General Motors (NYSE:GM) is laying off 15% of its employees and scaling back production. In this episode of MarketFoolery, host Chris Hill and analyst David Kretzmann discuss why GM had to make these tough decisions. Elsewhere, Black Friday set a new record for online sales. Plus, David shares highlights from attending MJBizCon in Las Vegas.
A full transcript follows the video.
This video was recorded on Nov. 26, 2018.
Chris Hill: It's Monday, November 26th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, back. He's been away. It's David Kretzmann. Thanks for being here!
David Kretzmann: Great to see you again, Chris!
Hill: Good to see you! We're going to get to your travels in a moment. It wasn't just holiday travels, you were working.
Kretzmann: A little bit of work.
Hill: [laughs] Based on your Twitter feed, it seems like there was more than a little bit of work going on. We're going to get to the retail. But we have to start with the new story of the day, and that is General Motors. GM announced it is laying off 15% of its employees and cutting production at five plants in the U.S. and Canada. And just to be more specific on that, two of the plants are in Michigan, one in Ohio, one in Maryland, and one in Ontario. That's close to 15,000 jobs. As we've come to expect, at least from the stock market perspective, we shouldn't be surprised that shares of GM, up on this news.
Kretzmann: Of course, we always sympathize with people who are losing their jobs. That's a big blow --
Hill: And a rough time of year.
Kretzmann: Yeah. It's unfortunate on a lot of levels, for the individuals, the families, those communities that probably rely a good amount on those factory jobs there. That's always a painful process. But looking at GM from a business perspective, this is a company that needs to cut costs. They need to find ways to cut expenses, raise free cash flow, and improve profitability. This is a company with an operating margin of 5%, a net profit margin of less than 1%. They're, right now, cutting a lot of corners there. They're pinching pennies at this point.
I think this makes sense from a strategic perspective. At first, when I heard this news, I thought, OK, maybe they're shifting some of those production jobs to another market, maybe overseas, where you're able to hire labor for a cheaper rate, or whatever it might be. But it looks like they're essentially just taking that capacity offline and just trying to ramp up capacity or utilize their existing facilities even more than they already are. From an efficiency perspective, that makes a lot of sense. If you have enough capacity with other factories, with other production facilities, then you should just focus on those existing production facilities rather than having several other facilities that you don't actually need to produce the vehicles that you need to supply.
Hill: It was interesting to see that this wasn't simply, as you said, "Let's cut these jobs and move them elsewhere." About 25% of these jobs are white collar jobs. So, yes, they're are a lot of factory jobs, but they're are also some front office jobs, as well. And, as you said, scaling back the production in a pretty dramatic way. It's interesting, this was hinted at a week or two ago by Jim Lutz, one of the former vice chairs at General Motors, talking about Mary Barra, the CEO of General Motors, and her message to her executive team. It was essentially like, "Let's start to look at ways that we can tighten the belt." I don't know if Jim Lutz thought it was going to be on this level, but it's clear from this move that Mary Barra and her team essentially are saying, "Not only are we tightening the belt for our own business, we're doing this now. We would rather be early in cutting costs in the wake of the economy and the run that it has had. We'd rather be early on this than be late. We don't want to be the last ones to do this."
Kretzmann: GM isn't in a position where they have a whole lot of flexibility. It's a company with a lot of debt. They're burning cash. And, as I mentioned, their profit margins are about as narrow as you can get and still be profitable. It's not like they have a lot of time to tinker with things around the edges. They really have to address those core issues now. In this case, they're ripping off the Band Aid. They're saying, "Yes, we can simplify our product portfolio." One thing I noticed in their press release is 75% of their global sales volume is expected to come from just five vehicle architectures by the early part of 2020. So, essentially focusing on select vehicles or architectures and building production facilities around those architectures, rather than having a ton of different types of vehicle architectures out there. It's just harder to have an efficient operation when you're trying to produce every vehicle under the sun. Trying to simplify the product portfolio, simplify production, and in doing so, reduce expenses, increase efficiency. This should end up saving them a lot of cash.
They're expecting cash savings of about $6 billion by 2020. Part of that is lower capital expenditure costs. Some of is just cost reductions, lower labor expenses, things like that. Ripping off the Band Aid, as we mentioned, it's a painful time for those individuals who are affected and losing their jobs. But for GM, it's a company that really needs to do something drastic like this, if they want to raise their chances of surviving over the long-term.
Hill: And I think if you're looking at automakers, two things to watch for over the next two months are, one, Ford Motor and others, are they coming out with similar tightening of the belt? Two, we are less than two months away from the North American International Auto Show, which is held every January in Detroit. I have to believe that this is going to be a topic of conversation for the media at that event -- whether anyone follows suit or not. It's almost like, if you're a reporter covering this industry, if Ford hasn't announced job cuts, that's probably one of the first questions you're asking their executives at the event next January.
Kretzmann: Absolutely. This move from GM undoubtedly impacts the competitive landscape for North American automakers, and potentially international automakers, as well. Building cars is a really challenging and capital-intensive business. These are companies with narrow profit margins. You've got to do what you've got to do if you want to raise the odds that you will be around over the long run.
Hill: Let's move on to retail, which is obviously the big headline over the last few days, certainly post-Thanksgiving, Black Friday, today being Cyber Monday. I feel like Cyber Monday is less of a big deal. I know everyone's talking about how Black Friday isn't as big of a deal, but it still seems like it's a pretty big deal. Cyber Monday seems like it's been extended. Black Friday, online sales were a record, around $6.2 billion. That's up more than 20% from last year. Total sales on Black Friday somewhere in the neighborhood of $23 billion. Black Friday still seems like it's kind of a big deal.
Kretzmann: Still relevant, although I saw a clip, I think from Black Friday a year or two ago, but a news blooper. There was a news station, you have all the cameras and reporters who are in the entrance of some retail store on the cusp of Black Friday. And the doors open up, and only one guy walks through.
For me personally, I've never been a big Black Friday shoppers. Personally, I feel disconnected from the whole thing. I didn't even buy anything online this year. Although I probably should. Christmas is coming up, right around the corner. For me, what really stuck out is the e-commerce strength, as you mentioned. We saw e-commerce sales up over 23%. Total Black Friday sales, I think I saw up something like 9%. A healthy amount. That bodes well for retailers. That shift to e-commerce, we're still in the relatively early innings. E-commerce as a percentage of overall retail in the U.S., depending on the category, can still be less than 10-15%. So, I have to think this is just another step along the way toward e-commerce taking a bigger piece of that retail pie.
Hill: We talk all the time about how important the holiday quarter is for retailers. I came across some stats about how it's even more so for some retailers, in terms of the percent of annual earnings per share that comes from the holiday quarter. Here are a few names. For Etsy, it's 42% comes from the holiday quarter. Lululemon, 45%. Best Buy, 50%. Bed, Bath & Beyond, 54%. So, yes, Target and Walmart and, obviously, Amazon, and others, they want to do well. But for those names, among others, they have to nail it.
Kretzmann: Yeah, absolutely. It's a challenging, competitive space. The companies that have that online presence, they probably have a better shot of reaching existing customers or reengaging customers who have been on those platforms before. I know with Etsy, that's a company that's constantly trying to find ways to be more than just a place to go to buy gifts, make it more of a regular e-commerce destination. But a company like Etsy, being the craft fair online, serves the holiday market really well. They continue to do really well. But companies that are only focused on the brick and mortar aspect, or don't have a strong of an e-commerce angle... as we're seeing, e-commerce is growing faster than overall retail. If you don't have that e-commerce presence, you're probably going to risk falling behind.
Hill: As I mentioned, you were traveling recently, not just for the holidays. You were out in Las Vegas. Hopefully, as longtime listeners know, you have become, over the past 18 months, the go-to cannabis industry expert. Not just here at The Motley Fool. I saw that you did an interview with Consuelo Mack for her show?
Kretzmann: Yeeha, for WealthTrack.
Hill: That's bigtime!
Kretzmann: I was flattered that they asked! Yeah, Consuelo Mack and I had had a conversation. It turned out to be about 50 minutes. It's up on YouTube if you search "Kretzmann cannabis." Maybe we can tweet it out.
Hill: Yeah, send me the link and we'll tweet that up.
Kretzmann: It was a great conversation, about 50 minutes, diving deep into the history of cannabis, how we got to where we are today, then talking about how we're approaching this from an investment perspective at The Motley Fool, recognizing that it is still a risky, volatile, and emerging space, but undoubtedly has captured a lot of attention lately. It's an exciting space to follow, but then trying to keep expectations at a realistic level, recognizing that this is still a very risky, very volatile space.
Hill: By the way, over Thanksgiving, one of my cousins lives up in Toronto. He's an attorney, and he listens to the podcast from time to time. And he said, "I always smile whenever I hear you talking about cannabis. Our firm has been doing so much business," because there are so many companies that are suddenly in need of legal help on this front.
You were out in Las Vegas. What was the name of the conference? I know it's a huge conference, but the name is escaping me.
Kretzmann: MJBizCon. They host regional events over the course of the year. They've had events in Toronto, I think they have one coming up in New Orleans, Miami. This one in Las Vegas has been going on for at least five or six years now. This is the flagship cannabis event. My understanding is that's the largest cannabis conference and expo worldwide. This year, I heard estimates range from 30,000-40,000 attendees over the course of the week. It's not quite as big as CES, which is also Las Vegas, but it takes up the entire Convention Center over in Las Vegas. You have hundreds, if not thousands, of vendors, and thousands of people going around networking, trying to capture their little piece of the cannabis opportunity.
Hill: A couple of questions, in terms of the events that you went to, the breakout sessions, and certainly the interviews that you did. First, was there anything that surprised you, either on the good side or the bad side?
Kretzmann: I don't know if there was anything real surprising. One thing that stuck out is the number of U.S. companies that are going public in Canada now. That's a trend that we've been seeing ramp up the past month or so. You have this murky legal framework in the U.S., which we've talked about. You have now over 30 states that have legalized medical cannabis in some shape or form, but it still remains an illicit substance on a federal level. From a financial or investing perspective, what's interesting there is that the major stock exchanges both in the U.S. and Canada won't let you be a publicly traded cannabis company on their exchange if you're operating in a territory where it's still federally illegal. You can't list on the NASDAQ, New York Stock Exchange, the Toronto Stock Exchange, or the TSX Venture Exchange up in Canada if you have any involvement in the U.S. But you have this smaller and relatively obscure exchange in Canada called the Canadian Securities Exchange, sometimes referred to as the Cannabis Securities Exchange. [laughs] They say, "We'll let you list on our exchange as long as you're operating in a state where it's legal."
Over the past month, you've had a number of U.S. cannabis operators go public on the Canadian Securities Exchange. That's their way of tapping the capital markets, riding this wave of cannabis hype that we've seen throughout the year. Companies like Curaleaf, which has a market cap of well over $3 billion now, probably one of the biggest, if not the biggest U.S. operator by market cap now, it's public up in Canada on that relatively small exchange. Then, some other companies like Harvest Cannabis, Dixie Brands is another one going public.
Over the course of the conference, I was able to have conversations with a variety of executives and insiders, and a lot of these companies are the U.S. operators who are looking to take advantage of that backdoor way to go public and access the public markets through the Canadian Securities Exchange. That was an ongoing theme that I recognized. It's interesting. For a lot of reasons, the U.S. market is more appealing than Canada or the other international markets out there.
Hill: You mentioned CES, the Consumer Electronics Show. Huge consumer tech show in Las Vegas every January. You've been to that. I recall from a conversation you and I had that one time, you went to CES, and I asked you the most absurd thing you saw. If memory serves me correctly, it was a smart rubber duck.
Kretzmann: Edwin the smart duck.
Hill: Edwin the smart duck. What was something that you saw at this cannabis conference that maybe a vendor had, or someone setting up a booth, where you looked at it and shook your head and said, "Yeah, I don't know that's going to work out."
Kretzmann: One technology aspect that I saw walking the floor, imagine a big machine that pumps out what's essentially synthetic DNA.
Hill: [laughs] Wait, what?! That is not at all what I thought you were going to say.
Kretzmann: I didn't know this was a thing! And the company said, "No, we haven't actually sold anything yet." They were walking me through this technology. First, I'll say what the technology is. The idea is, when you're drying your cannabis, you would be able to pump this synthetic DNA through the air, it would touch the plants, and that synthetic DNA would essentially be almost like a DNA barcode that would be tied to your cannabis. It'd be a unique form of DNA that's tied to your cannabis, so if the government comes knocking and saying, "Hey, we think someone might be knocking off your product," or there might be some legal issue for whatever reason, you'd actually be able to test that product that might be in question and see, "OK, that cannabis did come from our production facility in California." That's the selling point. But then I asked, "Has anyone actually bought this? It seems like a bit of a stretch in a lot of different ways." And it's like, "No. We've talked with a lot of people, but we haven't actually sold it."
For one thing, I didn't even know synthetic DNA was a thing like that. And the idea of having this chamber of dried cannabis where you have this machine pumping tons of synthetic DNA into it, didn't sound all that appealing. I was like, "Man, is that really healthy?" If you're consuming it, do you want something that has that DNA being pumped on to it? A lot of questions there. But it was an interesting technology to learn about.
Hill: I was going to say, the idea that you could bombard cannabis with synthetic anything, and that it would have no effect other than for government inspection, that seems like a stretch. Also, I'm glad you provided that explanation, because if you just left it at synthetic DNA, I thought that sounded like a recipe for a Spiderman-type situation. Instead of being bitten by a radioactive spider, someone smokes a synthetic joint, and then all of a sudden, they have some sort of powers. I'm not sure what powers, but they've got something.
Kretzmann: Synthetic DNA raises the chances that you really go places.
Hill: David Kretzmann, thanks for being here!
Kretzmann: Thanks, Chris!
Hill: As always, people on the program may have interest 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. Chris Hill owns shares of AMZN. David Kretzmann owns shares of AMZN, ETSY, LULU, and TWTR. The Motley Fool owns shares of and recommends AMZN, ETSY, and TWTR. The Motley Fool recommends F and LULU. The Motley Fool has a disclosure policy.