Schnatter’s Shadow Shakes Shareholder Assurance

On today's episode of Market Foolery, host Mac Greer along with Motley Fool contributors Jason Moser and Matt Argersinger touch on some of the market's biggest stories. Domino's (DPZ 1.36%) reported an unusual miss on their earnings, but investors shouldn't lose sleep over it. Papa John's (PZZA 0.23%), on the other hand, probably has some serious trouble brewing with their ex-CEO.

eBay (EBAY -0.14%) had a rough quarter and blames it on a strengthening U.S. dollar ... but come on! Come on! American Express (AXP 0.07%) is down on concerns over revenue and its market is getting tougher and tougher. Also, Matt and Jason talk about some fascinating companies they just pitched at The Motley Fool's quarterly board meeting.

A full transcript follows the video.

This video was recorded on July 19, 2018.

Mac Greer: It's Thursday, July 19th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts David Kretzmann and Jason Moser. Guys, welcome! How are you doing?

Jason Moser: Doing great!

David Kretzmann: Absolutely!

Moser: I'm ready to wrap up the week here. You know, we're going to go pick up our daughters from camp on Saturday. They've been gone for three weeks straight. It's a preview to the college years.

Greer: How has that been for the kids, and how has that been for you and your wife?

Moser: The kids have had a blast, I just spoke to them last night. It's funny, my wife and I made this point to each other, we had never had this long of a stretch together sans kids ever since they've been born. It's been wonderful to reconnect and do things and whatnot. But we thought, even after 20 years, we're still not killing each other, I think we're in it for the long haul. It's all working out well. [laughs]

Greer: That's nice. That's a win-win. That's an earnings beat, is what I call that.

Moser: It is, it's beating expectations and raising guidance.

Greer: We're going to talk about some companies that did not necessarily do that. On today's show, we're going to talk some American Express, eBay and, guys, you're going to share a few stock pitches that you gave to our board of directors yesterday. 

But let's start with pizza. Who doesn't love pizza? A rare earnings miss from Domino's. Domino's has been a monster stock over the years. Shares up 300% over the last five years, and 2,500% over the last ten years. David, shares falling a bit today on disappointing revenue and lower than expected same-store sales growth. Now, they actually beat on the earnings front, but those other numbers weighing the stock down.

Kretzmann: I think this is just a case where you have a company that has really high expectations. The underlying performance of the company is still undeniably very strong, especially in the context of not only other pizza restaurants or chains, which we'll talk about, but also the restaurant space as a whole. As we know, over the past few years, it's been very competitive and it's been difficult for companies to grow same-store sales, let alone total revenue by opening new stores. Domino's domestic same-store sales up 6.9%. You'd be hard pressed to find any other restaurant putting up anything close to that. They had 4% international same-store sales, earnings per share up 35%. So, I wouldn't be worried if you're a Domino's shareholder.

Greer: This is just a matter of the bar being too high, or unrealistic, do you think?

Kretzmann: The stock is only down 2% today, and as you mentioned, it's had an incredible run this year and over the past two, three, five, ten years. I don't think it's necessarily that expectations are too high, it's just, the stock has done really well, and this is business as usual. For a company with expectations as high as Domino's, sometimes business as usual is a little disappointing. But if you're a long-term investor like us at The Fool, there's no reason to be worried here.

Moser: You know that old saying, pizza does not grow to the sky. 

Greer: OK, wait a minute. [laughs] 

Moser: It's trees.

Kretzmann: I was going to say, I don't think I've heard that one.

Greer: I hadn't heard that. I want to ask you about the longtime Domino's CEO, Patrick Doyle, who just stepped down a few weeks ago. This guy is credited with really turning Domino's around. In terms of my proprietary Mac Greer Humility Index, he scores very highly. I don't have his exact number, but he was a guy who came out and said, "We hear you, we know you think our pizza tastes like cardboard." Whether you think that or not, I think a lot of people agree their marketing campaign was brilliant, and that he helped turned the company around. Going forward, how much does it concern you that he's no longer there?

Kretzmann: He said one of his goals was to leave the company in good shape for his successor. In this case, you have a new CEO, Rich Allison. I think this was the first quarter where he had that CEO title. It'll be something for investors to watch. But, you look at the foundation that Domino's has today. They have over 15,100 stores. Pizza Hut still has more locations worldwide, so going forward over the next couple of years, Domino's shouldn't have a very difficult time opening more stores. You want to continue to see existing stores continue to perform well. We want to see that same-store sales number continue to tick up. But, you have to love the trajectory that the company is on. I think Rich Allison, the new CEO, is in a good position to continue the momentum that Doyle put in place.

Moser: I think, the one thing to look out for for Domino's -- I agree, essentially, he set this up so that going forward, the new CEO, don't change anything. Just keep doing what you're doing, keep that ball rolling. 

Something that's completely out of their control is, we know that with all of Papa John's woes, Pizza Hut is now the official pizza of the NFL. We're going to see a lot more Pizza Hut here in the coming months, toward the end of the year and the next year, as football season kicks up. It's going to be something to watch here in the next few quarters, to see if Pizza Hut doesn't have a little bit of a resurgence and potentially take a little bit of share away from Domino's. It's certainly a realistic possibility. Domino's, just don't change anything, keep doing what you're doing.

Greer: You mentioned Papa John's woes. Maybe Papa John's should hire Patrick Doyle. There's a free idea for you, turnaround specialist.

Moser: [laughs] Consultant Mac Greer.

Greer: There's a new twist in the Papa John's story. Last week, founder John Schnatter resigned as chairman after admitting he had used the n-word on a conference call. This week, Schnatter said it was a mistake to resign. He said the board's decision to remove him was based on "rumor and innuendo." And, David, he owns 29% of the company's stock.

Kretzmann: And he's still sitting on the board. This is a little bit awkward. This morning, Forbes came out with an article called "The Inside Story of Papa John's Toxic Culture," basically talking about a bro culture, big ego, and all sorts of things that Schnatter has been up to. It's like, that's supposed to happen in Silicon Valley, not in Louisville. What are you doing, man? 

He still has 29% of the company, he's still plastered on the pizza boxes and the marketing -- although, that's really been pulled back. Then, it's also come out this week that Wendy's (WEN -0.70%) and Papa John's, before all of this stuff came up over the past couple of months, they're actually in talks to have some sort of merger. Going forward, if you're the board of directors at Papa John's, I think you have to really consider that possibility. Maybe the best step forward for the company is to look for a merger or a sale, because, man, this seems like a train wreck that keeps accelerating. When you have Schnatter on the board, he would have to be in favor of a buyout or a merger for it to go through. 

Also, Major League Baseball suspended their partnership with Papa John's, so it's not just the NFL. The Papa John's name is coming off the University of Louisville football stadium. It really is a train wreck here. They have to figure out something, quickly. To the board's credit, they have acted pretty quickly to distance themselves from Schnatter, in terms of the marketing and the branding. But Papa John's, John is still in the name, the founder is still in the name.

Moser: Is there a Papa John's bowl? You're talking about it coming off the stadium. Is there a bowl game? I think there's a Papa John's bowl.

Greer: I'm not sure about that.

Moser: I would imagine that's probably on the chopping block, as well.

Greer: Do you have to, at some point, change the name of the company? Or, is this one of those stories where, for the average buyer, if I'm looking at pizza and I like Papa John's Pizza -- as my kids do -- this story doesn't really matter that much? Or, at some point, are they going to have to change the name?

Kretzmann: I think longer-term, they're probably OK with the name, especially when you're taking Schnatter off of the marketing and the branding. I would think, three years from now, you'd be fine, especially if they do partner with someone like a Wendy's or some other restaurant chain. 

Right now, Papa John's enterprise value is $2.3 billion. Buffalo Wild Wings was bought for $2.9 billion by Arby's. It's in a reasonable ballpark for some sort of acquisition or merger, so I would look for something like that over the next year. I really think, going forward as an independent company with Schnatter still owning almost a third of the company and sitting on the board, that's going to be a really tough situation to navigate. 

Someone who I would love to hear from on this, who sits on Papa John's board of directors, is Texas Roadhouse founder and CEO, Kent Taylor, who is very much a straight shooter, as we know. We've interviewed him before. I would love to hear his perspective. He also works in Louisville, and he's been involved with Schnatter and Papa John's for a while. I'd be curious to get his perspective on everything that's going on with the company -- because apparently, with this Forbes article coming out, there's a lot of cultural and leadership issues at the company that didn't just pop up in the past year or two. This has been going on for a long time.

Moser: It's important to note, too, that for everything that's gone wrong here -- I think the best thing they can do is get out of the headlines, in one way, shape or form. Don't let this thing keep dragging out through the headlines. But, for everything that's gone wrong, let's not dismiss the things that have gone right. They were very quick to build a robust mobile presence. It's very convenient, very easy. They make a pretty good product. I think it would be very easy to get this thing out of the headlines, keep focusing on what works for them, and keep the business moving forward. The problems that they have are extremely fixable. It sucks, but it's fixable. It would be different if it was really bad pizza and a really bad app and a really bad brand. Right now, they just have some identity problems.

Greer: Good business. I think you bring in a new Papa John. It's basically how Bewitched, back in the day, they switched key actors between seasons. I think, you bring someone new -- his name could be John, it doesn't have to be -- and you say, "This is Papa John." Patrick Doyle is Papa John.

Kretzmann: Patrick Doyle joining, that would be awesome. I do agree with JaMo -- when you look at Papa John's, their issues are fixable. What makes this different from something like a Chipotle is, a leadership change alone probably isn't the only thing you need. Schnatter in this case still owns so much of the company and still has so much influence. It'll interesting to see how those dynamics play out, but that's why I'm a little less optimistic about their opportunities going forward as an independent company. If you're trying to distance yourself from Schnatter, but he still has so much ownership and influence and control over the company, those are tough waters to navigate.

Greer: Let's switch gears here. Shares of American Express down on earnings. Jason, better than expected earnings here, but some concerns over revenue.

Moser: American Express has recently been lost in the conversation of modern-day money moving. I think a lot of that had to do with its brand identity growing up. For a long time, it has been a brand that's affiliated with well-off people, or bigger spenders, perhaps. That's partly because of their closed-loop system. They have more control over the transaction from start to finish. Because of that, they've historically been able to charge merchants more in order to accept American Express. 

Now, the obvious question that comes from that is, if I'm a merchant, why would I bother paying more for American Express if I have all of these other options out there? Customers are bringing Visa (V 0.33%) and MasterCard (MA -0.07%), and now PayPal (PYPL 0.64%) and Square (SQ -1.57%) and whatever else. Interesting, there was a lawsuit that tilted in American Express' favor here recently that basically prohibits merchants from incentivizing customers to use other cards. That gives American Express at least a little bit of a leg to stand on in charging those higher merchant fees. 

It's not a bad business. It's a good business. But when you look at it in the context of the other opportunities that are out there -- Visa, Mastercard, those are bigger bases. Square, PayPal, far more advanced on the tech front. PayPal is now a bigger company than American Express is, believe it or not. That just came out of nowhere. It's not been the greatest investment to hold in the world. It's not a bad company, but if I'm looking in this space, I just don't think American Express is really at the top of my list.

Greer: When you look at the numbers here, David, interesting, higher spending by the consumers, by small businesses, and by corporate card members. But the kicker here is that those higher spending numbers were partially offset by an increase in the cost of rewards. They're really having to do more to compete. I can see that because I'm a happy, incredibly satisfied Chase (JPM 0.49%) Sapphire Reserve card holder.

Kretzmann: Me as well! It's all about the points!

Greer: I love that card. You would have to pry that card for my dead, cold hands.

Moser: Is that the Amazon (AMZN -1.64%) Prime card?

Greer: No. [laughs] Come on, man.

Moser: It's the Chase card. I have a Chase Amazon Prime card. I don't even understand what you're talking about.

Greer: Come on, is that your child's credit card?

Moser: Wow!But, I think you make a good point --

Greer: [laughs] I'm just kidding. The Chase Sapphire Reserve card has incredible travel rewards, and that's why I use it. I transfer it to Southwest and United and all that good stuff.

Moser: The Amazon card's similar. You get these cash-back rewards for Amazon. Given that we already spend so much money on Amazon's platform anyway, it's very convenient. But, what I was going to say, I got an email from American Express recently. They were congratulating me for being a cardholder for ten years now. I thought, "Wow, that was thoughtful!" But, you know what I noticed? In the last couple of years, when I got that Amazon Prime card, my spending on my American Express card has curtailed significantly.

Greer: Interesting.

Moser: The rub here is, because I've had that card open for ten years, and I have a good credit record, if I close it, that's not really a net win for me on the credit score side. So, I'll keep it open, it's nice to have. But there's no question that my spending has diminished considerably on that, and much more of us spending now goes to that Chase Visa.

Greer: I'm sorry I talked trash about your Amazon Prime card. I know people love it, I know people love the Amazon card.

Kretzmann: Why not have both?

Greer: I know. I just get a little enthusiastic about the Chase Sapphire Reserve.

Moser: I appreciate your enthusiasm. Is that a Costco card, by the way?

Greer: It's interesting that you ask, because now, yes -- I can use it at Costco, because they don't have their AmEx deal anymore! So, it's just one more reason.

Kretzmann: Can you use any Visa at Costco?

Greer: I think so.

Moser: I think that was the straight-up Visa agreement. It really opened up the floodgates for Costco. Before, the only card you could use was American Express.

Greer: Do you guys spend paper cash at all?

Kretzmann: No.

Moser: Very rarely.

Greer: I don't think our kids are going to know what it is.

Moser: Our kids do not carry cash around with them. Whatever they get, part of it goes into their investment account, part of it goes into their savings account, they have a little bottle at home that they keep a little bit of spare change in, but nothing much.

Greer: Can your kids talk about the war on cash basket? I imagine that's a big conversation. Are they conversing, talking about PayPal, Square?

Kretzmann: Every night at the dinner table, "Daddy, how's the war on cash basket doing?"

Moser: That is one of the stocks on their radar. [laughs] 

Kretzmann: Mac, it's interesting, going back to the higher expenses related to credit card rewards, that has become such a competitive element for Visa, MasterCard, and American Express. You and I are happy Chase Sapphire reserve customers. A year or two ago, their sign-up bonus was 100,000 points, which basically works out to $2,000-3,000. It's not cheap. American Express has had to ramp up the rewards in an effort to compete against the Sapphire Reserve card. It'll be interesting to see how that all plays out. 

At this point, American Express is still the biggest of the three, of AmEx, Visa and MasterCard, in terms of cash flow production. But they also have the slowest revenue growth. At this point, you look at Visa and MasterCard, they're growing much faster, they tend to appeal more to a younger audience than AmEx. AmEx is really having to find some ways to appeal to a younger audience. In doing so, their expenses are rising, because they need to offer more compelling rewards to compete with those Visa and MasterCard offerings.

Moser: A couple of points to note with American Express. American Express is a bank holding company, so it is going to be beholden to those bank capital ratios that Visa and MasterCard are not. It's not a bad thing or a good thing, it's just a different business. 

I feel like we're in the space where the costs of these services are coming down. American Express is going to have a tougher time proving their case that they should be charging merchants more. I just don't think merchants are going to be as open-minded to paying more to accept American Express when they can accept other cards, other payment forms, for less.

Greer: Guys, let's talk some eBay. A rough day for eBay. Shares down around 9% at the time of our taping. Jason, let's look at the numbers here. We have disappointing full-year guidance and disappointing revenue. eBay blaming the strengthening U.S. dollar, which it says is hurting international sales.

Kretzmann: Oh, yeah, that's the reason. [laughs] 

Moser: That's what did it. [laughs] 

Greer: International sales account for 60% of eBay's business.

Moser: Jeez, eBay is in a really tricky situation. It's not really that it's a bad business, per say. It's decent business. But it's really hard to come up with a compelling reason why anybody should invest in it.

Greer: It's not the strong dollar? That's not the main problem? [laughs] 

Kretzmann: [laughs] If the dollar was a little weaker, it'd be all about eBay.

Moser: When you talk about the problems that they need to solve, that's not really one of them. I think a lot of this is summed up in a chart we saw on eMarketer the other day. It was talking about the top ten U.S. companies ranked by retail e-commerce sales share in 2018. Amazon is now at 49.1% market share there. The closest competitor to Amazon is eBay. The bad news is, it's at 6.6%. 49.1% vs. 6.6%. Then, you keep on going down the line. 

The biggest surprise to me was Wayfair at 1.1%. You see what Wayfair has done as a stock over the past year, it's been phenomenal. I think there's good reason for that. I've certainly used Wayfair more than eBay. 

I think that eBay is just getting lost in the shuffle here. They're not doing any one thing really well. The StubHub acquisition is just, meh, it's not really producing any meaningful top line growth for the company. Quarter in and quarter out, I'm just like, eh. It's really a shame that they unloaded PayPal, because that was the crown jewel of that company, in my opinion.

Kretzmann: The capital allocation here is really baffling to me. What stuck out to me in the press release is that they're selling their $1.1 billion stake in Flipkart, which is one of the larger e-commerce platforms in India. You compare that to October 2016, when they sold their 18% stake in MercadoLibre. Since that time in 2016, MercadoLibre has more than doubled. 

To me, what would be an interesting angle for eBay is if they were investing in these different brands internationally rather than trying to go it alone like they've done in the U.S. To me, it would be more appealing if they did have some partnerships and stakes in some of these up-and-coming e-commerce platforms in Latin America and India. Instead, they're selling it off, they're trying to go it alone. To me, then you're competing directly against Amazon and these local players. I don't have a lot of confidence that eBay can make a better stand-alone platform, because it's not really working even here in the U.S. Within the U.S., I feel like they could go after an Etsy or a Wayfair and really bolster their e-commerce platform and do something different from what Amazon or some of these other players are doing. 

So, from a capital allocation perspective, getting rid of PayPal, selling off MercadoLibre, now selling off Flipkart, it makes me really wonder what the long-term strategy is here. I don't see how this wins against Amazon or some of these other local players long-term.

Greer: It sounds like the long-term strategy might be for the U.S. dollar to weaken. 

Kretzmann: [laughs] That's it!

Moser: [laughs] Currency effects as a strategy.

Greer: Guys, as we wrap up, we had our Motley Fool quarterly board meeting yesterday. I have it on good source, I have some people out there that have told me, maybe some people in this room, that you had an opportunity to pitch some of your favorite stocks to our board of directors. I want to recreate that magic, because most of us were not there at the board meeting. Jason Moser, I want to first of all hear what your stock was, and then maybe give the quick pitch.

Moser: Sure. I had to bring the heat this time around, because we did it a quarter ago and I pitched Teladoc (TDOC -0.07%). I set the bar high, given where that stock has gone.

Greer: You mention Teladoc almost as much as I mention Costco, is that fair?

Moser: Yes, I think that is fair. Maybe there's an advertising partnership there.

Greer: This is the first time I mentioned Costco in this show. This is probably the latest I've gone into a Market Foolery.

Moser: I prompted you mentioning Costco, too, if I'm not mistaken. Really, you didn't do it, I pushed you to do it. 

Greer: It's OK. I'm still feeling bad that I ripped on your Amazon card. I'm sorry. I'm sure it's a great card.

Moser: [laughs] Bezos will be coming after you.

Greer: Believe me, I know. That's what I'm really afraid of.

Moser: This time around, I went with a name I think a lot of our listeners will be very familiar with, Ameris Bancorp (ABCB 0.81%). A little small-cap bank down in Southwest Georgia, Moultrie, Georgia, where my mom and dad live. I discovered this as a stock, I was looking at it back in late 2010, when the financial crisis was really taking it to town on a lot of these little banks. It became very clear that Ameris Bancorp was a baby being thrown out with the bathwater. A very well-managed bank, small community bank, but the FDIC found them as a partner to help roll up a lot of these failed institutions with basically risk-free acquisitions. Ultimately, what that ended up doing is, it took the bank from a total base of assets of around $2.5 billion back in 2010, they're going to close out this year with close to $12 billion in total assets. 

One way to value banks is based on return on assets. They've been very good at consistently displaying good return on assets here, year in and year out. I think we're entering a stretch where it's going to be very favorable for banks. As interest rates continue to rise, they're going to be able to make a little bit more money on that net interest income line and continue to do smart lending with a community focus. I think that Ameris Bancorp, ticker ABCB, still has plenty of room to run.

Greer: David Kretzmann?

Kretzmann: I'm going with Namaste Technologies. This is a small-cap Canadian company. This is a cannabis e-commerce company. They have 32 websites in 20 countries. They mainly sell vaporizers, hardware, and other accessories. They're not actually selling the plant or oils yet. Worldwide, they have 1.5 million registered users, 600,000 monthly visitors to all of their different sites around the world. 

I like the fact that the two co-founders, they're still with the company, they own about 5%. Something that really stuck out to me is two board members they have. They have the product manager at Google's Waymo, and they have the former 10-year CIO at SpaceX -- basically Elon Musk's right-hand man. These two heavy hitters in the tech space, of all the companies they could choose to join and be on the board of, they chose this $400 million Canadian cannabis e-commerce company. I think that's noteworthy, if nothing else.

The balance sheet is pretty strong. They have over $50 million in net cash. They're still unprofitable and burning cash right now. This is definitely still on the riskier side of the spectrum. But looking at this emerging cannabis opportunity worldwide, I like the fact that they already have some traction with 1.5 million registered users. 

Also, earlier this year in Canada, they launched the Namaste MD app. This is a telemedicine app. We were talking about Teladoc earlier. Namaste MD is an app you can download on your Apple or Android device, and you can have a free virtual consultation with a licensed healthcare professional. Rather than going to a brick-and-mortar clinic in an attempt to get a medical cannabis prescription, where you're not necessarily sure if the doctor even likes medical cannabis or will give you a prescription, instead, you can do this virtual consultation, get your prescription online in just a matter of minutes. Then, from there, you can go fill your prescription online through one of Namaste's licensed producer partners.

A riskier company, but I think in the grand scheme of things, with this cannabis category, this is an interesting one to keep an eye on.

Greer: I want to give a shameless plug. Now that you mentioned cannabis -- I never thought I'd find this connection here -- on this week's Rule Breaker Investing with David Gardner, we did a blast from the past episode. If you've heard the podcast before, there have been a couple of times where we've gone back. Tom and David Gardner used to host a radio show, and we go back to some of our favorite interviews and play some of those clips. 

One of the clips is from Cheech Marin, who is half of the long-term comedy duo Cheech and Chong. He's known for a lot of his voiceover work, but also known for the movie Up in Smoke, and known for talking a lot about cannabis and marijuana. In 2002, we basically asked him about marijuana -- buy, sell, or hold the legalization of marijuana. I won't give it away, but I will say Cheech was incredibly prescient. He called it, he saw the future before it happened.

Moser: But, you're not going to give it away.

Greer: I don't want to give it away, but I think I just gave it away. [laughs] 

Kretzmann: How did he see the future? I wonder if it was a substance he was using.

Greer: Yes. Maybe he was an investor in that. [laughs] 

Kretzmann: Who knows? [laughs] 

Greer: That's a shout-out. There are a lot of other great clips on Rule Breaker Investing. We reflect back on an early Howard Schultz interview from Starbucks, Billie Jean King, Bob Geldof, humanitarian member of the Boomtown Rats, some great stuff. Give Rule Breaker Investing a listen when you get a chance. 

As always, our wonderful, incredible listeners can email us here at [email protected] with their questions, with their comments. Jason, sometimes they're not just emailing us.

Moser: No. Sometimes they're going above and beyond and sending us what they do so well. I want to give a quick thanks to Adeeb at Cafe Hanna in Scotts Valley, California. He went through the trouble of actually packaging up some of his proprietary hot sauce to send me. He knows from listening that I'm a cook, I like to cook, I like to try new things with food. He went through the trouble to get me some of his famous hot sauce. That stuff was just so good. If I'm ever out that way, you can rest assured I'm going to give his restaurant a shot. It looks like a Greek fusion restaurant; the menu looks amazing. Adeeb, thank you very much. We appreciate it.

Greer: Strong buy.

Moser: Very.

Greer: Guys, thanks for joining me!

Kretzmann: Thanks, Mac!

Moser: Thank you!

Greer: As always, thanks for listening to the show. Chris Hill will be back in the saddle next Monday --

Moser: Who?

Greer: Yes, Chris is back.

Kretzmann: He still works here?

Greer: Yes. Hold off on any angry emails. You don't have to worry. Chris will be back on Monday. Thanks, as always, for listening! As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you on Monday!