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How the Supreme Court's Decision Will Affect E-Commerce

By Chris Hill – Jun 22, 2018 at 1:43PM

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Some e-commerce companies had a roller coaster of a day after the sales tax vote, but what does it mean for the long term?

Yesterday, the Supreme Court ruled in favor of allowing states to collect billions in revenue from online companies -- which probably won't be as bad for Amazon (AMZN 2.13%) and Wayfair (W 2.98%) as it sounds. In this episode of MarketFoolery, host Chris Hill and analyst Jason Moser explain what this means for e-commerce.

Also, Intel's (INTC 0.86%) CEO suddenly resigned for violating company policy, and the hunt for a replacement is on. Kroger's (KR 0.87%) profits were better than expected, and the grocer's stock jumped a massive 10%. And, in honor of the official start of summer, a few grilling tips from a master. Listen in for more.

A full transcript follows the video.

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This video was recorded on June 21, 2018.

Chris Hill: It's Thursday, June 21st. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, Jason Moser is back.

Jason Moser: Yes, sir!

Hill: Thank you for being here!

Moser: Always, always happy!

Hill: I said this yesterday, I will say it again today: the news fairy is working overtime this week.

Moser: It's been a good week. We ought to have a very full episode of Motley Fool Money this weekend.

Hill: Yeah, we absolutely will. We're going to get to Intel's CEO in a moment, and we have some earnings in the grocery industry. 

We have to start across the river in Washington D.C., where the Supreme Court has ruled, in a closed ruling, that states may require online retailers to collect billions of dollars in sales tax revenue. The first thing I saw about this story when it broke had to do with one of your favorite companies, Wayfair. We'll get to the individual stocks in a second. 

Let me just throw out as an aside, one interesting thing when I was reading about this decision, it was a 5-4 decision. It's interesting to see who was in the majority. You basically had Ruth Bader Ginsburg, arguably the most liberal judge on the bench, and Justice Alito, and Justice Thomas, arguably two of the most conservative members of the bench. Anyway, those sorts of collisions are interesting to me. They have nothing to do with investing. 

Let's get to the investing part, here. How bad is this for Wayfair? The first thing I saw on Twitter was like, Wayfair is tanking. And it's not still tanking, it has since bounced back up a little bit, but the trading volume, though, very heavy for Wayfair.

Moser: I'm glad you mentioned the 5-4 nature of the ruling. I saw that and I'm like, "Man, there's nothing like a compelling ruling. Majority rules. Seems like they really were all in agreement there." That's the one thing I hate about these types of rulings. 5-4, you feel like, at some point or another, there's going to be some political swagger in there trying to tilt the scales in another direction. 

But, any which way you cut it, I think this is honestly the right call. I that think the biggest businesses out there today, the most important e-commerce companies out there today, foresaw this. I think they recognize it's ultimately the right thing, and they've been planning for this accordingly. Whether it was Amazon or Wayfair or Etsy, these are all businesses that have been practicing collecting taxes for some time now. That's why I think we're not seeing any big hammering in the share price. You're right, volume was a little bit crazy for a few minutes after the decision was released. But all in all, I think you're going to see a headline or two pontificating the effects of this on Amazon or Wayfair or Etsy. 

If you think this is something that affects Amazon negatively, you need to go back and rethink that. To me, if you remember, it was more than a year ago when Amazon started collecting sales tax in all 45 states that levy it with inventory that was held by Amazon. Now, they've recently also been rolling that out on the third party side, as well. It's nothing new. I think it's just more or less finalized. 

I think the thing ultimately is, when we look at the commerce environment today compared to the commerce environment that you and I grew up with, you and I grew up in an era where there just wasn't a lot of choice. If you wanted something, you had to go out and get it. Today, there's a lot more choice, and consumers ultimately have a more profound way to value their time. I think that's what these businesses recognized so early on in focusing not as much, maybe, on being the low-cost provider, but being a provider that offers a very wide selection and super convenience. 

Whether you're Amazon or Wayfair -- and I think Etsy does the same thing -- they've developed very good loyal followings because of that convenience, because of the selection. They're not always trying to be the low-cost provider. They're giving you a good price. But now, there's a lot more at stake for you to get in your car, go out, and buy something. 

I think this is ... I hate the word nothingburger, but I think that probably applies here, so I'm going to go ahead and use it.

Hill: Let's drill down on Wayfair for just a second. They're still not profitable, yes?

Moser: That's correct. Wayfair is still very much early in the stages of their development. The stock has really been on a tear. I mean, I understand why. We are in that environment where this rising tide is lifting all boats. I think the higher-quality businesses are getting a little bit more favor. I think the market is looking at Wayfair, comparing it a little bit to Amazon and management's long-term vision there. When you look at all of the metrics that really matter for a company like Wayfair, whether it's sales or customers or items delivered, whatever, all of those metrics are headed in the right direction as well. And they obviously participate in a huge market in home goods and furnishing. 

The stock has done phenomenally well in a short period of time. They still have a lot of work to do to get to that profitable side of the business. A lot of that is going to be pulling back on that SG&A spend at some point or another, after they've really built out this brand identity. I think they're close to that here domestically. They're trying to pull the same thing off internationally and it's lagging a little bit behind, just as we saw with Amazon years ago. I don't know that I'd be looking at Wayfair as a very profitable business in the near-term, but I still think what management is doing is the right thing for the business for the long run.

Hill: Intel's CEO is out. Brian Krzanich has been Intel's CEO for the past five years. He has resigned following an internal investigation that found he violated the company's policy about fraternizing with direct reports. This applies to all managers. So, Krzanich has resigned. Robert Swan, who is Intel's CFO, is going to be the interim CEO while the company looks for a permanent replacement. 

Another interesting, very short-term look at Intel's stock -- in the case of Wayfair with the Supreme Court decision, there was the drop and then it bounced back up. It was the reverse with Intel. There was the headline, Intel's stock was up initially. Now it's down about 2%. Maybe that's because investors looked at the run that the stock had. Krzanich was there for five years, the stock was up 125% while he was CEO. Not saying that he shouldn't have resigned, or he shouldn't be out the door. But, he's done a good job with the company. 

I'm curious where this goes now. I think it's interesting, and probably the right move for shareholders, that the board said -- and, I don't know Robert Swan at all. I had never even heard Robert Swan's name before this morning. But it's probably a good move that they just said, "We need you to keep this seat warm. We think this is a plum job and we're going to go out and find someone."

Moser: Yeah. I mean, I think Swan probably was looking at that and thinking, "Listen, this isn't really what I want to do. I'm happy to get in here and keep this ship headed in the right direction, but let's try to find someone to fill Krzanich's shoes," because you're right, he's leaving the company with a really good track record in his wake. If you're an Intel investor over any of this period of time, I think you have to be feeling kind of bummed about this, at least from an investor's perspective. 

Now, as you said, I'm not saying he shouldn't step down. It's clear that he made an error in judgement, and I think you have to be able to answer to that. Stepping down sounds like it's in line with company policy, and it's probably the right thing to do, I assume. But, it's not like he's stepping down because he was a crappy CEO. He maybe did a stupid thing, but he has five years where he really demonstrated some pretty good results there. 

We were talking before taping, look at something like Microsoft before, what was it, a decade where Steve Ballmer essentially demonstrated nothing for shareholders. That was just a big flatline. Then, all of the sudden, you throw a new CEO in there who has a little bit of a better idea of where the puck is going, and now Microsoft is making all of these investments in cloud computing and mobile, and these things are starting to pay off like they didn't before. 

Intel is not at a position where they need to necessarily find a Satya Nadella, because they don't need to turn things around. But, they need to find someone of that caliber to keep things going in the right direction. This is a huge company. It's one of the most important tech companies on the planet, I think. When you're talking about a $250 billion market cap, it's not like you just jump in there and start running it. 

Thankfully, I think that whoever steps into that role is going to be able to step into a house that's in pretty good order. This isn't something that needs to be turned around. It's something that needs to be maintained. From that perspective, I'd like to think they could probably attract a few good names. Hopefully, hopefully, they can find a woman to take that position. I feel like the world would benefit from more female leaders. I think this is a great opportunity -- I'm not saying pick a woman for a woman's sake, but for God sake, get a couple on your radar because this is a great opportunity.

Hill: Nadella was the first person I thought of when I saw this news this morning. I agree with you that Intel as a business is not where Microsoft was as a business when Ballmer step down. Certainly, that has been borne out by the stock performance. But the reason I thought of Nadella was, I basically thought, "Okay, like Microsoft, here's this huge tech company that generates a ton of cash. Are there new directions they can go in?" I mean, that's the brilliance of Satya Nadella at Microsoft. Intel doesn't need a turnaround, but it does seem like this is an opportunity for a step in that direction.

Moser: Yeah, I think you're right. You have a company that has done a good job in, to use that old hockey analogy, skating to where the puck is going. I think that's why Intel has done well. They need to keep doing that. That's why Microsoft has done well under Nadella's watch. It's all about looking forward, seeing what's around that corner. 

Whatever they do, recognizing that they have a lot of capital at their disposal, they can continue to plow a lot of money into R&D to help take technology to the next level, wherever that may be, I think Intel is going to be a big part of it, as long as they can get a leader in there who's capable of maintaining the success that the company has realized to date, and also capable of being forward-looking enough to see what's coming next. I think that's going to be really important.

Hill: Kroger's first quarter profits came in higher than expected. Stock up 10%. It's a good day for Kroger. It's a good day for this grocery store.

Moser: Let's go Krogering, right? That's the commercial jingle, right?

Hill: Is that the old commercial?

Moser: It is! I grew up in a Kroger part of town, and I'll tell you. We had a Kroger on one side of the road and Mac's beloved Publix on the other side of the road.

Hill: We didn't have that in New England. [laughs] 

Moser: I have to admit, I probably favored Publix more than Kroger, but the Kroger was really nice. I'm not taking anything away from them. Kroger also owns Harris Teeter, which, many, many moons ago, I actually held a job at a Harris Teeter, Chris.

Hill: What were you doing there?

Moser: Bagging groceries and ringing up the register.

Hill: Nice!

Moser: I was pretty good at it.

Hill: I'm assuming you got faster over time, at the bagging groceries.

Moser: Yeah, I got pretty good at it. I understood. I think that really leads to my success today as a consumer, because I do a lot of the grocery shopping, because I do a lot of cooking. When I go into the store now, I very rarely go to the aisle where they're checking me out. I go to the kiosk where I can check myself out, because I can do it faster and I can bag it a bit more efficiently. And I'm not putting the canned tomatoes in with the eggs and loaf of bread.

Hill: But your first week on the job?

Moser: Oh, I was clueless. I was lost. It's all about learning not only what the customer wants, but there are good things, right things to do, and there are wrong things to do. I think I did all of the wrong things at least once, but you learn from your mistakes, right?

Hill: That first week on the job -- don't worry, we're going to get to Kroger's stock in a second. Don't worry. Hang in there, people. But, the first week on the job, were there any, "Oh, no, the bag is going to rip." Like, the experienced person on the staff was like, "No, dude, you have to rebag that."

Moser: Well, there were certain cases where you had to make sure you double-bagged, don't even ask. That was way back before we had the opportunity to bring our own bags as consumers. So, it was paper or plastic. And if you failed to ask that, paper or plastic, you're just starting off on the wrong foot. It doesn't go anywhere but down from there.

Hill: [laughs] Alright, let's get to the business at hand here. Here's a headline that truly stunned me: online sales up 66%. Kroger has online sales?

Moser: Sure!

Hill: Is this the whole Peapod delivery thing?

Moser: That, they have a partnership with, is it Ocado?

Hill: Peapod is Giant, I guess.

Moser: Peapod is Giant, but I think Kroger, along with all of the other grocery concepts, Walmart doing the same thing, they're talking about internet sales, they're talking order online, pick up at store, it's all of that. 

I want to hearken back to a year ago. It was a year ago, almost to the day, we got word of the Amazon-Whole Foods tie up. Remember? And we talked about, in this very room, as all of the grocery stocks across the entire market were getting hammered over that news, Kroger as well. There were a lot of groceries stocks that were being left for dead that day because the bromide that was going around was, "This is a Kroger killer, this is a Giant killer, this is a whatever killer." And I said -- go back and look at it, listen back to the tape -- I said, "This is not a Kroger killer, Chris." I said, "There's no way." I said, "This is just a great example of a knee-jerk reaction that could create opportunities for investors." 

And yes, I think Amazon's move to buy Whole Foods was disruptive. I think it sent a lot of folks in the space into a bit of a tizzy, trying to figure out, "Oh my God, what are we going to do to keep up with these guys now?" But, fast forward a year later, and Kroger is a good example of a business that has done a lot to keep up with the evolution of the grocery space. That 66% digital sales number that you mentioned is an example of that. They're continuing to focus on e-commerce, whether it's delivery or pick up at store, meal kits, incorporating more of that into their model. Obviously, they have Harris Teeter as maybe a step up from a Kroger concept. It's a smaller concept, obviously. And they also unloaded a convenience concept that was probably a little bit of an anchor on the financials, as well. 

I think, you get back to looking at this as a business. When we talk about grocery stores, I think Kroger is one of the better operators: financially fit, able to grow that top line, maintain some profitability. I think the downside is, when you look at grocery stores, they are so low-margin, and they're so cost-competitive. From an investor's perspective, it's just not the most attractive thing to be investing in, which is why I probably wouldn't. 

Now, that said, if you bought Kroger on that dip a year ago after the Whole Foods deal, you're feeling pretty good about that today. You've made a little bit of money.

Hill: I was going to ask about that. It does seem that, for all the things that Kroger is doing right -- again, it's a good day today for shareholders -- I'm not saying that this is the consumer staples industry, in terms of unattractiveness for investors, but it does seem like groceries ... if you're looking at the grocery industry, you may want to widen your gaze in terms of industries that you're looking for stocks.

Moser: I think so. On the one hand, we all need groceries. The model for the repeat sales is just there, and Kroger has a good loyalty program. They have a different brand beyond just Kroger. But it's so cost-competitive and so service-competitive, that's where you differentiate. And in order to do that, it costs money, and you see these low margins. It's going to be very difficult to overcome that. 

On the flip side, you see something like an Amazon or a Costco, even, where they're in the same business, essentially, but they have a nice membership model tied to it. I think that membership model creates a more loyal following over longer periods of time. I think that's why you see stocks like Amazon and Costco have done so well for so long, because they've been operating under that model.

Hill: Before we wrap up, it's June 21st, it is the official start of summer. 

Moser: Today is the official start?

Hill: Today is the official start of summer. The whole summer solstice, longest day of the year kind of thing. Isn't today the longest day? I'm pretty sure it is. It's the official start of summer.

Moser: You know, every day feels really long, Chris. Every day feels really long.

Hill: [laughs] Let's close out with a grilling tip. It could be a tip, it could be a recipe. I may actually be hitting you up for advice, you and Ron. I may need a new grill at some point. My grill is getting up there in years.

Moser: Mine, too. I have some friends who have Big Green Eggs. I've pondered maybe getting one of those, but man, they're a lot of work. You really have to learn how to use it, and I'm not sure if it's going to be the best thing for me. But, we'll save that for another day, I guess.

Hill: For me personally, the Big Green Egg, that's something that I could see doing in, like, ten years.

Moser: When you have more time? [laughs] 

Hill: When I have more time, when the kids are out of the house. It's like, "Alright, yeah, I don't really have anything to do. Here's what I'm going to do all weekend, I'm just going to slow grill this rack of ribs."

Moser: Ribs, there you go. You got my attention. Okay, I'm going to give everybody two tips here. First, I think a lot of people think summer, they think grill, and they think, "Alright, let's throw a steak on the grill." Now, I have come to find that I don't like grilling my steaks. I like cooking my steaks in the kitchen, on a cast iron skillet, under the broiler in the oven, just like you would get at any of those high-dollar steakhouses. Broiling a steak, to me, is just far better. You're able to get that sear on the top with the crust, and all of that good stuff. So, don't fall into the trap of just grilling your steak. Try learning how to broil it. I think you'd be very surprised at the results there.

Two, the grilling tip. I have a recipe that I've had for probably a year now for Thai chicken tacos. I got this recipe online, I think it actually came from Rachael Ray's website. I tried it out once at home and it knocked the socks off of everyone in my family. And anytime you find something that your wife and your kids are all on board with, then you keep that recipe in the rotation.

This is a great recipe. You marinate the chicken thighs, then you grill the chicken thighs. That's one of the keys, you have to grill the chicken. But, then, all of the accouterments that come with the tacos, you have the crunchy, you have the radish, you have this slaw. Oh, man, the recipe is knock-your-socks-off good, a great peanut sauce to go with it. I'm assuming I could just take this recipe, we could tweet it out on the Market Foolery feed later.

Hill: Absolutely.

Moser: Assuming anybody wants to give it a whirl. The degree of difficulty is not that high. I contend that if I can do, anybody can do it. Don't be intimidated. It seems like it's a lot, but it's actually pretty easy. And it's very tasty.

Hill: By the way, speaking of the Market Foolery Twitter feed, just this week, crossed the 10,000 mark in terms of followers. Thank you to the folks who follow us on Twitter. Jason Moser, thanks for being here!

Moser: 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 Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you on Monday.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of Amazon. Jason Moser owns shares of Intel. The Motley Fool owns shares of and recommends Amazon and Wayfair. The Motley Fool recommends COST and ETSY. The Motley Fool has a disclosure policy.

Stocks Mentioned

Intel Stock Quote
$28.57 (0.86%) $0.24 Stock Quote
$90.34 (2.13%) $1.89
Kroger Stock Quote
$47.35 (0.87%) $0.41
Wayfair Stock Quote
$36.67 (2.98%) $1.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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