In this episode of MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss Monday's biggest company news.
Shares of Hasbro (NASDAQ:HAS) fell 5% after the toymaker reported disappointing profit and revenue, but there are still plenty of Transformers and Furby movies that could get made to boost sales. Elsewhere, Polaris (NYSE:PII) stock jumped on a solid earnings report, but it has had an especially rocky decade in the wake of the financial crisis.
Finally, Sears (NASDAQOTH:SHLDQ) seems to be giving up the ghost at long last, leading some listeners to wonder: Should we have shorted the thing? We all knew it was going to die, and now it's dead. Did we miss a huge opportunity? But shorting is its own kind of complicated, and it comes with huge risks. Tune in to hear more.
A full transcript follows the video.
This video was recorded on Oct. 22, 2018.
Chris Hill: It's Monday, October 22nd. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Happy Monday!
Bill Barker: Thank you!
Hill: Do you feel the crisp fall air? It's finally fall here in the Washington D.C. area.
Barker: I was in Boston over the weekend. This is balmy.
Hill: I was going to say, even crisper air up in Boston?
Barker: Pretty crisp. It was low to mid-30s, overnight, anyway.
Hill: That's good to hear. We're going to dip into the Fool mailbag. We're going to get into earnings. And we're going to start with Hasbro. Shares of the toymaker down 5% this morning. Hasbro's third quarter profit and revenue came in lower than expected. They appear to have some operational problems at Hasbro. I'm basing that on the fact that the CEO, Brian Goldner, came out and basically said, "Yeah, the demand was there, and we couldn't meet it."
Barker: That was part of the issue. The headline that they're promoting -- and this was maybe a little bit of a kitchen sink kind of quarter, because they've taken some writedowns and things, and they're going to take an expense for some reorganization -- sales off 12%. The lead issue continues to be Toys R Us. There are no Toys R Us stores that are open now. That's their largest distribution channel. I think last quarter, they had given some indication that they had optimism about being able to counter that effect. This quarter, they've come out and said, "Eh. Eh."
Hill: [laughs] It seems like they've said more than just, "Eh."
Barker: That's part of what they've said. They've also said they have had some problems with their inventory controls in Europe, and, as you say, a little bit of an issue with meeting where the demand is. It is not, apparently, at the closed Toys R Us stores. Shipping their goods to those places turns out to be a bad idea and shipping them to the new places is something they're still getting down.
Hill: That's the part that I have a little bit of a hard time wrapping my head around. On the one hand, we're going to go out and say, "Toys R Us was such a stuck in the mud, going nowhere bricks and mortar business that it needed to completely go out of business." And yet, it was so valuable to companies like Hasbro that here we are, nine months after the liquidation of Toys R Us. I mean, they knew this was coming, so I kind of have to lay the blame at the feet of Brian Goldner and his team at Hasbro. They knew this was coming. You don't get to have it both ways. You don't get to say, "Gosh, that business needs to shut their doors completely," and then go, "Whoa, look, let me tell you why we're having troubles. Toys R Us, that thing was a gold star for us."
Barker: I don't think they were the ones saying Toys R Us really needs to shut down. That was more the market that was saying Toys R Us needs to go because it can't pay its bills, it's not able to manage its business any longer in the era of Amazon. It still was a jarring thing. The thing about Toys R Us was there was at least some hope and some reason to believe that it was going to go through a reorganization rather than a bankruptcy and just shut. That may have caught Hasbro by surprise to a degree. If it did, then that's something that you take away points from management. Hopefully bonuses this year will be affected by that.
On the whole, sales down 12%. The franchised brands were down 5%. The partner brands were down 37%. Partner brands like Disney and Marvel. Gaming was flat. Emerging brands up 2%. Weakness everywhere, but especially with the partners, and the partners are doing a lot of the heavy lifting in terms of getting the movies out that create the demand for a lot of these toys.
Hill: What should we be watching with Hasbro over the next six months? They're talking today about, "We might have to lay off as many as 10% of our global workforce." They've got about 5,500 employees worldwide. Where should the evidence come from, in terms of turning the ship around?
Barker: The traditional classic toys, the board games, and some of the action figure things, are likely to be under pressure for a long time. They are the cash cow, but really, you're looking at the gaming and the movie part of the business that would be more interesting and a more likely grower in the future.
Hill: Let's move on to Polaris Industries, maker of off-road vehicles, motorcycles, snowmobiles, etc. Third quarter results look good. Profits came in higher than expected. Overall sales did, as well. Why is this stock down today? This seems like it was, by most measures, a rock-solid quarter for Polaris.
Barker: I guess I'm going to have to help you out here.
Hill: That's why I'm here. That's why I have you here! [laughs]
Barker: I mean, you are confused as to why the stock is down. Excellent question! And yet, the stock is up.
Hill: Is it?
Hill: Oh, my goodness! It was down earlier.
Barker: So, there's where your confusion is. Why didn't it start up? Why did it take the market a few minutes today to figure out what was going on when it should have had all the information in front of it right from the announcement? Polaris is up 6%. That's because it had a pretty good quarter. But it's had a terrible year. It's had a good year on the top line. It's had an easy year to compare itself to from last year. Diluted earnings per share were up 17% for the quarter. Some of that's helped by taxes. Sales were up 12%. General strength in a lot of different categories, particularly in the Indian motorcycle division, which is benefiting from the turmoil, some of it political, cultural, around Harley. Polaris is picking up some of the disenchanted Harley purchasers. They're both under pressure.
One of the reasons why the stock has been under pressure all year, it's the same thing that's going on with RVs and everybody else who is building things out of steel and aluminum. The tariffs have really landed upon the backs of all of these companies. Polaris has done a reasonably good job of mitigating some of those pressures. Taxes are a help to all those companies as well, in terms of having bottom line profits even though their margins are contracting. For the whole sometimes Polaris' earnings are affected by weather for the snowmobiles and some of the off-road stuff. But it's got a lot of different brands. It's moving into boating, as well. It's mixed into a pretty decent quarter for this outdoor lifestyle company.
Hill: The stock has not been a great performer over the past year, over the past five years. When you look at the business, do you think to yourself, they might do better if they pared down. And I don't know which of their divisions is the least profitable, but if, for example, snowmobiles are not as big a moneymaker as off-road vehicles, then maybe they need to get out of that business.
Barker: You pointed out correctly that it has been a very weak stock over the last five years. If you go back over the last 10, over the last 15 years, that's a better story. Why is that? Because it's continued to grow over the last five years, but it was quite weak 10 years ago. 10 years ago, of course, the recession was peaking.
Hill: Many things were quite bad.
Barker: [laughs] It was pretty bad. But, something like this company, which is highly discretionary purchases -- off-road vehicles, boating, motorcycles are used more in actual transportation for some, but this was extremely discretionary, so it was hit particularly hard then. If you go a little further back, let's say to 15 years ago, the growth of off-road vehicles was really exciting growth. I think that certain people got too excited, looking out further and thinking that kind of growth was going to continue forever. It really hasn't. It's continued to be a good division for the company, but when you scale back projections of 30-40% annual growth down to something like teens, you get very different valuations for the company.
Hill: Our email address is email@example.com. Question from Matthew Widell, whose last name I'm probably mispronouncing. Sorry, Matthew. Matthew writes, "I've never fully understood shorting stocks. I had always been thinking about shorting Sears until it was announced they were going bankrupt. Can you explain what happens if a company you short goes bankrupt? How can you be paid if there is no longer any money in the company?" Good question. I know for a fact Matthew's not the only person either listening to this podcast or working at this company who thought about shorting Sears.
Barker: Yeah, you were advocating it more or less -- reading between the lines, this was your stock advice for the last 10 years.
Hill: I don't think I was the only one looking at Sears and saying, "Boy, this really seems like a company that's going to be going out of business unless they reverse course."
Barker: But you don't give direct stock advice.
Barker: Listening to you, going back, I think this the subtext was, "Why are you all out there not shorting this stock? Why am I not shorting this stock?" That's what I hear when I hear the echoes of your coverage of Sears over the last 10 years. And it would have been good advice for people to listen to, including Matthew here.
Hill: You know, it certainly took longer than I thought it was going to take. But, yeah.
Barker: I mean, if it's going to zero, it doesn't matter that much how long it takes. You get to keep all the money. So, how does it work? Say Sears is, for some reason, back in the past, going for $100 a share, a I think it's going to $0 because it's going to go bankrupt. I borrow shares from somebody else. My broker will find those shares for me. I borrow those shares and sell them immediately. I will someday have to get those shares back because I've borrowed them from somebody. I sell the shares, I borrow 1,000 shares and sell them for $100. I now have $100,000 of cash. In my broker statement, it says I have -1,000 shares of Sears. Someday, I'm going to have to pay those back. If Sears goes to zero, it's pretty cheap to find those thousand shares back and return them to their unhappy owner. You're not getting paid by Sears, you're getting paid by the market in that case.
Hill: Do you short stocks?
Barker: I have. Not right now.
Hill: What was the last stock that you remember shorting?
Barker: I can't remember. Having moved to Asset Management, before doing that, I closed all those. But I had shorted some housing-related stocks back in '08, '09.
Hill: I've never shorted a stock before. My assumption on shorting stocks is that -- and I'll just speak for myself personally -- I would need to have the greatest conviction possible. I would need to have a greater conviction shorting a stock than I would in owning a stock. That's because of the factor of time. We've talked before about people who are right directionally when they talk about shorting stocks, but in the short-term -- I mean, we've seen that with Sears. We've seen moments with Sears where, at various points, the stock has gone up 15-20% in a single day, even though the business has been terrible and getting worse year after year. When you were shorting stocks, was that the case with you? You thought, "I'm keeping this transaction on the shortest leash that I own."
Barker: Yeah, a much shorter leash than something you own. You can be wrong in more ways, and your downside is unlimited. If you buy shares of Sears and it goes to zero, then you lose all your money. If you short Sears and it quadruples, you're out many times your original investment. So, you do have to have a higher level of confidence, a higher level of attention that you're paying to it. A lot of people have lost money shorting stocks, even though they were right about the larger thesis, on the basis that this company, good as it is, is just overpriced right now, and the market is going to think like I do in the near future. During the .com boom, a lot of people were ultimately right about the overvaluation of those companies. But in the short-term, they were hurt pretty badly by being on the wrong side of the insanity.
Hill: We're going to get back to Hasbro in just a second. I know there was one other piece of the Hasbro business that you wanted to talk about. First, I want to give a quick shout out to Akash Pasricha, who's visiting Fool headquarters today. He's down here from Toronto. He's a student up there and just happened to be in the D.C. area and came by. Akash, thanks for coming in! Also, one little thing about Akash, for people who are looking for interesting podcasts, he hosts a podcast called Operation Internship, which involves talking with students who have worked in corporate internships. You can check that out on the iTunes, the Stitcher, all the places you find podcasts. It's called Operation Internship.
Hasbro, struggling as it is, as we talked about, has aligned itself with some pretty strong brands -- as you mentioned, Disney, Marvel. Some of which, you may have heard, end up on the big screen. They end up making movies. I don't know if you knew that about Marvel characters, but sometimes they make movies about them.
Barker: Really? Have you been to any of these?
Hill: I've been to a couple.
Barker: Was there anybody else in the theater at the time?
Hill: Yeah, there were a couple where it was hard to get a seat.
Barker: Well-kept secret.
Hill: As you pointed out when we were trading emails this morning, they have a lot of brands, and not all of them have made it to the big screen. Maybe that's an opportunity for them. When you look at their gaming brands, you look at what they refer to as their emerging brands, challenger brands, etc., is there one that leaps out of you as like, "Boy, if ever they were going to make a movie out of something, this would be a good time to do that"?
Barker: They've done very well with Transformers. There's another Transformers movie coming out. I think part of the quarterly story was that they didn't have a Transformers movie last quarter and I think they did the year before. The comparison of earnings may have been affected by that.
Hill: As a quick aside, for anyone who is a fan of movies and looks at the seemingly never-ending supply of Transformer movies that get made -- if, like me, you're looking at that saying, "Why do they keep making those?" That's where international box office comes into play. Whatever movie reviewers think of the Transformers movies themselves here in the United States, they do huge box office outside the United States. That's why they keep making them.
Barker: Yeah. They had Clue, long ago. That was a movie.
Hill: Yeah, in terms of board games. Jenga, I don't see Jenga making its way into a movie.
Barker: Not a good movie.
Barker: No. Play-Doh. Classic, but really, where do you go with the movie ideas for that?
Hill: The movie concept for Play-Doh?
Hill: That might have the greatest delta, in terms of classic toy that kids play with and, wow, would that not translate to the big screen at all.
Barker: Now, Lego has done incredibly well with its movies. Where would I go with this? I don't know. I might go with Dungeons and Dragons.
Hill: I was just going to say --
Barker: Were you a Dungeon Master back in your day?
Barker: Weren't you?
Hill: No. Never played D&D.
Barker: Spent a lot of time playing D&D?
Hill: Nope. Never.
Barker: You're not admitting to it for some reason. It's OK. It's OK!
Hill: [laughs] I don't begrudge the people who play D&D. Friends of mine played it, and it was explained to me, and I was just like, "I don't think that's for me." Also, along those same lines, Trivial Pursuit. I feel like Trivial Pursuit might lend itself to a live action game show with celebrities, possibly, but not to a movie. If there's a Trivial Pursuit movie, then something has gone seriously wrong in Hollywood.
Barker: I think technology has caught up to where Dungeons and Dragons could do pretty well, although I don't actually know what the premise of the game was, other than, there seemed to have been dragons, which are very popular these days.
Hill: They are. Also dungeons. And creative weapons, as I understand it. Look, isn't Game of Thrones really Dungeons and Dragons on some level?
Barker: Pretty much. As two guys who have never played Dungeons and Dragons, we assume that that's what people were absorbed with.
Hill: Let me push back on any listener who is either a huge fan of D&D or a huge fan of Game of Thrones and is very upset right now that we're making this comparison. I'll just say this, as someone who never played D&D, the onus is on you to convince me that Game of Thrones is not the televised version of D&D. The onus is on you. We've talked before, you're a lawyer -- or, were, once upon a time. We've had various conversations where you've said, "Given this lawsuit, given this case," whether it's in the business world or not, you've said, and I'm paraphrasing, "I'd feel pretty comfortable taking that side of the case." I feel pretty comfortable taking this side of the Game of Thrones-D&D case.
Barker: For whatever reason, this is my uninformed suspicion -- there's less sex in Dungeons and Dragons than Game of Thrones.
Hill: That's probably a safe bet.
Barker: Probably. And it's probably a little less violent.
Hill: I mean, yes, unless by unless it's live action D&D, in which case, then possibly horrible things are happening.
Barker: Is Magic the Gathering something that there have been movies for? You're a big Magic the Gathering player.
Hill: [laughs] No.
Barker: A fan?
Hill: I'm also looking at Furby, another Hasbro brand. Has that been made into it a big screen movie? That might have been a direct-to-video situation.
Hill: I don't know.
Barker: We're just naming things now.
Hill: Yeah, we're way past.
Barker: We apologize, as always.
Hill: This should have been taken up on an Apropos of Nothing episode.
Barker: Could be.
Hill: Could be. Coming soon: Apropos of Nothing 4.
Barker: You keep threatening and not delivering.
Hill: For the four or five people who are actually interested, that episode is coming soon. You can read more from Bill Barker and his colleagues, go to foolfunds.com and sign up for Declarations. It's free. It's free and it comes once a month. It's got good investing stuff in it, so for crying out loud, it's just once a month. Go sign up for that! Thanks for being here!
Barker: Thank you!
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!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bill Barker owns shares of HOG and DIS. Bill Barker is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Wealth Management are not the views of The Motley Fool, LLC and should not be taken as such. Chris Hill owns shares of AMZN and DIS. The Motley Fool owns shares of and recommends AMZN, Hasbro, Polaris Industries, and DIS. The Motley Fool has a disclosure policy.