On Tuesdays, We Buy Companies

In this Market Foolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker dig into a pair of big purchases. First up, luxury group Michael Kors (CPRI -1.67%) is adding the privately held fashion purveyor Versace to its stable of brands for 2 billion euros. Did it get a good deal, and what does the buy signal about the company's direction?

In the other market direction, the publicly held fast-food chain Sonic Corp. (SONC) will be folded into the private Inspire Brands, which currently gets the lion's share of its revenue from the Arby's and Buffalo Wild Wings chains. And the purchase price is the nice cherry on top of this year's share gains for the burger-and-shakes joint.

In other commentary, the Fools respond to a great emailed query from a millennial who wants advice on how to stop being a speculative investor and start being a smarter one. And finally, they weigh in on the much-telegraphed news that Dunkin' Brands Group (DNKN) has finally made official -- it's dropping the "Donuts" from its name and brand. (But no, definitely not from its menu.)

A full transcript follows the video.

This video was recorded on Sept. 25, 2018.

Chris Hill: It's Tuesday, September 25th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, Bill Barker. Happy Tuesday!

Bill Barker: Thank you!

Hill: It's merger Tuesday.

Barker: Acquisition Tuesday.

Hill: I guess it is acquisition Tuesday. Although, as we talked about earlier today, there are plenty of merger Mondays where it's like, "Look, this isn't a merger. This is really an acquisition."

Barker: And it's not even Monday.

Hill: Right. Hence, acquisition Tuesday. We're going to dip into the Fool mailbag. Let's get to the first acquisition, though, and that is Michael Kors taking a page out of the Tapestry playbook, buying yet another luxury brand, this time Versace for $2.2 billion. You look at shares of Michael Kors, they're up ever so slightly. Versace was a private business. It looks like, based on the evidence that we have so far, Michael Kors at least is not being viewed as having overpaid for this luxury brand.

Barker: But they were hit yesterday. The stock was down about 10% yesterday when the rumors of this leaked out into the market, and it wasn't confirmed until the end. I think that looking back at Friday's stock price, this is being deemed a mistake or overpaying or something. Of course, Kors had a history of being a rapidly growing company. Between 2011-2015, they moved from $800 million in revenue to $4.3 billion, in five years. Very impressive growth. The stock played along with that. Then the growth stopped for various reasons. They scaled down the store openings and closed some stores. In the last three and a half years, they've more or less been flat, in terms of the top line, as they've tried to improve the bottom line.

It looks like maybe they're getting back into growth mode and need to acquire another brand rather than try to expand Kors beyond the current lines of where it's at.

Hill: If you're a Kors shareholder, you have to feel pretty good, even with the drop. Over the past year, the stock's up about 45%, even with this drop. We've seen over the past decade both Coach -- now Tapestry, but the namesake brand, Coach -- and Michael Kors have periods of growth, have periods where you look at the company and say, "Yeah, they've over expanded. They shouldn't be trying to go down market and discount and really get into outlet malls and that sort of thing." To your point, I think that if you're thinking about the next five years for Michael Kors, the namesake brand itself isn't necessarily going to be the greatest driver.

Barker: No. Maybe they're going to be on the lookout for more brands. They had a very concentrated position, that being the Kors brand. They did an amazing job, in terms of that growth that I referred to. The stock quadrupled from its IPO to 2014, but then it got cut down from $90 to $30. $66 today. It's visited a lot of interesting places over the last 5-7 years. Today, probably closer to rationally valued than a number of those times in the past. As you say, it's had a good year because there was a little bit more stability to the story than seemed to be the case over the last couple of years.

Hill: They've got the namesake brand of Michael Kors. Now they have Versace. They also bought Jimmy Choo. Do you think at some point, they go the route of a rebrand? The same way that Coach looked at their brands and said, "Alright, we need an umbrella brand." At least in the case of Coach, they were getting hit by the namesake brand results. Those were overshadowing Kate Spade and the other things that they had under that brand, Stuart Weitzman, etc.

Barker: I'm going to go out on a limb and say that they will change the name to Capri Holdings.

Hill: Capri Holdings?

Barker: Yeah.

Hill: Why that?

Barker: That's that the announcement.

Hill: Did that just come out?

Barker: Yeah.

Hill: Oh, OK!

Barker: [laughs] I've read one more article, I guess, that included that information. Capri, what do you think? You've gone after a few rebrandings in your day.

Hill: I have, yeah.

Barker: Does this pass the Chris Hill test?

Hill: I mean, let's be clear. In general, it's been a good indicator -- in some ways, it's been a buy signal -- if I attack a rebrand. There have been companies that have rebranded and I've ranted like, "This is a stupid name," or, "This isn't going to work!" And it turns out that was the time to buy. So, let me put it this way: Capri Holdings makes more sense to me then Tronc or Oath.

Barker: Tapestry?

Hill: I'd say it's slightly above Tapestry.

Barker: There's nothing wrong with Capri Holdings.

Hill: No.

Barker: I think that's going to work out fine. As you say, when you do rebrand like that, it communicates to the employees of the acquired brand or future acquired brands that they are not taking a backseat to the name brand. That is, I think, what will mostly be achieved by naming the company something else, rather than keeping the Michael Kors name as the name of the company and the stock. It'll have a new ticker symbol, I'm sure. I would look for additional brands to be acquired.

Hill: Let's move to the second acquisition of the day. That is Inspire Brands, which is the parent company of Arby's, Buffalo Wild Wings and Rusty Taco, buying Sonic for $2.3 billion. That assumes the debt that Sonic had on the balance sheet. That's a premium of about 19%. If you're a Sonic shareholder, drinks are on you tonight.

Barker: It's been a good year for Sonic shareholders. Before we go there, do you know what the Inspire Brands company motto is?

Hill: No.

Barker: "We ignite and nourish flavorful experiences."

Hill: OK. [laughs] That's something.

Barker: They have Rusty Taco, Buffalo Wild Wings, I can see the ignition there, the igniting. You have a little bit of spice there. But it seems wordy, doesn't it? "We sell food" probably was a little too simple. But really, that's what they do.

Hill: Now all of my questions for Inspire Brands have nothing to do with the Sonic acquisition. They have everything to do with how many people it took to come up with that.

Barker: That was a committee. That was not one person coming up with that.

Hill: Oh, no, no, no! That was a bunch of people.

Barker: That may have taken a year.

Hill: And, by the way, somebody was married to each one of those words. Someone was like, "Look, whatever else we come up with, flavorful has to be in there." "Look, I'm OK with that as long as we have some version of ignite or ignition."

Barker: "We're not a restaurant. We're not selling food. We're selling experiences."

Hill: Yes.

Barker: That's going after those millennials who want experiences rather than things.

Hill: You know what, millennials? You want an experience, get yourself into an Arby's. That'll be an experience.

Barker: Yeah. Or a Rusty Taco.

Hill: I mean, to go back to --

Barker: Talk about the actual story?

Hill: To no longer making front of Inspire Brand's motto, this continues the trend. This continues the trend that we've seen over the last couple of years in this industry, which is, it's hard out there to be a publicly traded restaurant. In the case of Sonic, it was, "How much? Sure. For that amount of money, we will hop on board."

Barker: Yeah. There definitely are some economies of scale when you're putting together restaurants that are working with a similar demographic. Your marketing can be streamlined and the food costs can be streamlined by acquiring more operations. Not getting into what the price tag was, it looks to me like it makes sense. Arby's, Buffalo Wild Wings, Tacos, and Sonic all fit comfortably into the same sort of category in my mind. Which of those have you been to?

Hill: I've been to Buffalo Wild Wings. I've not been to a Rusty Taco. I looked at the website, there are only 28 of them, and they're concentrated in the western half of the country. I've never been to Sonic. A very long time ago, probably when I was in college, I went to an Arby's. And you?

Barker: Sonic, Arby's, Buffalo Wild Wings, but not Rusty Taco. Maybe when you're in Denver, you can hit one. Maybe.

Hill: Yes, they have them in Colorado.

Barker: It's a must stop.

Hill: Depending on how close it is to the hotel that I'm staying at.

Barker: I don't know if you've heard, but it's a pretty flavorful experience.

Hill: [laughs] That's what I've heard.

Barker: Getting back to Sonic, a good year for the stock. A relatively tough year for restaurants in general. I think that if they got a price it's worth being acquired at, with the economy being where it is and with the future of these types of restaurants being a little less certain, I think, than they had been, although certainly more secure than your mall-based retailers, I'd prefer to be hopping on board a conglomeration of known brand restaurants than something that is stuck to malls. It's a little different, but it's still been challenging, more than ever. People are eating as much as ever and eating out more and more is still the trend. But the inflation in input costs for food has been pretty dramatic this year. It's really been eating up the margins of a lot of these companies.

Hill: We've talked about this with other umbrella brands in the restaurant space. Most recently, last week, we were talking about Darden Restaurants, and their portfolio of eight different restaurant brands. I like to think that, whether it's Darden Restaurants or Inspire Brands, they are getting as much data as they can on all of their different locations; and, to the extent that it makes sense, they are swapping out concepts. They're looking at, maybe some Arby's locations and saying, "Those aren't really working. Rather than shut them down completely, we're going to flip them, and now they're going to be a Sonic or a Rusty Taco," or that sort of thing. But maybe I'm giving them too much credit.

Barker: No, I think that makes sense, to have that optionality in your business and not be married to a single concept. If you're Sonic and you're a stand-alone company, your choices are, "How many more restaurants can we build?" If you have been in business as long as they have, there's a good chance, if you're a good operator, that you're in the best locations already. You're not getting around to premier locations where you're going to increase your per restaurant transactions. So, I think, as you see with something like Taco Bell, and KFC and Pizza Hut, where there may be all three available in one location, that might be something that someday you're going to see with these companies.

Hill: Our email address is [email protected]. Question from Jay in Atlanta. "I'm a 24-year-old millennial investor and I own a Robinhood account from which I hold my primary stock portfolio. Unfortunately, most of my investing has been mostly speculative up to this point." Oh, Jay! Oh, Jay, what are you doing, speculating like that? "I want to do a better job at quantitatively analyzing the companies I'm about to invest in. Do you have any tips or advice for me in how to do so? Any tools or platforms or suggestions that y'all have that could help in such endeavors?"

You're someone who researches stocks for living. Any suggestions for Jay?

Barker: Yeah. Actually, what I'll focus on first is, you took a pause, and said, "What are you doing, speculating?" But I think that the good news here is, Jay has identified not only that what he has been doing is speculation, but he starts the sentence with "unfortunately." He recognizes that this is not who he wants to be. When you recognize what your own weaknesses as an investor are, you're ahead of most. Recognizing the problem, to an extent is -- I'm not saying this is a big problem. People do speculate on stocks, especially when they first get involved with investing. Checking prices multiple times a day, thinking, "This has moved up a little bit, should I sell?" Speculating.

Hill: You and I have seen that in a couple of significant periods in our lifetime. I'm thinking primarily of the late 1990s, when people started investing online. You can speculate and do well, and you draw the wrong conclusion. The wrong conclusion is, "You know what I am? A phenomenal investor! Everything I buy goes up! I'm just that good!"

Barker: Unfortunately, a lot of focus goes into things which are best categorized as speculation. You take the marijuana stocks right now. You take Bitcoin. Tremendous amounts of attention because the movements are so dramatic in such a short period of time. If not every part of those stories is speculation, a large chunk is. I just wouldn't get started on things like that. If you know that you want to have some fun with a small portion of your money, have your speculative portion of your portfolio to massage that part of your attention, that's fine.

Getting back to the latter part of the question, tips and advice on how to analyze companies. Of course, our site. By "our," I mean The Motley Fool site. We always recommend to get some ideas and follow people that are interested in sharing ideas about stocks. I would read Jack Bogle's work. Anything by Jack Bogle, which focuses on the long-term, focuses on the appropriate expectations to have for investing, and also the importance of keeping costs low when you do so. But none of what he writes about really gets at buying individual companies. I don't want to just plug the fool.com site, but it's always been a good one for that.

Hill: I'll throw another one out there. This goes for Jay, this goes for anyone listening, particularly if you're just starting out. It's been my experience, and I think a lot of people's experience, that the stocks they tend to do the best with are the businesses that they understand. I would say, look at your circle of competence. Look at what are things that you understand? Some people are really smart when it comes to science. Maybe they have a college degree in that. They're far better equipped to look at biotech stocks, pharmaceutical stocks, etc., than I am.

What I would say is, wherever you find your interests gravitating toward, I can promise you there is absolutely not just a general business news site like fool.com or CNBC's website, Bloomberg, etc. out there. There are also trade publications. We were talking earlier about Sonic being acquired. You look at QSR, you look at Restaurant Business News, that sort of thing. There are trade industry publications for whatever industry you're interested in. That can be a really great resource, as well.

Barker: I think books are a good resource.

Hill: Books?!

Barker: Books, yes. [laughs] Books! Peter Lynch's books are a good place for a young and new investor to start reading, with some of his stuff. I think the numbers are somewhat outdated from the time that he was writing. You're not going to find a lot of stocks at the valuations that he was able to write about and where he made so many great investments in his money. You have to make certain adjustments to a market that doesn't offer obvious steals the way he was able to write about. But, just going through his thought process, I think, is good. The Warren Buffett Way is a good book for actual learning about valuation. It's not by Buffett but about Buffett and how he was finding stocks. It was written a couple of decades ago, but I think the math is still good there.

Hill: And speaking of Buffett, if you go to the Berkshire Hathaway website, you will find two things. One is, you will find a website that appears to have been built in 1997. Second, you will find the annual letters from Buffett. You can just pick any one of the recent years and just read those. Very insightful, and it will take you a lot less time than reading a book. I don't want to come off as anti-book. I feel like I am.

Barker: Yeah. [laughs] A little.

Hill: Let's close with this. You were Johnny on the spot with breaking news regarding Capri Holdings, here's some more breaking news. This broke right before we started taping. Sometimes there's news that breaks right before we come in the studio. We were just about to start, and this news broke. Also in the restaurant space, Dunkin Donuts coming up with the announcement that had been rumored for a while -- starting in January 2019, Dunkin Donuts is rebranding to simply Dunkin'. This was unveiled at the Global Franchisee Convention. Get ready for Dunkin'. You know why? Because America runs on Dunkin'.

Barker: This is important news to you, especially, and everybody in New England, I guess. Even more than the rest of us.

Hill: Let me tell you what's going to be on the front page of the Boston Globe, the Hartford Courant, the Portland Press Herald, every major newspaper in New England tomorrow. This will almost certainly be on the front page, as it should be.

Barker: Yeah. What else is there to say about it?

Hill: Well, the interesting thing -- we were talking before about, how did Inspire Brands come up with that statement, and that it was a committee. Well, anytime there's a press release from, in particular, a publicly traded company, a lot of different people look at that. What's interesting to me about the Dunkin' Donuts press release on their website is that there's a whole section down below after they rationalize, "This is why we're changing to just Dunkin'," there's a whole section that goes out of its way to reassure the readers and the Dunkin' going public, "We're still going to sell donuts." There's a whole section that's like, "Yes, we're dropping the word Donuts from our name; we're still selling donuts, people. Everybody relax. We're still going to sell the Munchkins. We're still going to sell the donuts."

Barker: It's forward looking, I think, getting on the right side of history. Donuts, delicious as they are, are not really thought of very often as being healthy.

Hill: Not in the same way that coffee is.

Barker: No, not at all. In fact, to mix those two together is to imply in some way that coffee might not be as healthy as it is, by comparing it to donuts, which, as I say, are delicious. I understand getting out of having that be part of the name. I understand the need to assuage everybody that they're still going to be selling donuts, even if they're not going to be putting the idea of donuts at the front. Are you going to link to the Saturday Night Live thing on Dunkin' Donuts with this, on the Twitter or something? You really should, it's so good.

Hill: Oh, the fake commercial they did with Casey Affleck? Yes, I'll put that out on the Market Foolery Twitter feed.

Barker: It'll be all over today. It'll be everywhere today. It should be, because it's always worth a rewatch.

Hill: It is. You can read more from Bill Barker and his colleagues. You can go to foolfunds.com and check it out. Speaking of resources for investors, foolfunds.com. Find everything from Motley Fool Asset Management, from Bill and his colleagues. Thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool man 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!