Last week, shares of Stamps.com (NASDAQ:STMP) fell almost 60% after the company announced it was cutting ties with Big Stamp itself, the U.S. Postal Service. In this week's Industry Focus: Consumer Goods, host Shannon Jones and Motley Fool contributor Dan Kline explain why this might not be as suicidal a move as it sounds, what the new business model could mean for Stamps.com, and what investors should watch with this company.

Check out the latest Stamps.com earnings call transcript.

And stay tuned for a deep dive on a new gambit by CVS (NYSE:CVS). In a bid to integrate with Aetna and get ahead of Amazon.com (NASDAQ:AMZN), the drugstore giant is rolling out HealthHUB, where customers can find things like yoga classes and diet plans. Learn about how this could help CVS with traffic, a few red flags and unanswered questions investors need to watch, and more.

A full transcript follows the video.

This video was recorded on Feb. 26, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Tuesday, February 26th, and we're talking Consumer Goods. I'm your host, Shannon Jones, and I am joined in the studio by a very special guest, none other than Foolish contributor Dan Kline. 

Dan Kline: Back to "very special!" I appreciate it!

Jones: You're very special and I'm super excited to have you in the studio today! We've got two big stories to talk about that have been in the news, also not known as Elon Musk or Tesla, [laughs] but nonetheless very important.

Kline: He may shop at both of these companies.

Jones: You never know with Elon Musk. Anyhow, let's dive right in. We've got a lot to cover. Let's start with the bigger story, and that would be with Stamps.com. Shares of Stamps.com, ticker STMP, dropped as much as 58% on news late last week, wiping out nearly $2 billion in market cap. Dan, for such a steady-eddy company like Stamps.com, which for our listeners has been the leading provider of postage solutions for regular Joes like you and I and also business customers, what in the world happened when shares can drop 58%? 

Kline: Well, basically, they're no longer going to be able to sell stamps. We've thrown around a lot of jokes about this. This would be like if flowers.com was just in the gym business. Essentially. they're losing their exclusive deal with the U.S. Postal Service. This didn't happen from the Postal Service side. Stamps.com decided it couldn't afford to only be with one dwindling player. While it had other solutions, its deal with the USPS was very restrictive in what it was allowed to do with other players. So, they went to the Postal Service and they said, "How about a non-exclusive deal? Can we do things different ways?" And they weren't able to make a deal. They were in the midst of a business pivot anyway. This isn't a shocking, "Hey, renewing our deal? No! Oh, no!" They knew this was coming. But, it happened a little bit harsher than they expected and maybe with a little more finality than expected, and boy, did shares tumble. 

Jones: Yeah, 58%. Basically, non-exclusive partners, sounds a lot to me like a reality show at this point. They're friends but will not be seeing each other exclusively. Dan, it sounds like this was not necessarily precipitated by any one thing or even by bad quarterly performance. Am I right?

Kline: Their quarterly numbers were good. Because of this change, they cut their guidance in half. The problem with it is, when you cut your guidance that much, it's clearly a guess, not a guidance. They're largely changing their business model. They used to focus on selling postage, which was getting you or I or companies to buy postage, buy their shipping software, and most of that volume moved through the U.S. Postal Service. Now, they're moving to focus on companies that do shipping and offering whatever the best solution is for that market. You might be working with 300 national companies, the five or six major ones, but then companies that just do very limited things in very limited areas or very specific carriers for certain types of products. They're going to try to match you with the best service. They're not alone in this space. Shopify would be a big example of a platform that does some of that. 

Everything going forward for this company is uncertain, but the reality is, they could have kept their deal with the Postal Service, and that would have been ignoring that the Postal Service is a decaying business that probably has to raise prices, that's not financially solid. When you see Amazon pulling away from these people and taking on shipping customers on its own, you can't just let that go just so you can say, "Yeah, my numbers will be this next quarter," if you know that three years from now, your numbers will be terrible if you stick with that business model. 

Jones: Exactly. Speaking of numbers, just to give our listeners a quick rundown, Q4 revenue was actually up 29% for this company. Full-year was up 24%. When you start digging into some of the actual platform metrics, there was really a lot to like about this company. This was a stock that was a Fool favorite for a lot of reasons, one of which was their churn rate. Looking at the last quarter, their churn rate -- which basically is the percentage of subscribers who discontinue their subscriptions -- declined to 2.9%, a good sign. This is an important metric when you're looking at any company with a subscription-based model. For context, since 2010, churn rates have actually been on the decline. In 2010, it was 3.9%. What this has been telling us is that more customers have been sticking with their subscriptions, which has been good for them. 

Additionally, a couple of other metrics that everybody has been liking. If you look back since 2013, compound annual growth rate for new customers has been 10%. Average revenue per user -- this is another important platform metric -- has grown by 19% over that same time frame. This was actually one of those situations that on the surface looked really good. 

Kline: Let me jump in there. When you talk about the average revenue per user, which over a lifetime has gone up 29%, that is the only piece of news long-term. They've been working for the past year to get a different type of customer, to get a corporate customer that's doing shipping. That customer is working at higher volume. They're going to be a higher-revenue-producing company. So, if you want to look at anything from this report -- honestly, the metrics of last year don't make sense anymore because they're largely not going to be in that business, or at least not on an exclusive basis with the best terms. It's not going to be the revenue driver it was. The fact that they've been able to use their shipping platform and get those mid-level companies suggests that this is a well-run business that has a chance of turning this corner as it moves into an entirely different business model. 

Jones: Exactly. That's really, I think, the silver lining, and what Stamps.com investors are hoping for, that there's some sort of way forward. You mentioned, they're now cutting earnings expectations literally in half moving forward. 

Let's talk a little bit more about market dynamics. Just how competitive is this particular space?

Kline: It's ridiculous. I've probably done three different Consumer Goods shows and a couple of Industrials shows on the trucking piece of this. You have all the major retailers -- Amazon, Walmart, Target -- taking on last-mile shipping. Amazon has been taking on customers. If they're shipping in your neighborhood, they become a solution that, in theory, the Stamps.com platform can plug in as an option. For Amazon, they can be cheaper because they're already delivering, they're already running those trucks, so any added business -- to a point -- is value-added for them. That makes it harder for FedEx, UPS. Everyone is having to try to figure out how to be as efficient as possible and how to take costs out of this. Stamps.com is coming in and saying to the company, "We know you're not going to go to six different platforms to figure out the best price. Let us do that for you." In theory, I'd be sitting in my shipping office, put all my stuff in, it would export all the different labels, and maybe three different companies show up to pick up those goods depending on where they're going. So, there's absolutely a place to be here. The question is, that space is crowded, too. We mentioned Shopify. There are other people doing this. The numbers are good so far. About half of their packages last year were not delivered by the U.S. Postal Service. That's encouraging. But, half of them were, and that part is getting more expensive, if not going away. 

Jones: Exactly. You hit the nail on the head when you were talking about Amazon. Amazon has been both friend and foe for them. In 2018, Amazon actually made up 88% of their revenue, which is astounding. For investors, that's one of those pink flags, if not a red flag, because you don't want to see that over-reliance on one particular customer. But Amazon has been rather circumspect when it comes to their entrance into the space. They haven't come out until recently saying, "Yes, we are indeed moving, and one of our strategic focus areas is in the shipping and logistics platform." So, now, Amazon has really been the driver for a lot of this. As a matter of fact, if you go through their 10K, I think they talk about Amazon over 200 times. So, formidable foe, for sure, and I think is driving a lot of what's happening.

Kline: It's a foe and a partner. They're going to be presenting Amazon shipping as a solution. As Amazon grows its force going from 20 planes to 27 to 40, and who knows how many they're going to get to, they're building out their network of vans and trucks and all. In some markets, Amazon's a competitor. In a lot of markets, Amazon is a service they're going to be booking things on to. And that's a real fine-line challenge for how to balance your business for any company. "Hey, I rely on you, but you might also use the data I'm providing you to decide to eliminate me."

Amazon scares me because they have said, "We are going to be able to price below market rates." It's very hard for a company that doesn't have the scale to match that.

Jones: It reminds me a lot of Amazon Web Services and their platform. They were basically able to do the same thing, leverage all of this extra capacity on this platform and this infrastructure that we built, and then basically undercut competitors. You see that happening here with this space, too. 

Kline: The good news for Stamps.com is they're not a shipping company. They facilitate shipping. As long as Amazon needs that and doesn't become so market-heavy that they're always the best solution, companies are still going to need the software interplay that says, "60% of the time, Amazon is best for your local customers. But 40%, it's Joe's Delivery that only operates in Tacoma, Washington," or whatever it happens to be. There is a place to be here, but it's a very narrow piece of the pie that you're going to have to work really hard to solidify.

Jones: That's a great point. To round this out, what should stamps.com investors look for moving forward?

Kline: Don't worry about the next quarter. Don't worry about the quarter after that. What you want to see is the number of these midsize shipper customers increase. You want to see average revenue per user stay at growth rates like where it is. It's fine if they lose the customer that's not going to pay full freight for stamps. It's not fine if they max out in terms of this new type of customer. As long as they can continue, maybe their revenue will halve, but it could build back up. That's what you should be watching for. Don't judge this company by year over year comparisons because it's comparing apples to baseballs.

Jones: Wise words, Dan!

Let's shift gears. Let's talk about the other big story that's been on the radar for a lot of investors. We've actually gotten a ton of questions about this particular company, and that's CVS Health, ticker CVS. CVS is basically moving forward with their plans to transform the healthcare delivery model. Dan, what can you tell us about that? 

Kline: What caught my eye is, we've all followed, CVS got rid of cigarettes a few years ago. That was a move that cost them billions of dollars. You could argue that they made some of that volume up with the shelf space. They were walking away from a ready business because it didn't jive with the name CVS Health. Since then, they've bought Aetna. They've embraced this, "We're going to manage your healthcare relationship." The first step of that was adding MinuteClinics to about 1,100 of its stores. Those are walk-in clinics, similar to what any community has but inside a CVS where you can get a flu shot, you can get some simple diagnoses, you can do maintenance medications, things like that. 

Now, they're testing what's called the CVS HealthHUB. The HealthHUB takes about 20% of their floor space and devotes it to things like yoga classes. When you walk in, there's a health concierge, and he might point you toward a dietary plan, or, they're going to be selling hard medical goods like canes. You're going to walk in and have a catered concierge experience. They're not going to get rid of snacks and wine, but they're going to focus more on health and helping their customer, who may not have access to full-on healthcare in every case, do the best they can get. Figure out if you have diabetes, how to maintain it, weight loss classes, community seminars. They haven't entirely figured out all of the pieces of it, but it's going to be more of a community center approach than a convenience store approach. 

Jones: It's a pretty innovative approach to continue to drive traffic into their stores, and hopefully drive sales beyond some of their lower-margin household items. What's actually driving this change for them? What are they trying to get ahead of? 

Kline: They're trying to get ahead of Amazon, the healthcare market, and Teladoc. They want you to have to come to CVS. They don't want you to go to Teladoc, who then sends your prescription to Amazon or Walgreens or whoever else they partnered with. They want to own the healthcare process. This is about keeping you in those stores where, yes, you fulfill your prescription, but you also might buy a magazine, a Hot Wheels car, an As Seen On TV product. What else do they sell at CVS?

Jones: Everything.

Kline: A beach chair. This is about leveraging what they are in a better way to get you in the store. It's also the first step of getting closer to Aetna and CVS being integrated. 

For me, the challenge on this isn't whether it's a good idea. It's execution. Have you been to a CVS?

Jones: Many times.

Kline: Have you noticed that some CVS stores are better than others when it comes to, I don't know, having anyone working there? [laughs] 

Jones: Customer service? Absolutely, Dan! [laughs] 

Kline: In my neighborhood, there's a number of CVS stores. The nice, new one is really well-staffed. You go to the pharmacy counter and all the technology is there. If you go to the older one, there's one employee in the store and he's nowhere near the register. I don't know how they're not getting robbed blind. Maybe they have good security. But, if you say you're going to have a yoga class at two o'clock on Tuesday, you'd better have a yoga teacher there. If you're going to start having machines that tell you your blood pressure might be high, you have to have the person that explains what the next steps are. So, this takes CVS from becoming, let's call it a traditionally run convenience store, where the quality of employees is going to vary based on location, based on level of interest of management toward that store. You're going to need almost a Starbucks-level of customer support. CVS has not shown an ability to do that. 

I think this is a great idea, but this could also become, "Remember three years ago when CVS offered yoga classes?" and it gets completely forgotten, and there's a couple of machines in there that do some medical testing that nobody remembers how they work. There's a very big red light.

Jones: Yeah, I totally agree. 

Kline: Well, a yellow light. Not a stop, a caution.

Jones: A pink flag. I totally agree. I think for them, with such a high-touch healthcare model, you're really going to have to up customer service. That'll be a question mark for me. I am glad to see they're actually piloting this, though. They're not rolling it out to all stores. They're only doing it with a handful.

Kline: Three.

Jones: I'm glad to see that they're taking a very measured approach. 

Kline: And I will say they've done well with MinuteClinic. That was an outside company that... do they own it? Sorry, listeners, I don't remember if they own it or if they're just licensing it. But that's a good experience if you've ever had to go in for some minor healthcare need. If you do a Teladoc, which I think a lot of our insurance is encouraging these days, they can't send you the prescription. At least in my state, they can't. You still have to have it called into a CVS and go there. But if I go to a MinuteClinic, it's one trip. I don't have to do two things. And I get it. Teladoc, I can do in my living room. I didn't really go anywhere. But it does make the process a lot easier. Things like flu shots and others, they've brought access to communities that didn't have easy access to that type of stuff, and they've executed it pretty well. I found the MinuteClinic to be a better experience than your typical walk-in clinic in most neighborhoods. Where I live in West Palm Beach, Florida, it's particularly important because transporting elderly people to doctors' offices is an actual civic function that we have a bussing service that does. So, being able to take a group from a senior home all at once to a CVS for just routine blood pressure checks and refilling medication, that actually does clear up a problem, in admittedly an older state. 

Jones: For sure. I think there's a lot to watch here. Again, to your point, there are a lot of question marks, too. Another one that is still overhanging the company right now is just being able to finally close this Aetna deal. We found out just this week, the Department of Justice has formally asked a judge to finally put the stamp of approval on the CVS-Aetna merger. There's about a 50/50 shot, at least according to some analysts, as to whether or not they'll get this final approval. It sounds like the district court judge has been very adamant about saying they should have actually gotten consent before moving forward with integrating and closing the deal, which they actually did. That's one question mark.

The other question mark that I think a lot of investors, particularly this last quarter, have been scratching their heads about, is earnings. High level, looking at their earnings, we saw mixed results. Net sales did rise 12% to $54.4 billion, just slightly below where analysts were expecting at $54.5 billion. Not a big difference. We did see same-store sales increase 7%, really driven by the retail pharmacy locations and some modest growth in their PBM business. But I think, Dan, the big overhang for this company was actually in their long-term care business. This is where they're providing services to a lot of the skilled nursing facilities, which we've talked about it on the Healthcare show with a lot of these REITs. These healthcare REITs have really been hammered over the past few years with these long-term care facilities. We're seeing that happen, and it's been taking place throughout 2018 for CVS. That was a pretty big overhang. 

They actually reported a net loss of $421 million in this last quarter. On an adjusted basis, CVS came out to $2.14 per share, above where it was expected. But I think for 2019, this is still very much a transition story. 

Kline: Assuming the merger gets approved, there's a lot of questions. This isn't CVS buys 1,000 Walgreens stores and now calls them CVS. This is two adjacent but completely different businesses. How are you going to integrate the insurance model and CVS? Obviously, wellness should impact insurance rates. There's an area where you could see. But it's something a lot of companies have tried to do and it's not a simple one. This isn't your typical merger, where you can say, "Let's get rid of all this back-end functionality." Accounting for an insurance company and accounting for CVS are different. There's not going to be necessarily some of the synergies you easily get. They're going to have to kind of drag people kicking and screaming as they do some of this because they're going to be transforming what Aetna is at a time when the country hasn't really figured out how healthcare and health insurance works. 

Jones: I totally agree, Dan! A lot of question marks. Right now, the stock is trading at a P/E ratio of about 9X. Dividend yield of about 3%. What do you say to the investor who's just sitting on the sidelines? Is now the time to get in? 

Kline: No. Stay on the sidelines. I'm not nervous about the success of this company, but the merger and whether they five years from now spin it back off and decided didn't work doesn't necessarily depend on them. We have an election coming up in 2020 that may very well change our national attitude on healthcare and how it's provided. You own an insurance company, we have a major change in how insurance is provided, that's going to impact you. There's things out of CVS' control. They're smart to be moving into the wellness space. But, we've talked about this before. If you're going to go on a diet, would you go to the CVS Diet Club or would you just go to Weight Watchers, or WW as they call themselves now? 

Jones: Probably WW.

Kline: Yeah! They're going into a lot of areas where, alright, I might take a casual yoga class at a CVS, but how are they going to work that out? I'm trying to meditate, and the person over at the counter is loudly complaining that their prescription is too expensive? If you've lived in Florida, you've heard that every time you've ever been in a CVS. There's a lot of issues to figure out. 

And, as a consumer, I don't want to suggest anything nefarious, but CVS does better if I'm not well. So, when you put your hand in the new CVS medical diagnostic tool, do you trust 100% that CVS is going to not tell you, "Maybe you need a little blood pressure medicine! Maybe you should talk to your doctor about Zelnorm!" 

Whatever it is, I think they have a lot of barriers. I'm not saying they won't get there, but I would wait if I was an investor.

Jones: Fair, fair warning there! I agree for the most part. I think long-term, this is a very interesting company. They are going through a massive transition in terms of who they are, but I do like that they are trying to get ahead of Amazon. And really, we could probably call this show "how to get ahead of Amazon." [laughs] I do like what I see. But all in all, I think there are a lot of pink flags there that investors will need to keep an eye on. 

Dan, any closing thoughts before we close out today's show?

Kline: No. I think I'm going to go to CVS.

Jones: [laughs] And do yoga?

Kline: [laughs] Yes, do yoga, then buy a bag of pork rinds. They still have some business to figure out to how they embrace health and some of their -- they stock Chef Boyardee products on the shelves. Convenient, I get it. Healthy? No. There's some identity that they have to work out.

Jones: Yeah. You heard it here first, listeners. Lots to work out here on the CVS front. 

That will do it for this week's Industry Focus: Consumer Goods show. 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. This show is produced by Austin Morgan. For Dan Kline, I'm Shannon Jones. Thanks for listening and Fool on!