In this MarketFoolery podcast, host Chris Hill is joined by Motley Fool Director of Small-Cap Research Bill Mann to discuss some items of interest in the business world, and they open in the food space. On the one hand, you have Texas Roadhouse (NASDAQ:TXRH), which reported comps growth most chains can only dream of -- but shares sank anyway. On the other, there's Chipotle (NYSE:CMG), which is facing what looks to be a small and well-contained food-borne illness scare, but the market is reacting with muscle memory from last time.
Meanwhile in the real estate investment trust arena, Brookfield Asset Management (NYSE:BAM) revealed it's buying Forest City Realty Trust (NYSE:FCE-A) (NYSE:FCE-B). Bill offers some background on Brookfield, and explains why he's optimistic about the acquisition. And finally, the Fools talk about a trend that some watchers see as becoming excessive: big stock repurchases. Bill may not be a huge fan of share buybacks, but he's concerned that a lot of the negativity about them is missing the point.
A full transcript follows the video.
This video was recorded on July 31, 2018.
Chris Hill: It's Tuesday, July 31st. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, the one and only, Bill Mann. Thanks for being here!
Bill Mann: You know there are multiple Bill Manns, but I do appreciate it!
Hill: Not to me!
Mann: I love that! There's a gospel singer named Bill Mann.
Mann: Yeah! Basketball player, played for West Virginia University, named Bill Mann. But I'm the one who's here.
Hill: You know what? Maybe next time, I'll get one of them.
Mann: That's right, they might have better takes than me. [laughs]
Hill: We'll do a compare and contrast, who knows. We have some real estate news, we have some restaurant news. Let's start with the restaurant news. It's Texas Roadhouse and Chipotle, they're both falling, but for different reasons.
Let's start with Texas Roadhouse. Second quarter results. You tell me. Why is this stock down? I get that there are results that they posted that are below expectations. But I see a restaurant in the middle of 2018 posting same-store sales growth of nearly 6% at company-owned locations. Most every restaurant that is publicly traded would kill for those kinds of numbers.
Mann: Yeah, maybe. You started the story by saying that the two restaurant chains were down for different reasons, that's a little bit true, but there's something that they both have in common, and that's labor costs. Kent Taylor came out in the conference call and said, "Everything is going great at the restaurants. We've been putting investments into a lot of things, including training our staff, and we're paying them more". Some of that is coming from them choosing to pay more, which is great, that's the Costco model; and some of it is the reality that the labor market is tight.
When the market sees that, they say, "This isn't a cost that's one-time in nature. It's probably a sustained pressure on the business." That's OK. It really is. Texas Roadhouse, both as a stock and, as you mentioned, a company, has had a fantastic few years. Labor costs have gone up, and I think that's really primarily the issue, because the results were fantastic.
Hill: One thing on the same-store sales, because, they have company owned-locations, they have franchised locations. The franchised comps were about 2% lower than the company-owned ones.
Mann: It's because they're holding all the good stuff for themselves! [laughs]
Hill: I think, for someone who might be new to restaurants, they might look at that and ... is that a cause for concern? Or, is that an opportunity for Kent Taylor and his team to go to the franchisees and say --
Mann: "Look at us!"
Hill: -- "We have some tips, if you're looking to boost your comps a little bit."
Mann: It's a really good question. One of the interesting things about how Texas Roadhouse is managed is that they do a really, really good job of taking ideas that come from franchisees and then rolling them out across their stores, and then back out to the franchisees. Maybe there's an Easter egg in there, and some franchisee has told them something amazing that's in the process of being rolled out to everyone else.
But, generally speaking, it's a pretty sustainable gap, that you'll see a little bit better performance at their company-owned stores than you see with the franchisees. It's not a huge gap. It would be great to say, "Yes, they could pull this level and it'll be flat," but I don't think that's the case.
Hill: Before we move on to Chipotle, I should say, later in the podcast, we'll be dipping into the Fool mailbag. I just got an email the other day from Rich Smith --
Mann: The Rich Smith?!
Hill: I think it might be the Rich Smith, who's a writer here at The Fool. But it was a different email address, so maybe it's a different Rich Smith. Maybe it's just a listener Rich Smith. But, basically, Rich Smith saying, "Hey, I'm traveling and I'm close to a Bubba's 33," because Texas Roadhouse has a sports bar model called Bubba's 33. As I've mentioned before on this podcast, there's not one within a couple of hundred miles of here. So, Rich is going to do a little boots-on-the-ground research and send his thoughts.
Mann: I'm very excited to hear what he has to say about Bubba's 33.
Hill: Do you remember when Kent Taylor was here? Was it last year for FoolFest?
Hill: We were sitting with him before your interview on stage, and he started talking about Bubba's 33. And you and I were like, "What is that?" And one of the people with him --
Mann: Travis, I think.
Hill: -- reached into his bag and pulled out a menu. And you and I were like, "What?! Can we go there now? This looks fantastic!"
Mann: We're not close to Cincinnati ... I don't know where the closest one was.
Mann: Fayetteville, that's right!
Hill: That's why Texas Roadhouse is down. Chipotle shares are down about 7% today because of the news that Chipotle has temporarily closed a restaurant in Ohio after --
Mann: They're back!
Hill: -- customers reportedly fell ill after dining there. I feel like we've seen this movie before.
Mann: We have! I have a really hard time figuring out exactly what to do with this information. 170 people got sick at some level. We don't have all of the information yet. Chipotle immediately voluntarily closed the store.
Two things about this. One is, it was a single store. That suggests to me that the protocols that they have in place as a system are probably OK. If it was multiple stores, this would be an absolute disaster. So, something happened at that store, which is probably more solvable.
Now, because Chipotle has had those problems, in 2015 in particular, it's not a great look for them. But, it's a single store. I'm not sure whether my instinct is underreacting to this or my instinct is overreacting to this. I'm sure it's something.
Hill: Clearly, investors are reacting, in terms of selling off the stock. That might be a mistake. I looked at the story this morning, and what went through my head -- after the initial, here we go again -- was, this is a spotlight moment for relatively new CEO Brian Niccol. This is Brian Niccol's chance --
Mann: Here's your close-up.
Hill: Yes. We're ready for your close-up, Mr. Niccol. As you said, we still don't know all the facts. But once Chipotle has all the facts -- and, I'm no longer a shareholder of this stock. But if I were, I would want to see a very strong statement from Brian Niccol. He has to be in front on this and basically do the opposite of what Steven Ells did in late 2015.
Mann: I think that's exactly right. The instinct has to be, "We're on top of it, we know exactly what this is, here's the process." They're actually trying to, depending on the local health authority, they want to reopen the restaurant today. I suspect that they are on top of it in an entirely different way than the last regime was.
This is actually true for both Chipotle and Texas Roadhouse -- keep in mind, you have to keep the stock drops in a little bit of perspective. Both of those stocks have had fantastic years. So, the fact that it has pulled back, it's 7% as we record, it'll be a couple of percents within that, we hope, by the end of the day, or by the time the podcast is released. It's just, this doesn't feel like the market is treating it like the debacle that existed in 2015.
Hill: Absolutely. As you said, this is one location.
Mann: Something happened. Because it's Chipotle, because of their history, it's big news.
Hill: They don't get a pass.
Mann: They don't get a pass, no.
Hill: I think Niccol and his team probably know that. Let's move on to real estate. Brookfield Asset Management --
Hill: BAM, great ticker. It's buying Forest City Realty Trust. You tell me for how much, because I'm looking at two headlines, one from Reuters and one from Bloomberg. Reuters says it's an $11 billion deal. Bloomberg says it's a $6.8 billion deal.
Mann: Well, $4.6 billion in between them. It's both, actually. One headline is properly including all of the debt that's being purchased, and the other one is just, this is what the equity looks like. If you look at the market cap of Forest City, it's about $6.8 billion. It turns out, depending on what you're looking at, as a shareholder or as an enterprise, both are correct.
Hill: I'm assuming this is being viewed as a good deal for both, because both stocks are up. Brookfield Asset Management, much larger, around a $40 billion market cap or so. They're paying a little bit of a premium, but not much of a premium, it seems like. What was your take when you saw this headline?
Mann: I'm a longtime admirer of Brookfield Asset Management and their CEO, Bruce Flatt. I started writing about them in 2002. They're capital generators. They do it by buying underperforming assets, dressing them up, either holding them or selling them. The fact that they have gone in to buy Forest City means that they see not so much an opportunity at the current price, but they see that they can do some things and pull some levers and make this portfolio much more valuable in their hands.
Their track record is not perfect, but it's pretty good. The fact that they're paying a premium to current cap rates doesn't raise any alarm bells with me.
Hill: Brookfield Asset Management, I think this might be the first time we've ever talked about them on this podcast.
Mann: It's a longtime company that we've talked about a lot in other places in The Fool.
Hill: Where do they sit in the competitive landscape? When you think about their competition, what types of companies are out there?
Mann: Vornado would be the biggest one. Brookfield Asset Management owns, for example, one financial center directly across from the new World Trade Center, that's their property. They either own properties, a lot of Class A office space in New York and around the world. They're based in Toronto, so, a lot of Canadian property.
They also own things like Brookfield Homes, which is a separate, publicly traded company, and that's theirs, they own a portion of it. There's also another one called Brookfield Infrastructure Partners, which owns forest land, like half of Vancouver Island and British Columbia. I say half, I'm exaggerating a little, but they own a lot of Vancouver Island, timberland, things like that. So, they are a little bit as agnostic as to what sort of assets they buy.
Hill: In terms of branding, not much of a leap to go from Brookfield Asset Management, which is in real estate, to Brookfield Homes; unlike the branding leap that you showed me earlier today from about 35 years ago, which was a picture I had never seen before.
Mann: We should post this.
Hill: Yeah, send it to me, we'll post it on the Market Foolery feed. It was basically, about 35 years ago, when Colgate (NYSE:CL) decided they wanted to slap the Colgate brand -- Colgate, synonymous with toothpaste --- decided to slap their brand on frozen lasagna. That's not to say that Colgate can't be a conglomerate that owns a frozen food division, but nobody wants Colgate lasagna.
Mann: We talked about this a little bit, but, what do you suppose they were thinking? Is this something that's going to extend the brand? Let's get your teeth really messy, and then ... It's absolutely fascinating to me. I think one of the most interesting things is, it actually hurt the sales of their toothpaste. They pulled it. It's not just that this product failed, it actually harmed the reputation of their cash cow.
Hill: I have to assume that the calculus was, the brand recognition for the toothpaste is so strong, therefore, the brand recognition of the Colgate name is so strong. Here's how we'll stand out in a frozen food section when people are just staring and thinking about which one to buy. The name recognition will be there. In that sense, they were probably right. And people just instantly recoiled, as I did, when you showed me the picture.
Mann: It looks terrible! It doesn't make sense.
Hill: It looks like something from The Onion. It's like someone took a standard photo of frozen beef lasagna and like, "I'll just Photoshop the Colgate logo on there."
Mann: It's like driving down the street and there's a new fast-food place that says Nokia, it was just seriously ridiculous.
Hill: Something that came up on yesterday's episode with Taylor Muckerman, we were talking about Chevron and their recent earnings. Actually, this came up on Motley Fool Money last week, as well, inexplicably with PayPal (NASDAQ:PYPL). It's the continued drumbeat, the increasingly loud drumbeat, of share repurchases.
I kind of get it in the case of Chevron. They hadn't done anything for a few years, so they're coming out, and for as big as Chevron is, a $3 billion repurchase plan is not insane. The PayPal one still has me scratching my head. As we've talked about before, a lot of times, the signal that's being sent when company X says, "We're buying back shares, here's our plan," is, "We don't have a better idea of what to do with this money."
Mann: Right. I think that a lot of the drumbeat about the share buybacks -- in fact, I don't think, I know this to be true -- has to do with the fact that this is happening after the Trump tax cuts. So, people are saying, "Companies are buying back shares rather than increasing their investments in new products, increasing their investments in any number of things, including giving people raises." Fair point.
But, keep in mind, when you buy back shares, generally speaking, what you're doing is making a capital decision. You're taking the difference between equity or debt. It's almost somewhat irrelevant. I think people are banging the drum about the wrong thing. If you think about it, the other story that's going around this year is that corporate debt is at all-time highs, and people are wondering if they should be nervous about it. Companies aren't really pulling back at all.
Now, there are a lot of conversations you could have about the political ramifications, are the tax cuts going to do what they said they were going to do, but that's not really what this show is about. We could make a lot of people angry about that. I just see this drumbeat about share buybacks being basically a battle between a gift to the shareholders and something for the workers, and that's not the relationship that actually matters.
Hill: Did you see the PayPal announcement last week? Just for context, PayPal is a $100 billion company. They announced a $10 billion share buyback plan. I'm still scratching my head. I think it's the size of it. If they had come out and said, "Here's a $1 billion plan," or something like that, it would be slightly odd to me, just because I still think of PayPal as a dynamic, innovative company with good ideas, particularly on the acquisition side.
Mann: I don't want to be sitting here sounding like I'm defending share buybacks. I don't like them. I don't think they're a great use of capital, for a couple of reasons. I think in the case of PayPal, this might be really illustrative. That $10 billion in share buybacks isn't necessarily going to benefit shareholders. What it's going to benefit are the option holders, which are insiders. That company has grown very rapidly, with a huge number of options being given out over time to employees. We can argue whether that's good or bad. But, when you're buying back shares, in a case like PayPal, primarily, it's happening so they can undo the dilution from options. So, it's a big payola to the insiders who hold those options.
Hill: Before we wrap up, you can email us, email@example.com, you can follow us on Twitter @MarketFoolery.
Mann: The best.
Hill: We will post that picture later today. I want to say a couple of quick thanks. First to Greg Strassell, who sent me a very nice handwritten note. It turns out, he was at Podcast Movement last week in Philadelphia, and I stupidly didn't find my way to his session. I'm sorry I didn't get to cross paths with Greg, but, a very nice note.
Thanks also to Ben Chambers, who also sent a note, along with some coffee. [shakes coffee beans] There's the sound effect. Just a glass jar with some roasted coffee beans and a very nice note. I'll just read part of it. He mentions that he's one of the dozens of listeners, noting that I talk about Dunkin' Donuts and how they don't really have a lot of locations west of the Mississippi.
Ben writes, "Let me clear a couple of things up for you. These two things are related. Out West, we know what good coffee is supposed to taste like. While there's nothing wrong with Dunkin', I'd rate them about as good as Starbucks -- certainly drinkable, but nothing to write home about. For good coffee, you have to find a local roaster. Or, if you're as obsessed as I am, you can simply roast it yourself." So, he sent some Colombian coffee that he roasted.
Mann: Fantastic. By the way, I totally agree with him. Honestly -- wait, before I say this, Dunkin' Donuts doesn't sponsor any of our stuff, do they?
Hill: No, they don't.
Mann: I'm surprised that he put them up as high as Starbucks. I know that's a little controversial.
Hill: Hey, I'm more of a fan of Dunkin' than Starbucks, but I'll drink both.
Mann: I know you're an equal-opportunity coffee drinker and utterly not snobby about it. I like the Dunkin Donuts experience of going in and getting coffee there, I really do. I just think I'm looking much more forward to what Ben has sent us. [laughs]
Hill: Yes, which will be ground up and consumed.
Mann: Did you notice that I put me in the us? Because he actually sent it to you.
Hill: I don't think we have a grinder on the premises, but we do have coffee makers, so we'll make this work. I agree with that. Actually, we were talking -- I was in Asheville, North Carolina, over the weekend. Any time I travel, if I can find a local place for coffee --
Mann: Do you know about the Find Me Coffee app?
Mann: It's the best.
Hill: Is it all local breweries?
Mann: If you press a button, it'll give you a list of the local breweries.
Hill: And it weeds out the chains?
Mann: No, it'll put them in there. If you want, it's there. I've found some really good stuff on the Find Me Coffee app.
Hill: Bill Mann, thanks for being here!
Mann: So good to see you, Chris!
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 Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Bill Mann has no position in any of the stocks mentioned. Chris Hill owns shares of PayPal Holdings and SBUX. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, PayPal Holdings, SBUX, Texas Roadhouse, and TWTR. The Motley Fool recommends COST. The Motley Fool has a disclosure policy.