In today's episode of MarketFoolery, host Chris Hill and analyst Seth Jayson hit on the stock market's biggest stories. Home Depot (NYSE:HD) shares are up big on yet another knockout quarter. Redfin (NASDAQ:RDFN) was decidedly more honest and less flashy than Zillow (NASDAQ:ZG) in their earnings report, which shed light on some dour trends in the real estate industry that Redfin just can't do much about. Tapestry (NYSE:TPR) (formerly Coach) is up this morning on a decent-to-good earnings report, depending on how you look at it. And finally, Southwest Airlines (NYSE:LUV) says no to emotional support animals, opening the door for other airlines to follow suit. Tune in and find out more.
A full transcript follows the video.
This video was recorded on Aug. 14, 2018.
Chris Hill: It's Tuesday, August 14th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, for the first time in a long time, thank goodness he's back, Seth Jayson. Good to see you!
Seth Jayson: Hello! I was thinking of doing the Lenny and Squiggy, the Squiggy hello, but I didn't know if I could pull it off. And if I could, if anyone would recognize it.
Hill: That's definitely skewing old for our audience. We have earnings, we have retail, we have real estate. Let's start with Home Depot, which had a rough spring.
Jayson: That's real estate and retail right there.
Hill: Exactly. Summer's looking good for Home Depot. Second quarter profits came in higher than expected, overall sales just north of $30 billion. And their same-store sales, impressive.
Jayson: It's odd, the real estate market isn't so great. A lot of the home improvement, especially the smaller outfits, seem to be a little bit more directly linked to that market. Home Depot seems to be able to keep selling stuff in any climate, at least for the past few years. You have a comparable sales store figure of something like up 8%, and the guidance for the full year is going to be 5.3%. That's pretty strong. A lot of companies aren't doing that right now. Home Depot, of course, is big enough to actually take advantage of that.
The other thing, I haven't heard the call yet, but it's probably still working really well for them, we've talked about this, is the online sales. They're one of the better retailers out there equipped nowadays to do the internet and app thing -- in other words, order stuff from Home Depot online rather than going to Amazon. I think part of that strength is, not too long ago, they said that about 46% of their online sales were actually in-store pickup, which to me makes sense. There are a lot of things you don't want to wait for in the mail, necessarily, but you don't want to walk around the Home Depot picking out. So, you make the order and show up a few hours later and drop it in your car, it's a lot easier. That's a really smart way for them to expand their business. Another billion dollars or so in sales, that helps.
Hill: I've done a little bit of online shopping with them, and I can tell you from my experience, they've worked to improve the online shopping experience. There's so many things that they sell, so, being able to more quickly help people like me whittle down the choices and find what you're actually looking for.
Jayson: I think I'm actually going to make an online purchase from them in the next week or so. I need a small bandsaw, and getting it in store seems like a pain, it's heavy, I'm not sure exactly if I need a separate blade for it. I can take care of some of those problems online and just show up, throw it in the trunk of the car, and leave.
Hill: One other thing I want to call out from their quarter was the average ticket, which is something we don't talk about all that often with retail or restaurants, but it's a metric that's important. It's basically the average person in this quarter, what are they spending? In the case of Home Depot, their average ticket sale ticked up a little bit to $66.
Jayson: Of course, if you can get that average ticket up, there's a little less pressure to bring people in through the door. It's best if you can do both. But it's always good to see average ticket going up. If you're bringing in more people, but it's because you're throwing in doorbuster sales, your average tickets go down, and that hit you in your profitability. They're doing a great job.
Hill: They really are. They had a rough spring, we saw that with a lot in this space. The stock is still up about 26% over the last year. When you look at this stock, does it look expensive? Or do you think it still has plenty of room to run, especially given how they're operating?
Jayson: Who would have thunk it? I wouldn't have thunk it. I should have thunked it.
Jayson: I would say you're probably OK, if they keep going like this.
Hill: Last week on the show, we talked about Zillow. We should also mention Redfin, which reported their second quarter results recently.
Jayson: Suffered a similar fate.
Hill: They did, although not quite as bad. They put up good numbers. Redfin gears more toward the luxury market of real estate.
Jayson: It's a different business. For those who don't know, Zillow is search and ads, for the most part. Redfin is really operating a nationwide brokerage predicated on search, but then their real hook is they are going to save you a bunch of money because they offer lower commissions, so you can save six figures on selling or buying a house.
They had a 30% revenue increase for the quarter. You'd think that'd be great. But Redfin, unlike Zillow, is fairly candid about what's going on in the business. And they said, "Listen, the market the last few weeks has been bad." They said they had one OK week and three crummy weeks. Good for them for saying that. But the stock was down early on the day of the earnings. I looked and read the report and I thought, "Oh, that's not so bad." It was down 5-7%. Then I came in on Monday and saw that it had flopped 22%. Everyone freaked out at the end of the day.
I think this has ramifications for both companies. Zillow, for some reason, didn't mention this. I don't know if they didn't see it, or they just thought maybe they wouldn't talk about it. I think it's going to be a problem for the near-term, until at least we get some clarity. Right now, Redfin has been talking for a couple of quarters about housing supply being really low. They're having a tough time -- being agents themselves, they know this a little bit better than Zillow -- helping people find houses to buy. They've doubled down on costs, they're putting fewer customers per agent, and so on.
This is going to be a tough business for a while, at least until we see what happens with housing. House prices are high in markets like ours and some others, and apparently, shoppers have finally said, "We're not paying that."
Hill: As you said, the quarter itself for Redfin was good. If they had maybe not had a conference call at all, the stock wouldn't have taken the hit. But as you said, Glenn Kelman, the CEO, wasn't pulling any punches, and said very matter-of-factly, "Buyer demand is waning, it's that simple."
Jayson: I have a lot of respect for them. I own the shares, I've recommended them. Part of the reason is, they are not big on hype. When they go into a new business, they've been buying homes, they started the business small. They said, "We're going to make it a full-time business, but it's still going to stay small." They don't make a bunch of pie-in-the-sky, total addressable market estimates -- the kind we got out of the Zillow call that make me cringe. It just feels gross to me. I feel like I'm talking to a used car salesman. I just don't trust the management at Zillow. I don't trust what they're saying. Redfin seems more trustworthy to me.
Hill: We talked about this last week on the show, one of the things working against Zillow is, they made that acquisition of Mortgage Lenders of America. Their track record on acquisitions isn't great. Part of what we saw with the sell-off with Zillow was a similar reaction, which is essentially, we don't trust your ability to make acquisitions work. The reason we don't trust it is because you haven't done a great job of it to this point. It doesn't mean you can't in the future, but right now, your track record is telling us otherwise.
Jayson: I'm recalling from their calls, Redfin's also in the origination business -- again, a very small effort, to see how things go. If you're going to buy a mortgage lender, don't come out and say, "Let's look at it this way, homebuilders have a 75% mortgage origination attach rate, so if we do that times this many homes sold in America, that's potentially $800 million a year in revenue." Don't do that. That's nonsense. That's like saying, "If we can get just 1% of the market in China ... " We've heard that, it's junk. Come out, tell us the potential synergies, be realistic. Try being a little humble about it. It doesn't seem to be in their DNA.
Hill: Shares of Tapestry up 12% this morning. This is the parent company of Coach.
Jayson: Do we need to tell people who Tapestry is? I had forgotten that they were Coach, to tell you the truth.
Hill: It's recent enough that I like to remind people. It's the same way with Booking Holdings. Like, "Remember, we used to call them Priceline, now they're Booking Holdings." Tapestry, parent company of Coach, Kate Spade and Stuart Weitzman, the company formerly known as just as Coach. Good fourth quarter.
Jayson: I would say decent, especially when cruddy had been the norm.
Hill: Yes. Although, probably like you and other people, when they did announce the name change, "We're changing from Coach to Tapestry," I had more than a couple of chuckles at that. I may have possibly mocked them. In retrospect, I think it's the right move.
Jayson: You have to. It's a different business now, is the problem. Instead of just managing Coach, and trying to find the trends there in a more limited collection of items, now you're trying to be a small warehouse of brands that all have to do that. There are some benefits to that. Like this quarter, you can have Kate Spade down 3% and Coach up 2%. Things balance each other out. It also means there are more balls in the air that you're juggling.
I think it was a good quarter. The margins look pretty good. Hopefully they can keep the Kate Spade acquisition rolling along. Stuart Weitzman looks like it's doing OK. I have to admit, I had no idea what Stuart Weitzman even sold until I did a search, and you can on the screen of my computer -- the rest of you can't.
Hill: I was going to say, do you know it's an audio podcast?
Jayson: If you go to the Stuart Weitzman home page, you might have to shield the computer from your kids, because it's a little bit racy. For someone who's selling $800 suede boots ...
Hill: I was going to say, they're selling boots.
Jayson: It looks like a good quarter. Hopefully things continue to roll for them. Luxury items have been doing well. I follow a few watchmakers like Lovato, they've been doing well of late. People who sell expensive stuff seem to be doing fairly well. I'm not going to say whether that has anything to do with tax policy. [laughs]
Hill: But, to that point, I think we've seen this with not just luxury retailers, but even discretionary income companies. I put Dave and Buster's in that category.
Jayson: Really, they're doing well?
Hill: On balance, over the last five years, I think they have. But they're also the ones that I look at and I think, "When the economy turns south, and at some point, it will turn south for enough people, that I think the luxury stocks are maybe the first to suffer."
Jayson: You stop buying Stuart Weitzman boots and go to Dave and Buster's instead?
Hill: No, you stop going to Dave and Buster's, too.
Jayson: Oh, jeez, that would be a bummer. We're already seeing that, restaurant stocks in general are suffering right now. There's a funny thing going on in the economy, where a lot of luxury brands are doing pretty well, and there's so much competition for low-end retail. We've seen bricks and mortar retailers getting killed. There's a whole bunch of reasons for that. Lower-end restaurants, Chuy's, we mentioned, doing OK but not great, and the stock is suffering as a result. It's tough out there. Business is tough.
Hill: Definitely not easy. Our final story, I'm tempted to break into applause here for Southwest Airlines, because Southwest Airlines announced that it has revised its policy on emotional support animals. The new policy will be limited to just cats and dogs, one per customer, and the emotional support animals must be in a carrier or on a leash at all times. So, emotional support turkeys, that's not happening anymore on Southwest Airlines flights.
Jayson: I'm going to take a controversial position and say, I would rather the emotional support turkey than a dog that's not actually trained to be out in public like the ones that have been biting people on airplanes. I'd rather have a turkey crapping on the seat next to me than look at someone with a pitbull and go, "I wonder if that dog's going to bite me."
Hill: Have you been on a plane with an emotional support animal?
Jayson: I've been on planes with people who had dogs in small carriers before everybody thought to go on Amazon and get a fake service animal vest for their dog, so they could get their dog on an airplane, which is sort of where this comes from. My mom was involved with therapy dogs for a while, so I'm a big fan of dogs that are properly trained and go out and do work. But the problem with the whole emotional support animal trend is, most of this was just people looking to get their pets on airplanes and ginning up a reason to do it.
Hill: Yeah, once we started seeing reports of, "This is my emotional support iguana," it's like, is it really? Is there a lot of cuddling that's going on?
Jayson: I love having my dog in my lap when I watch TV, and I suppose I could say I need him on the airplane, but I really don't. I'd just be lying so I could get my dog on the airplane.
Hill: Kudos to Southwest Airlines! Interesting to see if other airlines follow suit on this.
Jayson: I think they have to.
Hill: Certainly, Southwest has given them cover to do so. Seth Jayson, thanks for being here!
Jayson: I'm about to go get a turkey. Thank you!
Hill: [laughs] For emotional support? Or for ingestion?
Jayson: We'll see how the turkey behaves.
Hill: [laughs] 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 Austin Morgan, pulling double duty this week. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Seth Jayson owns shares of Redfin. The Motley Fool owns shares of and recommends Amazon, Booking Holdings, Chuy's Holdings, Tapestry, and Zillow Group (A shares). The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Dave & Buster's Entertainment, Home Depot, Redfin, and Southwest Airlines. The Motley Fool has a disclosure policy.