In today's episode of MarketFoolery, host Chris Hill and Motley Fool analyst Jason Moser go through some of the messy metrics from this quarter and explain which areas long-term investors should focus on to track how the company is doing. Also, Texas Roadhouse (TXRH 0.14%) clocked in another good quarter, but how can the restaurant grow from here? Virtual healthcare provider Teladoc (TDOC -8.87%) reports earnings later today, and long-term investors should watch for progress in these key metrics. Tune in to find out more.
A full transcript follows the video.
This video was recorded on May 1, 2018.
Chris Hill: It's Tuesday, May 1st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, it's Jason Moser, back in action. Thanks for being here!
Jason Moser: Switching the days up here a little bit, aren't we?
Hill: You know what? Throw a little curveball every now and then.
Moser: Why not? We don't want to let people just rest on their laurels and just assume this is the way things are going to be.
Moser: Keep them interested.
Hill: Well, hopefully. Otherwise, they're like, "What is Planet Money doing? I'm going to go over there." It's May 1st, which means it's time to sell all of the stocks you own, and then we just buy them back in the fall. That's what we do, right? Sell in May and go away, right?
Moser: Yeah, I was going to say, just sell them and get out of here, go do something else. Go play golf or mow the yard. Not really, no.
Hill: No. We have earnings. We're going to get to restaurants, and we're going to get to, actually, an experience you had over the weekend with, I think it's fair to say it's one of your favorite public companies.
Hill: We'll get to that. Let's start with Under Armour, though. First quarter revenue came in higher than expected for Under Armour, but it's still ... the stock, up pre-market, and I don't know, did they already have the call? I haven't seen the call, I don't know what was said on the call that made the stock drop, because it was up pre-market, and the stock is down 4-5%, something like that. It's nothing dramatic. But, this is what we've seen the last couple of quarters, isn't it? By that, I mean, international, looking pretty good; weakness in the United States of America.
Moser: Yeah. To a degree, this is what we've seen. I think it's a little bit different, at least, in that over the last year, every quarter they've been throwing a little bit more of a kitchen sink quarter at us. I think we were really looking for the kitchen sink quarters to end.
Now, with that said, no, I wouldn't chalk this up as a good quarter, but it was better than expected, so that's to be noted. It's also important to note that they didn't change their guidance. They didn't adjust upwards or downwards. That's important to note. I think that's for a number of reasons. When we think about Under Armour, investors are going to have to exercise patience. If you're an investor in Under Armour and you're buying into the fact that you think that Kevin Plank and his team can turn this thing around, it's going to take a little while, right? Because it's only really been a quarter since they finally got out in front of this, acknowledged problems, identified problems, and then laid out a bit of a roadmap on how they're going to overcome these problems.
So, this was really the first step in what's going to be a multi-step process. I think the market's reaction, as tepid as it may be, is probably the right one, because like I said, it wasn't a good quarter, it wasn't a bad quarter. It was just basically what was expected.
Hill: I knew they were going to be reporting, and yesterday I was looking at my portfolio and I saw exactly how small a percentage of my individual portfolio Under Armour represents. And that's, in part, why I'm holding onto my shares, because it's such a tiny fraction that I just look at it and go, "Alright, it's not really going to be meaningful if I sell this."
And, I've gotten a couple of questions recently since I've referenced Chipotle -- it came up on Motley Fool Money last week that I sold my shares, and I've gotten a couple of questions about how I arrived at that decision. It largely has to do with Steve Ells. Obviously, this was before the leadership change. But, when I look at Under Armour, I don't have [laughs] the same level of animosity toward the leadership that I had with Steve Ells. I was just ... it was actually affecting my sleep, just a little bit. With Kevin Plank and his team, I look at Under Armour and -- look, I would have loved to have seen an even bigger surprise on the upside from Under Armour, an even bigger revenue beat, a beat on the bottom line, all of that stuff. But, that being said, there was nothing that happened this quarter that compounded the negativity.
Moser: No. I think the most glaring problem for Under Armour recently has been the North American story. The North American wholesale segment has been brutalized, and it didn't really show any signs of recovering in this reported quarter, either. Sales were essentially flat in North America. International has done a little bit, probably, to make investors feel a bit better about the story. That growth is still there. Asia-Pacific, for example, revenue was up 35%, I think it was. Direct-to-consumer business is up 17%. So, there are good pieces to this release.
And, again, we go back to the keys that we identified on our team as meaningful signs that progress was being made, and over the course of the coming year, we really wanted to see that they were able to stanch the bleeding in the North American sector, that they're able to improve their balance sheet position, because they really took that from a position of strength to a position of weakness with, honestly, some bad decision-making. Then, also, to make sure that the team that Kevin Plank has assembled here is still on board a year from now, ideally five years from now. But, in COO Patrik Frisk, CFO David Bergman, we're seeing them take a bigger role on the calls in dictating that strategy, communicating the strategy. I think investors are starting to feel a little bit better that maybe Kevin Plank has realized he needs a little help here. Because, I think, if he lets this go, he could probably run into a situation where you get people looking at Under Armour and feeling that same sense of angst and disdain that you were feeling with Chipotle. Because that, really, downright, it was really frustrating, right? And you saw Steve Ells take this business from such heights to, really, wow, such doldrums in such a short period of time. And Kevin Plank has kind of done the same thing here, right?
Hill: He absolutely has. You keyed in on something that I think is important, and that is the leadership team that he has around him and watching that they stick around. I would say, more so than the average public company, this is a metric to watch. Look, it's always going to be worth an investor's question when they see that part of the leadership team of a company that they own has left. The CFO leaves, the Chief Operating Officer, Marketing, whatever. It's always worth saying, "OK, why did they leave?" In some cases, it was, oh, it was time to go, they're retiring. There are perfectly valid reasons for leadership to leave that don't involve you as an investor changing your thesis. I think in the case of Plank, he needs to prove a bunch of things to investors, and one of the things he needs to prove is that he can keep a leadership team around him. So, the fact that he is giving them a greater role in the conference call, it's a small step, but it is a step.
Moser: Yeah. I think really, for him, it's actually a big step. For us, it's a small step. For him, it's a giant leap, because this company has basically been all about him up until this point. And that's fine. He founded it, he grew it to what it is. It's interesting to hear the language on the call. He's sort of changed his tune a little bit here. Before, it was all about supplanting Nike, becoming the biggest brand on the planet, growing that top line to peak levels. Now, he's talking about being a bit more methodical about how he grows the business.
Hill: "We'd like to be one-fifth as big as Nike."
Moser: [laughs] Exactly. I mean, let's just run a good business, and maybe over time we overtake Nike, and that's the product of really running a kick-ass ship here, right? I think, it's an easy trap to fall into. You put the cart before the horse. And really, let's remember that Nike has been around for a while. There's a reason why it's so big and so successful -- they've been doing this for a long time.
So, I think, with Under Armour, there's a lot there to work with. I think the brand itself is probably worth more than the market capitalization of the company today. But, I think investors are pretty sour right now on the state of affairs, and rightly so. I think there's a lot to prove and I think we're going to assess here over the coming three quarters and on into 2019 how this leadership team is doing. If we happen to see one of these two executives step away, there'd better be a darn good reason why. But, other than that, I think we just keep an eye on what they're doing. I think this was a good small first step in the right direction, but there's still plenty of work to do.
Hill: Let's move on to Texas Roadhouse. First quarter results were pretty good. I'm curious what stood out to you, because what stood out to me was the same-store sales, which was higher than expected. Texas Roadhouse, some of those locations are company-owned, some of them are franchised. They break out the comps differently. And maybe not surprisingly, company-owned same-store sales about a percentage point higher than franchise-owned.
Moser: And that disparity actually isn't so big. That's actually nice to see, a pretty tight range there. If you see where franchise restaurants are underperforming by a lot, then you have to wonder, are you really franchising to good people.
The thing that stands out to me really with Texas Roadhouse is, if you've been an investor in this business over the past one to five years, you have to be feeling really good about life right now. The stock has done very well. And I think that's for a lot of good reasons. The company has been performing very well.
I think the question for me is really just, how far can they go? We see with restaurants all the time, it's a difficult business to really maintain that sustained level of performance. And, for Texas Roadhouse, a little bit more than 560 restaurants today, how far can they take it? I don't know. I think if you look at it in context, there's 740 Outback Steakhouses at the end of 2017. That gives you an idea of, maybe, how far Texas Roadhouse proper can go.
But, we also know they have the Bubba's 33 concept. I'm not terribly sold on the competitive advantages there. I mean, burgers and beer, that's just a national identity. I think that's going to be tough, to build any kind of a real sustainable presence there, but I do appreciate the fact that it's another way for them to grow. And to your point about the comps, I think this was their 33rd consecutive quarter of same-store sales growth, so obviously they're doing something right. A lot of that was thanks to traffic being up 4%. That means people are coming in your doors, and that's the name of the game in the restaurant business.
Hill: It really is. We were talking the other day, you look at the ways that you can drive comp increase, you can drive it with more people through the door, you can drive it with higher ticket prices. I think the Bubba's 33, I agree with you, nobody should be necessarily looking at the Bubba's 33, which is essentially a sports bar concept -- which, I still would love to see one in the greater Washington D.C. area. [laughs]
Moser: [laughs] We could do some market research, right?
Hill: Nobody should be looking at Bubba's 33 as some magical driver of growth. That being said, they appear to be taking the same approach with that as they are with the Texas Roadhouse concept, which is, let's focus on food. And, in the case of Texas Roadhouse, they don't really have dessert on the menu, because they want you to leave. They want to turn over those tables. In the case of Bubba's 33, if you're sticking around and watching sports, you can stick around because there's sports on, but we'd like you to drink some more beer and have another pizza.
Moser: Well, that's just it. Stick around, drink some beer, because that's a high-margin sale. Yeah, the dessert thing always makes me chuckle. That's one of my favorite stories of Kent Taylor. He's like, you want dessert? No? OK, get out! It's just like, listen, let's focus on what matters here, and that's just turning tables over.
And I think that, with Texas Roadhouse, it's interesting to note that they've grown traffic in the face of what seems like -- industry data from the National Restaurant Association says that there are still some challenges on the traffic front. So, I think on the whole, restaurants are dealing with a bit of a challenge there, and Texas Roadhouse seems to be overcoming that challenge a little bit.
And I think part of that is because they continue to focus on really presenting their customers with a value proposition that I think customers appreciate. In the face of food inflation rising a little bit, yeah, they'll pass along modest price increases, but they're not looking to eke every penny out of you. You don't see them really trying to hit that price increase button every quarter. And I think that does matter. It's not to say they don't have any pricing power, but they're very careful in how they exercise what pricing power they may have. And you'll hear management say it on the call, they said it on this most recent one, they recognize this is a marathon, not a sprint. They're looking at this business from the perspective of longer-term success, as opposed to hitting numbers on a quarterly basis. And I think that matters, and I think investors are winning from that, obviously.
Hill: A few weeks ago, a friend of mine turned 50. I went to the birthday party, ended up talking with a woman who works for a chain restaurant. I'm not going to name the restaurant because I don't want to get her in trouble, but I would say they are a competitor of Texas Roadhouse. They are in that space. We're not talking Chipotle or fast casual, we're talking a legitimate restaurant here.
And the interesting thing I learned from her, getting her experience, because she works with about 25 franchise restaurants in the Washington D.C. Baltimore area, and when I started to ask her about, what do you find works with them, what I learned was, the challenge of the franchise model is -- in her case, she has some franchisees that have a great location. So, they're doing well in part because they have a great location. She has some franchisees that do well because they're very involved in the community, so they're doing a lot with local high schools and doing fundraisers and, "Hey, this will benefit the high school track and field team if you come in on Tuesday night, 15% of the ticket will go to them, it'll be a fundraiser," that sort of thing. And there are franchisees that are essentially absentee landlords, that they do not live anywhere close to where the franchise is, they're not involved in the community, and they're struggling big time.
Moser: And I think that's the challenge of any franchise model. I think you're seeing more and more concepts trying to do a lot of the heavy lifting up front in making sure they're getting reputable franchisees on who want to be there for the long haul. We saw Panera for a lot of years taking this approach. I think that Texas Roadhouse has taken this approach for some time. The majority of their stores are company-owned.
But, when you get good franchisees, it makes your life easy. I liken it to, when we owned our house in Georgia and were living up here, and I was renting it out for several years, and man, you just cannot discount the advantage of having good tenants. I would give you that house for $100 less a month if I know you're going to be a good tenant. And I operated on that premise and it worked out very well. So, you do a little bit of the heavy lifting up front, it can really make managing that process over the course of years a lot easier.
Hill: Before we wrap up, Apple reports after the bell today. Teladoc, a company that you have a great deal of affinity for, reports after the bell. Before we get to what I should be looking for in Teladoc's report, do you want to share your Teladoc experience over the weekend?
Moser: [laughs] Well, at the risk of grossing somebody out, why not? I think this is important stuff, here. I've listened to people on both sides of the coin with this company --
Hill: For those who don't know, what is Teladoc?
Moser: Teladoc is the move toward virtual healthcare. It's bringing that doctor's office essentially into an app on your smartphone. And it is actually an app on your smartphone. Probably a month or so ago, I learned that our health insurance provider -- we have our health insurance through my wife's employer, which is the Federal Employee Program. The Blue Cross Blue Shield FEP recently signed on Teladoc as an added service to our plan. That's a big win. That's an additional service. So, Chris, I don't remember the last time this happened to me, I think it was when I was growing up, swimming on the swim team, but somehow or another, over the course of the weekend, I landed a case of pink eye in my right eye.
Hill: Never fun.
Moser: Kind of gross. I like to call it conjunctivitis because it sounds more adult.
Moser: Pink eye is like you're a kid. But, listen, I live in a house with two kids and three dogs and two guinea pigs to boot. Something came from somewhere and I'm not pointing fingers. Regardless, I needed to take care of this problem. So, I was taking my daughter to horseback riding on Sunday afternoon, and it got to the point where I said, I need to figure out what this is. I had an idea what it was, but, you know, you have to get a diagnosis. And, I'm taking my daughter to horseback, get her out there to the stables, drop her off, and I'm sitting in the parking lot, and I'm like, "Well, hey, let me just give this Teladoc thing a shot, see if it works."
I already had everything set up in the app through our insurance, so I just go in there, submit all the information, request a visit. Ten minutes later, doctor video conferences in. We have about a 20-minute meeting. I had taken a couple of pictures so that she could see what I was pointing out. Long story short, she made the diagnosis, she prescribed me the eye drops that I was then able to go pick up at my local CVS pharmacy by our house, and the problem was solved for a $15 copay.
Hill: And you never left your car.
Moser: I never left my car. I went to the doctor while I was at my daughter's horseback riding lesson. And to me, it reiterated the power of this business, and the power of the idea of virtual healthcare. And I'll tell you what really took me back was, in meeting with the doctor, of course I have to try to get some sort of insight as to how she felt about the virtual healthcare movement. This was not company-specific, I was just asking her opinion on this. She was probably somewhere between 50 and 60 years old, and she was an utter proponent of it. She was just floored by the implications, and how helpful it's been, particularly in areas where you're either in a remote area and you don't have easy access to a doctor, or if there's a natural disaster, whatever the case. She just felt like this was a long time coming, and she's excited as a physician about the possibilities and the potential. Then, when I asked her further about Teladoc, she just said she couldn't say enough good things about the company, enjoyed working with them, yadda yadda yadda.
So, it's all just to say that, from my misfortune, perhaps some investors will gain from this, Chris. I feel like I've been talking about this company for a while, and the stock continues to do well. Earnings are later today. Again, I'm excited about what these guys are doing. Whether the stock goes up or down after this report is meaningless.
Hill: What should I be looking for in their report?
Moser: We look at some basic metrics that they always report. It's revenue, the breakdown of revenue, subscription access vs. visit fees. But really, you're looking at the total base of users, paid memberships, the number of visits, which can give us an idea of engagement, and that can give us an idea of how much money per visit per member they're bringing in. And really at this point, this company is all about growing that user base, continuing to communicate the idea that they really are the No. 1 provider in this space. I think that's what a lot of the to-do behind this Best Doctors acquisition was, in the secondary opinion and expert opinion market. I think they're really focused on growing out to become the biggest network, the best network, so that they can offer the most solutions to any client that may want them. And it certainly seems like a lot of clients are signing on. So, excited to see what this company has to announce later today.
Hill: Jason Moser, thanks for being here, man!
Moser: Many thanks!
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!