When investors look at any company, one of the things they should focus on is its competitive advantages -- how strong they are, and what they're vulnerable to. This week's batch of earnings reports featured a trio of companies that have been hit to varying degrees right in the financial solar plexus. First up in the MarketFoolery podcast is high-end jewelry company Tiffany & Co. (NYSE:TIF), which suffered its worst single-day stock slide in four years after missing on its third-quarter estimates due to falling sales to Chinese consumers. At the other end of the spectrum, old-fashioned packaged goods stalwart J.M. Smucker (NYSE:SJM) -- which is these days more reliant on coffee and pet food than jams and jellies -- similarly missed expectations on profits, cut its guidance, and generally disappointed investors. But worst of all was the bite Wall Street took out of fashionable apparel seller Chico's (NYSE:CHS). Its shares lost nearly 40%.
In this episode, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss what led to those rough quarterly reports, and consider the companies' outlooks and options. They also discuss a surprising bright spot, and a retail stock that has outperformed even a tech highflier like Netflix over the past five years: Burlington Stores.
A full transcript follows the video.
This video was recorded on Nov. 28, 2018.
Chris Hill: It's Wednesday, November 28th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from MFAM Funds, Bill Barker. Happy Wednesday!
Bill Barker: Thank you!
Hill: Thanks for being here!
Barker: Thanks for having me!
Hill: We've got some earnings.
Hill: And what I say we've got some earnings... Let's face it, not everyone's earning money, as we'll see from the actual stocks.
Barker: Some earnings are better than others.
Hill: Some are better than others. Let's start with Tiffany. Help me to understand this. Third quarter revenue for Tiffany was light, the same-store sales were lower than expected. I wasn't expecting that Tiffany's stock would have its worst day in nearly four years. This wasn't a good report, but is it, "Wow, this is the worst day in nearly four years" bad?
Barker: No, it's not that bad. The reason for the weakness in the top line specifically was China. Whether it's tourists coming here or selling in China, if the Tiffany brand is not resonating either because of a perspective on the United States currently by Chinese consumers or something else, that is a big chunk of where you want your growth to be coming from in future years. I don't know if you start subtracting that from your growth equations or whether you just say this is a blip caused by current politics or what. But I think that's the question the market is asking by selling the stock off today.
Hill: This was not, as we've seen in some cases, a situation where Tiffany shares had been run up to some enormous degree. I'm wondering when you look at the stock now, do you see it as a value play? Is this a cheap stock right now? That always seems odd to say when you're talking about a company that's known for selling diamonds.
Barker: I don't know that I would call it a cheap stock right now. Then again, there are a lot of companies that I would say, even after a significant decline, are not cheap. At 22X earnings, no, not really. It's doesn't have the sort of growth story that would make me especially interested in it at that price, especially if you've got questions about how things are going to play out with China, maybe not over the long-term so much, but I don't have any good read on what's going to happen there over the next couple of years.
Hill: Also falling today, shares of JM Smucker, the consumer brand giant. Second quarter profits came in lower than expected. They cut guidance. You could look at Tiffany and say, "Well, they didn't do as well as they wanted to." Smucker's quarter was bad all over.
Barker: When you take the top line, which was only up a couple of percent for the quarter, and net sales were up 5%, that's OK. That's a little bit better than inflation. But one of the reasons it was up 5% all was because of an acquisition. They got Ainsworth, which is a pet food company, a gourmet pet food line, and they sold off the Pillsbury baked goods. We've gone over that Pillsbury exists in a couple of different actual companies. It's the baked goods part that Smucker wound up with. They sold that off. A couple of different things there. The top line is a little bit misleading. Really, a bigger problem for them is the margins came down. They're finding that there's a lot of competitive pricing in coffee, which is good for some of us, the drinkers of coffee. Always happy to hear that people are competing on price there. They still have, surprisingly, the No. 1 coffee brand in America, Folgers.
Hill: Still No. 1.
Barker: Still No. 1. They've also got Dunkin' Donuts, the beans that you buy off the shelf, not the coffee that you're buying in Dunks. They also have Cafe Bustelo and a couple of other coffee brands. They're really, at this point, much more of a coffee and pet food company than jams and peanut butters, which is what you associate the name with more.
Hill: Looking at a stock which is where it was five years ago, long-term shareholders of Smucker have not really been rewarded at all. You look at all of the brands they have, I'm wondering if they need to start taking a very serious look at selling off more of their brands. I went to their website, and one of the first things you see on their website is "Hey, we're hiring." Not that I was looking to take a job at Smucker.
Barker: You weren't looking for one, but, hey!
Hill: I thought, "Hey, I'll click on that just to see." They've got over 200 jobs listed. I get that it's a big company. But I look at the fact that they're doing all this hiring, that the stock hasn't moved anywhere, they have all these brands... it really seems like someone, an activist investor, perhaps, needs to come in and give Smucker a fresh set of eyes. It does not seem like a company that should be hiring hundreds of new people. It looks like a company that should be seriously thinking about getting strategically smaller.
Barker: A lot of openings in the podcast division over there?
Hill: None whatsoever.
Barker: None?! Well, that thing is firing on all cylinders. The Smucker podcast, legendary daily discussion of Jif peanut butter. They had to devote a month to the Pillsbury Doughboy leaving and all that.
Hill: Yeah, sure.
Barker: They've got a lot of different things going on. They're actually a very, very large player, I think the No. 7 player, in terms of the center aisle, in terms of packaged foods, store-stable things, the things you put in boxes and cans and stuff and just leave there for however many years it takes to move that product. They do have a direction, and that is coffee and animals, much more so than --
Hill: Jams and jellies.
Barker: -- jams and jellies, and even peanut butter, which was a much bigger part of the equation. Specifically within pets, going more and more high-profile, deluxe sort of stuff. The Nutrish brand, Rachael Ray is one of their big acquisitions. I can tell you, it does cost more and more to feed your pets. They had some interesting details about all of this on a recent investor presentation. There are significantly more people shopping for their pets than for babies, and things like that. There's just a lot of money spent there. That's where they're going.
Hill: Wasn't that the case during the Great Recession? The only part of consumer spending in the United States that did not drop, that actually went up during the Great Recession, was spending on pets?
Barker: Well, you don't want to punish the pets for a housing collapse. It's not their fault!
Hill: No. They're no they're not out there with credit default swaps. Or are they? Because that would be amazing!
Barker: It would be one of the greatest conspiracies all time, if they pulled that off without our realizing it. That is, I think, a better place for them to go. And, of course, devoting a large chunk of their present and future to coffee makes all the sense in the world because as the nutritional and health abilities of coffee get more and more publicized, they're going to be more and more in the right place with that.
Hill: Oh, yeah. They're absolutely on the right side of history when it comes to coffee. Since Smucker is doing all this hiring, I should also mention that we here at The Motley Fool are doing a lot of hiring, as well. You can check that out at careers.fool.com. We're hiring for here in our office in Northern Virginia, also for our office in Colorado. Just like I spent a few minutes this morning checking out the hiring possibilities at the Smucker corporation, check out careers.fool.com.
Our email address is email@example.com. Just want to say a quick shout out to Carlos, who works at Sheraton's finance group in Sweden. Another listener from Sweden. Thank you for listening, Carlos!
Shall we move on to the bloodletting?
Barker: Sure. Why the shout out to Carlos?
Hill: He sent an email, so I'll give him a shout out.
Barker: We're not going to go over the email? It doesn't have a question?
Hill: No, there was no question. It was just a brief, "Hey, listen to the podcast. Love it. Thanks for what you do." Thanks for the note!
Barker: "Thanks for pronouncing a few things right once in a while." That's where you got into trouble with one of your Swedish listeners. I mean, they were very polite about it.
Hill: Very polite.
Barker: "Just, for next time, here's how you would pronounce that word completely differently."
Hill: [laughs] "Here's how you pronounce it if you want to pronounce it correctly."
Barker: "I'm not saying you have to."
Hill: I shouldn't be glib when I say bloodletting, but I was stunned to see what is happening to Chico's stock today. The third quarter results for Chico's resulted in the stock dropping close to 40% today. They've got at least one executive leaving. Chico's has been public for 25 years. Probably not surprising to anyone that the stock being down 38% this morning represents the biggest single-day decline in that time. How bad is this? Because this is now a $550 million company with a 40% drop in one day? [laughs] Is this a business that now needs to, as they say, consider strategic alternatives?
Barker: First of all, for those that don't know Chico's, the full name of it is Chico's FAS. I would have, before today, said, "For some reason, the name is Chico's FAS." But I went to all the trouble of looking up why that is. Originally, it was Chico's Folk Art Specialties, which is the very first store that they had. After they expanded and franchised, they reduced it to FAS. They're now much more just doing fashion, which was only a small part of the original store.
As you mentioned, they've been around for a while. They had a phenomenal growth trajectory in the 90s and 00s, really right up through about 2008, when the growth basically stopped. Now, we're looking at a contraction. I talked last week about the golden equation for retailers, which is you've got good same-store sales or comps, and that allows you to build more stores, so your total sales are growing faster than either your comps are growing or your store square footage is growing. They're both growing. They combine to give you a top line that's growing, hopefully, in the double-digits. Because you're getting bigger, your margins get better, because you have to spread your costs over more. Then, maybe you've got enough money left over after doing all that to buy back some shares, so your earnings per share grow even faster than any of those other things. And it's all great. That was the Chico's equation when things were going well.
They've got three brands: Chico's, White House Black Market, and Soma. All of them are seeing same-store sales declines, and have seen for every quarter of the last five, except in the most recent quarter, Soma, which is the smallest element, grew 2%. Chico's, which is the biggest, same-store sales were down 10%. You can't do that for very long. So, that's why the Chico's CEO -- that's the Chico's brand CEO, not that Chico's FAS total holding company CEO -- was shown the door, I would say. They believe they've gotten the fashion wrong and they need to do things differently with their fashions.
Hill: On the flip side, Burlington Stores, which once upon a time was Burlington Coat Factory, is up on their third quarter report. As you mentioned to me this morning, that stock's done really well over the last few years. I went back and looked --
Barker: Because you didn't believe me.
Hill: I didn't believe you. Over the last five years, shares of Burlington Stores -- which is a basic retailer that sells, among other things, coats -- I was saying to you right before we started taping, I think the closest Burlington Store to where we're sitting right now is up Route 7. It's a few miles from here. I went there a year ago.
Barker: Did you need a coat?
Hill: I didn't need a coat. I'll just say that walking into that traditional bricks and mortar retailer, I would not have left that place thinking to myself, "Boy, this is a well-oiled machine. They are probably crushing it." Quite the opposite. So, the fact that over the last five years, shares of Burlington Stores have done better than shares of Amazon or shares of Netflix is astonishing to me. What are they doing?
Barker: They're doing that equation, with the comps. And they're doing it to a degree that allows you to have a 10X on your stock over five years. For the most recent quarter, they had comps up -- let me get the number right, because it's not that impressive -- 4.4%. Then you get down to the bottom line, and their earnings per share grew 73%. Well, how do you line up those numbers? Because they're adding stores. They're still small enough that they can add stores. They're not saturated. Their total sales were up 13.7%, almost 10% more than the comp numbers. Margins improved everywhere. And they bought back a few shares. Earnings per share up 73% sounds better than it really is because a lot of that has to do with reduced taxes. Still, earnings per share were up 73%. That's a number that is going to drive your stock price higher.
Hill: I'm still baffled. [laughs] I'm still baffled that this very basic, largely clothing retailer -- yes, they sell some home goods and that sort of thing, but Burlington is, I would say first and foremost, a clothing retailer, a pretty basic one at that. The fact that the stock has done this well for five years is still mind-blowing to me.
Barker: Yeah. I wish I had owned it for the last five years, [laughs] because it's quite a surprise. It's really grown the top line at a much slower pace than you would think must be the case for a stock that has done as well as it has. It has $6.6 billion in last 12 months sales. That's up from $4.4 billion in the year that ended in February 2014. They've grown sales less than 50% over that time, but they've grown their earnings a lot more. They were pretty cheap as a stock. They weren't really making much. The first year, I think they made $0.13 a share. Now, they're making $5 a share. $6 a share was the guidance for the rest of the year.
Hill: Do you think they want to take some of their cash and buy Chico's? [laughs]
Barker: No. [laughs] No. I mean, it's hard enough to get one retail store right. You can diworsify by getting another brand, as many companies have learned. Look, Burlington is on the right side. It's off-price fashion, so it's not as fashion-sensitive as a lot of other things. People there are buying more for the price than being on track with the fashion. But still, they'll get it wrong at some point. Things won't look as great as they do today. That happens to every fashion retailer sooner or later.
Hill: That's true. You just reminded me of Gap. You look at a company like Gap, which has Gap, Old Navy, and Banana Republic, and it seems like clockwork, every quarter, at least one of those three is not doing well. And lately, it's been the namesake Gap stores that have been underperforming, and it's Old Navy doing the heavy lifting, making up for Gap's lagging.
Barker: Yeah. It's very tough, year after year after year, to be right on the fashions. Chico's very much pointed out that their fashion choices -- I thought this was at least some small bit of something to hold on to from their report -- they spotted up the mistake that they made with the fashion. Didn't just blame it on market circumstances or anything. They said, "We overemphasized boho styles." I don't know, it's not my style, particularly, but I would say any emphasis is overemphasis there.
Hill: Buy one half off? Is that what that is?
Barker: [laughs] Bold colors and original, artisanal prints. They were wrong on that.
Hill: I'm in favor of any business using the word artisanal in any situation. I know it's generally reserved for bread or certain types of food, but I would love to see more businesses, particularly ones that have nothing to do with food or restaurants, start to use the word artisanal.
Barker: I came across a place recently, unfortunately closed, but they were doing artisanal donuts. That turned out to be a useful application, maybe not of the term, but of the concept.
Hill: Yeah, those generally worked out. I'm just saying I would like to see maybe some construction companies talk about their artisanal concrete, just to make people do a double-take. We should get out of here. We have to do a little prep for Apropos of Nothing.
Barker: What are we going to talk about?
Hill: Well, those who choose to listen later this week will find out.
Barker: Those that came in today hoping to hear you talk about Rudolph and your live-tweeting last night of the show, and your coverage in the mainstream media today. Are you going to promise a little Apropos of Nothing about that? Or do you want to touch on Rudolph before we go?
Hill: We could touch on that. Thank you to Jay Labonte, who tweeted at me right before we started taping today's episode that someone at the Huffington Post did an article about Rudolph the Red Nosed Reindeer last night. The article was entitled Viewers Noticed Some Very Disturbing Details in Rudolph the Red Nosed Reindeer. A bunch of people were tweeting about the show and some common themes. Some that I touched on, and others did, as well, mainly Santa being kind of a jerk, and Comet, the coach of the reindeer games, being an awful coach, and all that sort of thing. And one of the tweets that was featured was one of mine. That was very nice. So, thank you to Jay!
Barker: Unfortunately, it was the one that had a typo in it.
Hill: [laughs] It actually had a couple of typos in it.
Barker: You were really nailing the rest of the show. But that one was focused on.
Hill: So be it.
Barker: And yet, you know how to spell.
Hill: I know how to spell most of those words. But yeah, it didn't show up in that one tweet. Since I've already spent a few minutes today looking at jobs at the Smucker Corporation, I'm going to spend a few minutes on Twitter just to see if anyone else was pushing the idea that I've had for a couple of years now, which is I really want the Yukon Cornelius origin story. I want it to be live action. It could be a movie. Look, Solo. Disney made a Han Solo origin story into a movie. And that was fine. They made some money off that. I feel like a two-hour gritty --
Barker: It's a little gritty.
Hill: It's got to be gritty. He's packing a gun.
Barker: What's the right mix of comedy and violence that you're suggesting for your first iteration of this?
Hill: Only that both need to be there.
Barker: Is it sort of an Indiana Jones level? Or is it a little bit more hard-edged than Indiana Jones?
Hill: I think that's the opening bid. "We want it to be like Indiana Jones." And then, if someone wants to push the envelope, make it a little grittier, particularly if it's for Netflix. If it's going into movie theaters, I'm looking for a PG-13 here.
Barker: But you pitched it to CBS, didn't you? Through your communications with them on Twitter?
Hill: Yeah, but they didn't they didn't bite.
Barker: Not yet!
Hill: [laughs] I don't know that they're interested in this.
Barker: If it's on CBS, you have to tone down the violence a little bit.
Hill: So it's more of a PG-13.
Barker: But if you can get R-level violence, that's what you think corn Yukon Cornelius really deserves?
Hill: I mean, it's rough out there! He's basically by himself. He's got his sled dogs. He's got his corn meal, ham hocks, and gunpowder that he has to buy. He's packing a gun. He's got a knife. It's a tough world out there. So, yeah, of course it's going to be violent, because his world is violent!
Barker: [laughs] Is he looking for the peppermint mine in this? I mean, this is a reimagining.
Hill: I want a reimagining. I'm taking the character, I'm taking certain elements of it. No, we're not doing the peppermint mine thing.
Barker: Is the snow monster in there?
Hill: Of course!
Barker: But he's a little bit more terrifying than he is in Rudolph.
Hill: This was one of the things that I tweeted last night, and this is absolutely true. Even though it's Claymation, if you're a kid, the first time you see this, The Abominable Snow Monster is terrifying. It's a little bit like Jaws, in that you don't see the monster. You see him walking by, you see his feet, you hear his roar, that kind of thing. They keep him off-screen for a while. The first time you see that thing, as a kid, it's terrifying.
Barker: In your version, are there more of him? There have to be. That's biology. They don't just magically appear from space. There's got to be a mom and a dad. Maybe that's a little bit of the backstory there, some of the bad blood that we see in Rudolph.
Hill: It could be, although now you've given at least some of our listeners an idea that The Abominable Snow Monster comes from space. Which wouldn't be a bad idea, either. A pod lands, and --
Barker: That's ridiculous! Let's keep this a little bit more realistic.
Hill: That's true. Gritty realism. And it's violent, just like the world that Yukon Cornelius inhabits.
Barker: I think we've made people suffer enough.
Hill: I think we have.
Barker: Until Apropos of Nothing, when your suffering will be quintupled!
Hill: Yeah, it'll be much worse then. You can read more from Bill Barker and his colleagues, you can read more at their artisanal website, mfamfunds.com. 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 MarketFoolery. 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 DIS. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset 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, NFLX, TWTR, and DIS. The Motley Fool recommends DNKN. The Motley Fool has a disclosure policy.