Walmart (NYSE:WMT) is up big time, but it's not all smooth sailing from here. Home Depot (NYSE:HD) had a rough spring, but this hot summer is treating it well. Amazon has been getting into content, and apparently looking into movie theaters, too. Zoës Kitchen (NYSE:ZOES) was acquired by Cava Group, which might be the best-case scenario for the struggling Mediterranean chain. Tune in for these stories and many more -- and, of course, a sneak peek at the stocks on our radar.
A full transcript follows the video.
This video was recorded on Aug. 17, 2018.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week: senior analysts Jason Moser, Andy Cross, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street. Author Jonah Sachs has a few tips on how to be nimble and bold. And, as always, we've got a few stocks on our radar.
But we begin with the newest growth stock in the public markets -- Walmart! Shares of Walmart up 10% this week after second quarter profits came in higher than expected. E-commerce sales in the U.S. up 40%, Andy. CEO Doug McMillan and his team crushed it.
Andy Cross: Yeah, great investments that they're making in their business. I mean, growth stock might be a little bit bold, Chris. Their comp sales were up 4.5%, which was the best in 10 years. Traffic was up 2.2%, and their pricing was up 2.3%. They're really showing some progress on getting people to the store and getting them in the right products.
What I really like about it, as you mentioned, the e-commerce business is accelerating. That was some concern, whether they could actually grow that e-commerce. They're actually having success there. They're making the right investments. They're going to be buying 77% of Flipkart, which is India's largest e-commerce platform. That will probably happen this quarter. Coming up, they own 10% of JD.com, China's second-largest e-commerce platform. They're making a lot of investments into the e-commerce space, and it's showing up in the top and bottom lines.
Ron Gross: Yeah, top line looks good. Unfortunately, there is more to the income statement than just the top line. We do see some margin pressure coming in here. There's a consistent price war in this space, everybody's racing to the bottom to lower prices to grab the consumer. Obviously, they're spending a ton of money to invest online. Increased commodity, increased transportation costs are taking a whack at margins. Operating income was actually down. So, I applaud them for what they're doing on the top line for the sales numbers, but it is only a piece of the story. There are a lot of costs associated with this business.
Jason Moser: I think Ron makes a good point there. There is more to the story. I do think, given the narrative over the past five years, it's really just been Amazon (NASDAQ:AMZN), Amazon, Amazon. It is great to see Walmart competing in this space. Frankly, competition makes these companies better, right? If you're going to go up against a company like Amazon, you'd better bring your A game. It seems like they're doing the best they can here, Walmart is. To Ron's point, they are constantly going to be playing that low-price game. I think that's where Amazon has, still, a leg up in. They've given people a way to value their time a little bit differently than we used to. It's not always about just having that rock-bottom low price. It's about convenience, it's about great service. And certainly, Amazon has helped set new standards there -- not to take anything away from Walmart. I think they're doing all of the right things. It's just a very competitive space.
Cross: I mean, they're bringing Ellen DeGeneres, right? There we go, the new denim line coming up, sub-$30 price points. The grocery pickups are now in 1,800 stores. To Jason's point, they are making these investments, they are trying to be more relevant, certainly, than they were over the last five years. You have to really applaud Doug McMillon and what he's trying to do there.
Gross: I'll say one more time, keep an eye on margins. If you're going to pay 19-20X earnings for a company like this, in a market that's only trading around 17X, they'd better start improving those margins.
Moser: Ellen DeGeneres chasing the denim space? I mean, this has been a denim week! VF spinning off the Wrangler and Lee business into their own company, now you get Ellen introducing a denim line with, is that Walmart? Is that correct?
Cross: Yeah, Walmart. That makes a growth stock right there.
Moser: Jeans, who would have figured?
Hill: More retail earnings this week. Nordstrom's (NYSE:JWN) second quarter profits came in higher than Wall Street was expecting. Shares of Macy's (NYSE:M) falling despite second quarter profits also coming in higher than expected. And J.C. Penney's (NYSE:JCP) stock fell to an all-time low after a disastrous second quarter report. Ron, we'll get to Macy's and JC Penney. Nordstrom's stock hitting a 52-week high this week, and they are they earned it.
Gross: They earned it. I've always thought that Nordstrom was the best in breed here. But, it's a tough business, and remains a tough business. Department stores invariably all go out of business or go bankrupt at some point and then reorganize. We may be seeing that soon with the likes of JC Penney. But Nordstrom, a great job. Best quarterly same-store sales growth in three years. Love to see that. Online sales up 23%, now 34% of total sales, which is up nicely, and they consistently are getting that number up. Very important. Comp sales of 4%. That's a pretty big number. Both strong, in the full-priced stores as well as the Nordstrom Rack stores. They're doing a great job. Stock has severely underperformed the market over the last five years, as all of these stocks have done, but they're still doing a nice job -- right at this very moment. They're doing a nice job.
Hill: Well, Macy's stock is up about 80% over the past year, and they did everything this quarter that you would want, in terms of the report they put up and raising guidance. Was the sell-off in Macy's stock simply a valuation play there? Because people looked at it and said, "Wait a minute, we can't push this thing higher and have it double in a year?"
Gross: The answer is yes. [laughs] That is the reason. It's funny, though, because the stock's 9X earnings. It's funny to call that overheated. But, they did have a nice run, as you said, from a stock perspective. And they did everything they really needed to do. Kudos to them for closing underperforming stores and cleaning up inventory and raising prices. You can't ask much more than that. But, again, department stores is a tough business.
Hill: JC Penney has been without a CEO since May.
Gross: Is that a problem? [laughs]
Hill: It really does seem like a problem, when you look at how JC Penney's business is performing. Is it safe to assume that whoever they bring in to be CEO, that that person's main job is to execute some sort of transformation for the business? Not necessarily overhauling it, but essentially preparing it for either bankruptcy or some sort of take-over? Because I don't imagine a CEO coming in and saying, "I really want to roll up my sleeves and make this business work." They're taking on water on so many fronts.
Gross: Agreed. And you could point to the Macy's model and say, just do what they did. Close the stores that aren't working, keeping the ones that do, clean up the inventory. But it just seems like an insurmountable battle here for JC Penney. We've been saying this for a very long time. They keep losing money, quarter after quarter. They have a little spark of light, and then it just fizzles out. I don't think this is bound for a turnaround probably ever.
Hill: Home Depot had a rough spring, but everything is coming up roses this summer. Second quarter profits came in higher than expected, and global same-store sales, Jason, up 8%. That is a monster number.
Moser: We talk about all of these retailers existing in an Amazon world and how they're doing it, some better than others. I'll tell you, Home Depot's operating as if Amazon doesn't even exist. I mean, it's phenomenal what they've done with this business. I think part of that certainly is due to the nature of what they sell. There is something to be said for going to the store and actually seeing what size screw or the lumber that you need.
The other part of this business that probably doesn't get as much play is the pro side of the business, the pro segment of the business. We know Home Depot as the business where we go buy a bag of nails or a hammer, or whatever. But the pro side of the business, where they're selling to professional contractors, is a very strong part of the business. It continues to grow. The average pro customer spends $6,000 annually with the store. That sounds like a lot, but frankly, they have opportunity to grow that ticket considerably here in the coming years.
Big ticket sales transactions, their transactions over $1,000, that is approximately 20% of U.S. sales. Big ticket transactions were up over 10% for the quarter. So, they're hitting it on all fronts. The do-it-yourself consumer, the pro consumer, really killing it online. Just a very well-run retailer, and I think a unique and bit more of a protected market.
Cross: Yeah. 47% of their online sales are picked up in the store. I mean, they've really done a great job. And it's big investments. They're in the middle of this three-year investment to really get the digital part of the business set and logistics all set. To be able to have that combination of the physical presence and the online presence, that's really worked well for Home Depot.
Moser: The online sales were up 26% for the quarter.
Moser: The numbers speak for themselves.
Gross: Am I the only guy that thinks they need more service in the store? I walk those aisles searching for a guy or a girl, I can't find one.
Cross: I tell you, it's so much better than it was five years ago. Now, you go in, it's almost like a Walmart greeter right at the beginning. They welcome you in there.
Gross: I just need a lot of help, let's face it.
Cross: You do need a lot of help.
Hill: Jason, one last thing. When you look at Home Depot's stock, it's up about 25-26% over the past year. That's including the bump that they had in the spring. Where is this stock, in terms of runway? In terms of the underlying business, we were talking about this before we started taping, this is as close to a perfect quarter as you could put up.
Moser: Well, it was perfect. I think in the call, some analysts questioned some of the macroeconomic trends, as to, maybe, is this the peak of the cycle there, are we going to start seeing some of a downturn there. But I think, when you look at the overall market opportunity and Home Depot's position in the market, clearly the leader compared to a company like Lowe's (NYSE:LOW). I think there's plenty of room for this company still to run. They're going to continue to pay a dividend, they're going to buy shares back, and they're going to remain somewhat insulated from that Amazon competition in the near-run. I think it's a great hold.
Cross: And the stock really isn't all that expensive. It's about a market multiple. For quality company like Home Depot, it's a pretty good buy.
Hill: Now that Amazon is in the movie production business, it looks like the movie theater business might be next. Reports out this week that Amazon is in the running to buy Landmark Theaters, a chain that operates in major markets like New York, Chicago, L.A., San Francisco, and across the river in Washington, D.C. Andy, maybe I shouldn't be surprised by this. But I'm a little surprised.
Cross: You can never accuse Jeff Bezos of not looking forward into the future. Here's my take on this. I think, with potential changing regulatory landscape on studios potentially owning theaters and widening their distribution, Jeff Bezos and Amazon are saying, "Hey, listen, we have an opportunity to go after another distribution platform." Landmark specializes in the Indian foreign space, which we know that Amazon Prime videos have had a lot of success with. I think it's Jeff Bezos saying, "Hey, listen, this is another distribution platform for us. Let's get in before the studios start changing that landscape and buy up asset property for the cheap." And, by the way, Mark Cuban, who is a part owner of Landmark, is shopping the business around, too.
Moser: A million different ways to think about what he might do with it. But if we just look at one of the biggest complaints for going to the movies today, it's the price. It costs an arm and a leg just to get through the door. I think what they really want to do is get those moviegoers through the door, so they can sell all the concessions. Concessions are where a lot of the money lies.
But to Andy's point, Amazon has built a reputation as a very credible content producer at this point. If you can find more ways to reach the consumer, that's certainly Jeff Bezos's general line of thinking.
Hill: When you look at Landmark, this is not a major chain. They've got some good markets they're in, but the amount of money that Amazon would pay would not be all that big. Maybe somewhere in the neighborhood of upwards of $100-150 million. That seems like pocket change.
I am a little concerned, though. In the wake of the Amazon acquisition of Whole Foods, will that overhaul the concession? Instead of popcorn, my options are going to be, like, cucumbers and celery sticks?
Cross: Mm, maybe, good point. You're not getting that buttery popcorn anymore, my friend. Those big, large Cokes for $10?
Moser: I mean, Milk Dudes don't have a shelf life. He's going to be thinking about it.
Gross: I broke a tooth on a Milk Dud in a movie theater once.
Cross: You can't get those at Whole Foods.
Hill: Shareholders of Zoës Kitchen got some welcome news on Friday. Cava Group is buying Zoës Kitchen for $300 million. That is a 33% premium of where Zoës' stock had been trading. Good news, Jason!
Moser: I think this is very good news if you're a Zoës' shareholder, this is probably about the best you can expect. If you look at the actual business itself, it's just in a really tough bind right now. Sales simply aren't growing. Difficult to get consumers into the doors when they don't really have a reputation for ... any kind of product. We discussed this earlier in the meeting, like, "What exactly do they serve, now? Is it Mediterranean? Is it Greek?" Ron, what did you say? It was shish kebab, but it's like it's made by Americans? Not really authentic.
Gross: Yeah, that's a good way to put it.
Moser: If you don't have that angle, then it's very difficult, really, to keep on growing traffic. I think that's where Cava really shines. So, combining the two together, maybe that makes sense. Interesting to me that they're going to be maintaining the separate branding. Perhaps Cava's management's going to get in there, I think, tinker with the menu there at Zoës Kitchen somewhat. That gives them a tremendous presence there, in a number of more states than Cava currently exists. And after all is said and done, you've got a guy named Ron Shaich as the chairman of the new company there. I think they'll very much benefit from his experience, as well as current Cava leadership.
Hill: You look at the footprint of Cava and the footprint of Zoës Kitchen is so much bigger. You don't think they're going to take some of those locations and just flip them into Cavas?
Moser: I wouldn't be surprised if they did, but, based on the language in the release from Zoës, it sounds like they do intend on maintaining the two brands, at least for now. But that remains to be seen, how that ultimately shakes out.
Hill: Am I the only one surprised, not that Zoës Kitchen got bought, but at the premium that was paid? Andy, this is a business that's really struggled. Not that they wanted to necessarily get it in the cheapest way possible, but a 33% premium seems high.
Cross: Just based on my self-studies of looking at acquisition prices, if you're not paying more than 30% over some average recent price, getting shareholders on board, to sign off on that deal, may be a little bit hard. Even for a company like Zoës. So, it doesn't seem like it's a great asset for current investors, but for investors like Cava to pay that price, it may be well worth it.
Moser: Yeah, and Zoës is mostly company-owned stores, right? They're not having to deal with that franchise angle. I'm sure that's worth a little bit of a premium. But I mean, it's worth noting that the stock has pretty much just been on a downward spiral since it went public.
Hill: If it's hard to get shareholders on board if there's not a premium somewhere in the neighborhood of 30%, what does that bode for shares of Tesla? The $420 buyout price that Elon Musk was talking about, at the time, that was only about a 13-15% premium.
Cross: I said it earlier on one of our shows, I think they're going to have to raise that price eventually.
Moser: It's a bit more of a premium today.
Gross: That's true.
Cross: That's right. Yeah, exactly. Exactly.
Hill: Southwest Airlines (NYSE:LUV) has revised its policy on emotional support animals. Starting September 17th, you will not be allowed to bring your service or emotional support animal on a Southwest Airlines flight unless it is a dog, a cat, or a miniature horse. Not going to lie, Ron, that last one surprised me.
Gross: I honestly thought it was fake news. I did some research, and I was really quite fascinated to learn that it is a real thing. The Guide Horse Foundation formed in 1999 to provide miniature horses as assistance animals to the visually impaired. Really fascinating. I don't understand where you put the horse on the airplane.
Hill: Well, they're miniature horses.
Cross: In your lap.
Gross: They're miniatures. You stuff it in the overhead compartment, but that would be cruelty to animals. You can't do that. But it is a true thing, and they supposedly make great guide animals, and they're filling an important need.
Hill: I did a little bit of research and learned the same sort of thing. We think about dogs in particular being guide animals. Mini horses tend to live longer, tend to be sturdier than dogs, in general. I don't know, I feel like this opens an opportunity for another airline to go with other pets. That would be really interesting to me. If American Airlines (NASDAQ:AAL) came out, Jason, and said, "OK, we're gonna go dogs, cats, and guinea pigs."
Moser: Or alpaca.
Moser: Just get a big old smelly, hairy alpaca on that plane and see how people like it, right?
Cross: What is Spirit Airlines (NYSE:SAVE) going to do?
Hill: Do you think anyone goes really hard after the millennial market and just says, "Anything. Bring your snake, bring your iguana."
Gross: [laughs] No chance.
Gross: Allergies and messes and biting.
Moser: Haven't you ever seen that movie, Snakes on a Plane? I mean, you can't do that!
Hill: I think we have to go to our man behind the glass, Steve Broido. Steve, when you first learned about the Southwest Airlines news, what was your thought? I don't know if you have pets, or if bringing an animal onboard is something that's of interest to you.
Steve Broido: We have two cats. I am certainly a pet person. But these are service animals. These aren't pets. These are service animals. I think that it's very admirable of Southwest Airlines to acknowledge that. These are helping people make it through the airport easier and make it through their lives easier. It's a great thing.
Hill: Absolutely. But do you think it's possible that maybe there are a few people out there who are abusing this, and maybe if they don't need their cat as a support animal for emotional support, they just want to take their cat on vacation?
Broido: I'll tell you this, I've never seen anyone that looked happy when traveling with a cat on a plane. People always look miserable. The cat's miserable, they're miserable. Everyone's anxious. It's just not good.
Hill: Time to get to the stocks on our radar. Ron Gross, you're up first. What are you looking at this week?
Gross: I got Cedar Fair LP (NYSE:FUN), ticker symbol FUN. The country's third largest amusement park operator. Profitable recurring cash flow, regional monopolies. 6.7% dividend yield. Now, that's pretty fancy, but it's also because they have been struggling a little bit lately. Earnings were impacted by bad weather, higher wages, some slowing attendance. But I think in the longer term, shareholders will be quite rewarded. And, that almost 7% yield is pretty good.
Hill: Steve Broido, question about Cedar Fair?
Broido: Ron, what do you do with a seasonal business like Cedar Fair in the winter? They can't operate. What do you do?
Gross: That's true. They're actually trying to increase prices and spread out the seasonality by offering membership passes, more like a membership model than a one-time season ticket purchase. We'll see if that helps smooth out a little bit. But you are correct. It is for sure a seasonal business.
Hill: Jason Moser, what are you looking at?
Moser: On the heels of Home Depot's quarter, Lowe's, ticker LOW. Earnings report out next Wednesday, August 22nd. I'm going to be very interested to see management's narrative on the back half of the year here. We have Marvin Ellison, the new CEO over from JC Penney, of course. This will be his first quarter. Very service-oriented. I think he'll do a lot of great things with the business. We talk about the big aging home population out there. By 2020, 54% of the homes in this country are going to be 40 years or older. Plenty of opportunity. Lowe's is a smaller company than Home Depot right now, but I think, over the next five years, there's a potential better reward scenario out there for Lowe's than, perhaps, Home Depot.
Broido: At the end of the day, isn't this just a proximity play? Don't people just go to what's closer? If Home Depot's closer, I'm going there; if Lowe's is closer, I'm going there.
Moser: You know, I do agree with that, Steve. I do find some people are a bit more loyal to one brand or another. But I think that's really why you always find a Home Depot right next to Lowe's, anyway.
Hill: Andy Cross, what are you looking at?
Cross: Intuit (NASDAQ:INTU), the maker of Turbo Tax and QuickBooks and Mint personal software applications, reports next week. They had a monster growth in their QuickBooks Online. It grew 45% last quarter. Their QuickBooks ecosystem is up 41% on the revenue side. That's payments and payroll. Will that keep accelerating into the year?
Hill: And the ticker?
Broido: Do you ever see a situation where QuickBooks incorporates all its products into one suite?
Cross: They're starting to do that with their new Turbo app which, is Mint and Turbo Tax. It combines your personal finance life all together. Five million users. Will that continue to grow?
Hill: Steve, do you have a stock you want to add to your watch list?
Broido: I might take a look at Intuit.
Hill: Alright. Andy Cross, Jason Moser, Ron Gross, guys, thanks for being here!
Gross: Thanks, Chris!
Cross: Thanks, Chris!
Hill: Our engineer Steve Broido, our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Home Depot. Chris Hill owns shares of Amazon. Jason Moser has no position in any of the stocks mentioned. Ron Gross owns shares of Amazon. Steve Broido owns shares of Amazon and Home Depot. The Motley Fool owns shares of and recommends Amazon, Intuit, JD.com, and Zoe's Kitchen. The Motley Fool owns shares of Spirit Airlines and has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Cedar Fair, Home Depot, Lowe's, Nordstrom, and Southwest Airlines. The Motley Fool has a disclosure policy.