'm very happy you're here, my friend! We're not going to talk about Facebook, because there's been a lot of Facebook talk on this show this week.
Mann: What's going on with Facebook? I haven't heard. [laughs]
Hill: [laughs] Again, on Motley Fool Money this weekend, we have David Kirkpatrick as our guest. He is the best-selling author of the book, The Facebook Effect.
Mann: He's had a good week, I think.
Hill: He's had a busy week, so, happy that he's making a little time for us.
Mann: Yeah, it's great.
Hill: We're going to talk retail, and we're also going to talk about one of the more bizarre/ awesome stories in the world of finance.
Mann: I love this story.
Hill: I know you're excited. We'll get to that. Let's start with Bed Bath & Beyond, which is having a 20% off sale on its stock. Fourth quarter report came out, Bed Bath & Beyond's same-store sales were not good. Their guidance for the fiscal year that they are just beginning was anything but encouraging. And in terms of the stock, this is the worst single day shareholders have ever had for Bed Bath & Beyond.
Mann: I think I've always disliked Bed Bath & Beyond a little bit simply because of the grammatical mistake in its name. I'm always like, there should be a comma. Bed, Bath & Beyond. But maybe that's not fair.
Hill: That may be picking a nit.
Mann: [laughs] Be that as it may, the stock seems to have responded to my annoyance. This, to me, is a dead company walking. Right? If you look at what Bed Bath & Beyond is doing, they have gone from 8% same-store sales growth to negative same-store sales growth. They have 1,500 stores, and that's from 2010 to today. In the same amount of time, their capital expenditures have doubled. They are trying to do anything. They've got a membership program that they've launched. I don't know how effective that is. They're trying to move into the value and the treasure hunt segment à la what happens at Ross and TJ Maxx. As you know, those two companies are pretty good at that. I literally don't know what this company is going to do other than slide off into the sunset.
Hill: That's a little surprising to me, only because of how many locations they have, this is still a $2.5 billion company. With the drop today, the stock is still trading north of $17 a share. And it sounds like you're saying, no, this thing is, if not going to zero, it's certainly going lower.
Mann: I think the best outcome for shareholders is if this company gets taken out by private equity that's going to try and do some kind of turnaround. I just don't see how it's going to succeed. One of the big things they've talked about is, we're going to make sure that our products are differentiated. They're not. I mean, I get the treasure hunt. I think that's a reasonable place for them to go. But they are literally going from a challenging market to a different challenging market. This is being done. And when you're moving into a market where the biggest players are Target and Walmart, let's not even mention Amazon, that's hard. That's really hard.
Hill: And the thing is, this is a business that could, in theory, work. They are selling things that people need. This is not some niche retailer or niche product. This isn't Dave & Buster's. And not to pick on Dave & Buster's, but that's a fun thing that you can go do, you don't need to go to Dave & Busters.
Mann: You speak for yourself, pal.
Hill: I don't need to go to Dave & Buster's, but every once in a while, I'm going to need some new tiles, I'm going to need some new bedding, like everyone else. So, again, they sell stuff that people need.
Mann: Right. But they have lived for years. I'll tell you who this company reminds me of right now, and it's JCPenney. JCPenney, five years ago, Ron Johnson came in and the first thing he said was, "We're going to get rid of all of the coupons and all of the discounting that we've done in the past." They basically turned their back on their best customers. Bed Bath & Beyond, in order to generate margins, kind of has to do the same thing. They get so much of their revenues on these ubiquitous 20% off coupons that you almost can't avoid. Every time you open your mail, there seems to be another 20% discount coupon from them.
I just feel like they are, at best, spending a lot of money to run in place. It gives me no joy to say all this, by the way. Besides the comma issue, I don't dislike Bed Bath & Beyond. It's a fine experience. It's just, they seem to me to be panicking.
Hill: Let's move on. We're going to stick with retail, though. This is a story, if this goes through, this is going to be one of your big stories, certainly for the first half of 2018. Reuters is reporting that Walmart working on a deal to buy a majority stake in Flipkart. Flipkart is the leading e-commerce company in India. The numbers being reported here are that Walmart would shell out somewhere between $10-12 billion to get a 51% stake in Flipkart. This dwarfs the Jet.com acquisition that they made. Do you like this move?
Mann: I do, actually. There's a model for this, by the way. The same thing that's happening in India, a lot of the characteristics for the Indian online market, you see in China. China is several years ahead. A wonderful company there called Jd.com, and they have managed, really, to keep Amazon out. The winners, and I think the deal is done in China, will not include Amazon.com. And India is another very logical market with some of the same characteristics. And Flipkart, so far, has been the winner. Now, it's several years behind where China is. So, if Walmart is going to become a player anywhere in the world, they have to go into a place where there's a huge amount of flux. And because of a lot of the dynamics in India, very few big cities, a whole lot of smaller cities, a whole lot of villages, it's a really, really good market for online retail to change how commerce is done.
Hill: And I think when you look at what Walmart has done so far with Jet.com, because at the time of that acquisition, it was one of those things that you could just look at and think, "This makes sense on paper, I'm not entirely sure how they're going to bring Jet.com into the Walmart ecosystem. This seems like a smart deal, they need to make it work." I think, to this point, they've proven that they have made the Jet.com acquisition work quite well.
Mann: It's been fabulous.
Hill: So, I think that seems to bode well for this move with Flipkart, which if the reporting from Reuters is accurate, it looks like this deal might close as soon as June.
Mann: Yeah. I mean, it's India, and having had a great deal of professional experience in India, I can tell you that things tend to not happen as quickly as possible, as it seems like they should. You can almost guarantee that there will be regulatory hiccups along the way, in terms of a transaction of this size getting done, because this is a very important company in India. They have really big not only Indian investors, but they also have plenty of foreign money backing them as well now. So, I think it's a really big, important transaction for Walmart.
Hill: I'm glad you mentioned the foreign money that's in there so far. SoftBank from Japan owns about a fifth of Flipkart right now. Does that help Walmart? Does that hurt? Or is it neither?
Mann: It's a good partner to have. The more interesting current holder in Flipkart, to me, is Naspers. A lot of Americans don't know Naspers.
Hill: I'm one of them. [laughs]
Mann: OK, that's great. Let me tell you. Naspers may be the best investors on earth. In 2001, for $32 million, they bought a 33% stake in a little Chinese company called Tencent. That stake today --
Hill: How'd that work out?
Mann: -- $32 million, it's worth $155 billion now. They just sold a teeny bit of it for about $10 billion. Naspers itself, they have a $158 billion stake -- I just said $155 billion a second ago. Let's give them a couple of more billion.
Hill: In the time we've been talking.
Mann: Exactly, it could have moved. This happens. And Naspers itself is valued at about $112 billion. So, you can buy Naspers, and they're assuming that Flipkart, its television, its newspapers -- there's actually a newspaper company, maybe the most successful newspaper company on Earth, but, yeah. So, they have a piece of Flipkart. They have said they're not going to be selling any portion of theirs. Really, really good investor base for Walmart to be partnering with.
Hill: Earlier this month, the Securities and Exchange Commission here in the United States of America froze $27 million in trading profits involving the CEO of a company I'd never heard of before called Longfin, which is a cryptocurrency company. What about this story caught your attention?
Mann: First of all, the CEO of Longfin has now twice gone on CNBC and has given the most unhinged interviews I have ever seen. Most of this company's business is in Singapore, to the extent that it's trackable at all. This company came public in the U.S. under the JOBS Act, which purportedly, as the name would suggest, is to bring jobs into the U.S. They came on CNBC and they said, "How many employees have you added?" And he said, "We have three. We'll probably get to 12."
Hill: [laughs] That doesn't seem like a big number.
Mann: No. It's not so job-y, not so deep in the jobs. Somehow, this company got to be worth $6 billion on the U.S. Stock Exchange, on NASDAQ, actually. And there's actually no telling what, if anything, that this company is actually worth. So finally, this last week, in an emergency stop, trading was halted in Longfin. The stock has dropped about 90%. The cryptocurrency that they have, almost no information is available on it, it's called Ziddu. As far as I can see, there's been one transaction ever in Ziddu. I literally have no idea what this company does, and yet it managed to be worth $6 billion, and it's on its way back down. I think it's probably a zero. I probably haven't used the word allegedly enough, we're creating for ourselves some issues, [laughs] but let's just assume that every other word I've used was allegedly.
Hill: Among my thoughts are that this is one more thing about cryptocurrency that isn't helping. For people like our colleague Aaron Bush, who is a believer in cryptocurrency and blockchain technology and looks at both of those and says, "There are viable futures for both of these," stuff like this doesn't help.
Mann: Yeah. This is such a great story!
Hill: Because at the moment, you have this clown, and let's just say, allegedly, a decent amount of illegal activity going on with cryptocurrency. Right now, a healthy portion of people who are using cryptocurrency are engaging in what we like to call "allegedly criminal activity."
Mann: Yeah, "alleged fraud," allegedly. It's a pattern that's as old as time. You can absolutely bet your bottom dollar that wherever there is a bull market, right underneath it, there's a bull market in fraud. Whatever segment it is, wherever it's been, no matter what. We saw it in 2006, when people could not get enough of Chinese small-cap companies. And it turned out that most of those Chinese small-cap companies that came public in the U.S. through reverse mergers probably came public through reverse mergers because they could not have gone public through the front door. I think, very much similarly, in 2017 with the absolute magnificent, stunning rise in the values of cryptocurrencies, it became an area where people gave way too much credibility to anything that had crypto attached to it, and this is one of them.
Hill: Long Island Iced Tea, just slapping the word blockchain on their name.
Mann: Yeah, exactly.
Hill: Thanks for being here, man!
Mann: It's good to see you again, brother!
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 on Monday!