lululemon athletica (LULU 0.59%) stock hits a new all-time high while shares of PVH (PVH 4.05%) (parent company of Calvin Klein and Tommy Hilfiger) pop 15%. In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker compare the two apparel companies and analyze the relative valuations of their stocks. Plus, they assess the latest results from Five Below (FIVE 1.98%) and dip into the Fool mailbag to discuss long-term shorting.
A full transcript follows the video.
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This video was recorded on March 28, 2019.
Chris Hill: It's Thursday, March 28th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Happy opening day, my friend!
Bill Barker: Finally! Finally! You know, if there's one thing that I regret in getting to work with Steve Broido again, here, which is a rare treat, is that Dan is not here to chime in on opening day. He would be.
Hill: He would. He's in Chicago, at some sort of conference, some sort of event that he goes to every year. Austin Morgan, who produces Industry Focus, is not here because he's at opening day at Nat stadium. We'll get to opening day.
Barker: I'm not saying Steve can handle some opening day talk and contribute.
Steve Broido: I don't even know what sport you're talking about.
Barker: Well, Steve is saying that.
Hill: We'll get to opening day. We'll probably bring Steve in again. [laughs] We're going to dip into the Fool mailbag. We have to start with two companies that are in a similar line of business and are having eerily similar days, right down to what their stocks are doing. Lululemon Athletica and PVH Corp. PVH is the parent company of Calvin Klein and Tommy Hilfiger. Both companies reporting really good fourth quarters, both issuing strong guidance for 2019, and both stocks are up 15% this morning. Let's start with Lululemon Athletica. In the case of this stock, the stock's hitting an all-time high. Was there any downside to what you saw out of Lululemon? This was a great quarter. Their guidance for the full fiscal year was better than Wall Street was expecting.
Barker: Not only was it better than Wall Street was expecting, but it's a company that has been beating its guidance regularly. I think for the past seven quarters, it's beaten its guidance. It'll be put into the category of "It should beat its guidance again." As good as the guidance is, which I think is double-digit comps for the quarter; low double-digits, which is much higher than the mid-single-digits, which was expected. Margins are improving across the board, except they've made some investments in SG&A, but those are paying off, and the gross margin has improved quite a bit. So you've got what you want in a retail stock. This is a reminder that the death of retail has been somewhat exaggerated. You've got stores opening, you've got more merchandise going through all the stores and guiding to that continuing, and margins improving as a result of scale and other efficiencies. And, on top of that, buying back some shares.
Hill: Right, [$]500 million?
Barker: Authorized to buy back another [$]500 million. Yeah.
Hill: It's a nice reminder that in the case of Lululemon, you've got a company that really has not gone the route of discounting as so many apparel retailers have done at various points.
Barker: Oh, my goodness, no! I was looking at the site to try to get a handle on what the men's selection was, because this is one of their growth opportunities, to expand into the men's category, which they are not known for but which they provide. If they get that right, it'll be a lot more sales. And the hoodies were like $150, $180. I didn't know you could charge that much for a hoodie. But, as you know, I'm the worst-dressed man in North America, so I wouldn't know what to do with a $180 hoodie.
Hill: I'll just say that the hoodies that we sell at The Motley Fool podcast swag shop, much less than that. Probably not as high quality, but we're definitely not charging $180 for them.
Barker: I'm lost enough on some of the fashion retail trends to not know what to do with at least one analyst report that I saw, that was indicating that one thing that investors needed to keep in mind is that the move of Easter into deep April from the beginning of April last year, I think was April 1st, means that there will be a shift of sales from March to April. So, I was wondering, were yoga pants a big part of the Easter celebration for the Hill family growing up? [laughs] I just don't know how to connect the dots between Eastern shopping and Lululemon.
Hill: This was specifically about Lululemon? This was not about general --
Barker: It was in a Lululemon report. It was about retail generally for some of the trends. But it was in a report about Lululemon. "Investors should just remember that this shift is going to move a bunch of sales." I don't know, is this the attire that one goes to church in now? Yoga pants?
Hill: Uh, I don't think so!
Barker: Going to church: a little-appreciated part of Easter.
Hill: [laughs] Right. Doesn't necessarily get as much attention as, say, the bunny.
Barker: The bunny. The bunny's gotten all the headlines. I don't think the church that I went to growing up, yoga pants would have been appreciated.
Hill: Lululemon, do they have a line of bonnets that don't get as much attention as the hoodies or the yoga pants?
Barker: The Easter bonnet industry is not thriving, is my belief.
Hill: That's probably true. Let's move on to PVH Corp. Again, parent company of Calvin Klein and Tommy Hilfiger. Another one of those businesses that the brands that they own are much better-known than the parent company. It's basically the same report. They had a really good fourth quarter. Their guidance for the full fiscal year looked good. Clearly, I'm still reeling from the surprise of last week's IPO and the success that Levi Strauss had, with the stock popping 30% on the opening day. Again, not to knock Levi's, it's a perfectly decent pair of jeans, but it's just jeans. Calvin Klein, Tommy Hilfiger, arguably higher-end brands, is pricing power part of what's happening here for PVH?
Barker: To back up for a second and distinguish between the two, both of which at a stock level are having very good days, but from slightly different starting points. Lululemon is growing somewhere around, comps were up 16% for the quarter, which is an eye-popping number. Total revenue is up 26%. You've got a company that is growing quite rapidly, and growing rapidly off of all-time high achievements going into this. That's part of the justification for, really, the question with Lululemon is, what about the multiple? This is 30-40 times earnings, do you want to pay that for a fashion retailer? They can miss on fashion, and Lululemon has at times. So, that's the risk that you're taking with something that's growing as fast as it is right now.
PVH is trading at about 10 times earnings going into today. Up a little bit from that. Still, it's at a multiple which is an attractive entry point. To study any stock, if it's trading at something like 10 times earnings, why is it doing that? Is it in trouble? That's significantly lower than the market. PVH has run into some issues, but is, I think, repositioning the Calvin Klein brand. They gave some guidance in January and an announcement that the Calvin Klein brand was being repositioned in certain ways, and one of the big flagship stores was being shut down, one of the designers they were parting ways with. I think there was a greater degree of trepidation about where things were heading there. This report is pretty good, in terms of clarifying that things are on the right track.
Hill: To what extent is PVH pushing online sales? In the case of Calvin Klein and Tommy Hilfiger, you've got two established brands. I would argue they carry a decent amount of brand equity. These are, I think, well-thought-of brands. So, to the extent that they're able to push those online, presumably that moves to the bottom line of PVH a little quicker than if they're just selling through normal bricks-and-mortar channels.
Barker: Yeah, I think everybody has to be doing some of that, but they're not as far along on that as a Lululemon, which is getting about 30% growth online, somewhere in that category. These are a number of brands that you tend to find at a lot of different places. IZOD, Van Heusen, Calvin Klein, all of these. Not so much individual, stand-up stores, although there are some. But the things that you would find in a department store. They're a little bit less responsible for nailing it online. But that is certainly something that is part of every retail brand now.
Hill: Let's move off of apparel retail and move into discount retail with Five Below. Not quite as good a day for the stock, but it is up about 5% or 6%. Five Below's guidance for 2019 was actually lower than what analysts were looking for. But the fourth quarter looked like it was still pretty strong for them.
Barker: Yeah. This is a rapidly growing company right now. They are at somewhere around I think 750 stores, opened about 120 over the course of the year, net. A few closures. Plans to open 145 to 150 next year. That'll get them close to 900 stores. Growing the store count at 20%, 25% a year is pretty aggressive. They've done that while increasing comps as well. That is what you're looking for. Not many places are able to grow store count as fast as they have. Some of their numbers, you have to parse out last year. I think they had 53 weeks in their fiscal year; this year, 52. That extra week from last year came into the comparable quarter. But once you solve for all that, growing total sales about 32% for the quarter. Awfully good!
Hill: I want to get to the store count in a second. But how did they manage to get 53 weeks into their fiscal year?
Barker: This is something that --
Hill: Does that happen from time to time?
Barker: Yeah, with retailers, and every, like, seventh year, you have to solve that, as you don't have exactly 52 weeks in a year.
Hill: You don't?
Barker: [laughs] 52 weeks plus an extra day, and then leap years, plus two extra days.
Hill: OK, I haven't done the math on this.
Barker: 52 times seven is 364. [laughs] That's why your birthday comes on a later day each year than the year before.
Hill: You know what? We'll agree to disagree on that. In all seriousness, let's talk about the store count. That's surprising to me. Not that Five Below is doing well. I know they're doing well. We've talked about them before. But that's a growth that...I don't remember the last time I heard about any company trying to grow their store count by that amount on a percentage basis, for a couple of years in a row. Maybe I shouldn't say this about a business that's done a really good job growing to this point, is that overly aggressive? Is that wise?
Barker: Is it sustainable? Is it wise? A lot of companies have run into trouble growing store count that fast and from the size base they are. I think it's a legitimate question, how wise that is. Everything's going well, seemingly, at the moment. But opening a new store every two to three days, and growing at about 20% compounded -- I mean, it's declining a bit this year over last year in terms of the percentage growth. But the actual total number of stores is going to be about 25 more this year than last year. So I think it's a legitimate question for investors to keep an eye on, whether that kind of expansion leads to problems. The quarter completed indicates that those problems are not developing yet.
Hill: This is a company based in Philadelphia. You were just up in Philadelphia for a bit. Did you stop by any Five Belows?
Barker: Didn't stop by any Five Belows. I'm not the teen demographic that they are [laughs] pointing toward.
Hill: You were traveling with teenagers, though.
Barker: I was traveling with teenagers, my children. But, no, we did not make it to a Five Below. I'm aware of the location of a couple of them in the Greater Philadelphia area. But no, we didn't have time for that. We hit a couple of other classic Philadelphia establishments. Wawa, of course.
Hill: Of course.
Hill: What's that? Cheesesteak?
Barker: Water ice.
Hill: Water ice?
Hill: Oh, yeah, Rita's. Was there cheesesteak?
Barker: I believe it was National Cheesesteak Day while we were there, but we didn't get our hands on any, unfortunately.
Hill: You say unfortunately like that's an accident. That just sounds like a lack of effort on your part. You're in Philadelphia, for crying out loud! It was National Cheesesteak Day! What are you doing?
Barker: [laughs] We had a busy schedule!
Hill: One more thing before we dip into the Fool mailbag. We're hiring here at The Motley Fool for all kinds of positions. If you're looking for a job, check out careers.fool.com, particularly if you're someone working in the SEO space. Do you know what SEO stands for?
Barker: Yes, I do.
Hill: I'm not going to make you say it. Search engine optimization. Looking for SEO content strategists, technical strategists, and a host of other positions. Careers.fool.com, check it out when you get a chance.
Our email address is [email protected]. Great question from Shawn Brewer at the University of Oklahoma. Go Sooners! "You often talk about being a long-term investor and having positions in companies you believe in for the long run. However, I want your opinion on holding a short position for companies that you believe are mismanaged, poorly run, or have a business model that you don't believe in. Some shorts that I hold are in companies like Snap, Blue Apron, and a few others of the more recent IPO failures in the past three years. Would it be a mistake to hold long-term short positions in companies that are likely to become obsolete in the next five to 10 years, and are showing signs that they already might be on their way out? Examples include BlackBerry, GoPro, Fitbit, or really any of the major department stores."
Thank you, Sean! Great question! Major department stores, I'm assuming on that category is Bed Bath & Beyond, which had shares pop 30% the other day. As Abi Malin pointed out, a lot of that was due to short-sellers saying, "Oh, activists are coming in? I am getting out of this thing right now."
It's a great question! We were talking with Steve Broido right before we started taping about shorting. I have never shorted a stock because I don't think I have the temperament for it. I don't think I could hold on. It's the sort of thing where you could be right about something and you could just be wrong with the timing and get whacked in the process. What do you think about his question of holding for a long time?
Barker: As long as you end up being right, the company's going out of business, the stock is going to go to zero or nearly zero, then by definition, that's a good thing to do, as long as you're right. Bed Bath & Beyond, particularly in the context of how this was phrased, "what about major department stores," I would have said Bed Bath & Beyond, which we have kicked in the teeth a number of times here, would have been top of my list of things that I just don't understand how much longer it can survive with its current business plan. And yet, as a short, it cost you 30% in a day. Now, whether that ends up being the final chapter or not, I don't know.
But I can think of a couple of different stories from shorting from back in the day. The Fool Portfolio, which was an early online product The Motley Fool had featured. Bed Bath & Beyond was a short recommendation way, way back when. I think it was written up in the first book, The Motley Fool Investor Guide, based on mostly the price of the stock. This is going back 20-some years. I think that short was covered publicly, if I've got that right.
Another story which falls more in the category of high-profile shorts that were discussed here -- and you can look up the record of this -- of a business that was shorted based on "this thing looks like it's going out of business," which turned out to be right, was Trump Hotels, DJT, which was shorted in The Fool Portfolio. The analysis was right, although the short wasn't held long enough to get to the bankruptcy and the full payout. It was a profitable short.
Hill: It was, yeah.
Barker: It was correct. The numbers told the story: this thing is incompetently run, it's got way too much debt, can't pay back its debt, it's not a well-run business. I think that falls more into the example that you're looking for here, of, what would be a good long-term short, which is something that, if you're right, if it's inevitably going to zero, but you have to be much more on top of a short because they can go up 30% in a day and you can lose fill-in-the-blank X your money. If you're wrong, you're not out 100% of your money, you're out several hundred percent of your money.
Hill: For anyone who hasn't listened to David Gardner's weekly podcast, Rule Breaker Investing, this is, I think, a good opportunity to point out one of, if not absolutely my favorite episode. One of my favorite episodes of David's podcast. He relays this entire story about meeting Donald Trump, along with a couple of other people from The Motley Fool investing team. Going up there to meet with him when David had publicly shorted the stock. This is a long time ago, when this sort of thing simply was not done, that people came out and said, "Oh, I'm shorting this stock. This is why." So, definitely check out that episode of David's podcast if you haven't.
The other thing I'll say is that I think that when you're looking to short a stock, as you said, you need to be on top of it because it can go south very quickly. The other thing is, you need to be more confident about that position in your portfolio than arguably any of the longs that you hold in your portfolio. You need to be able to answer the question, "If I'm wrong and this stock goes up, why does the stock go up?" In the case of some businesses that are just loaded up with debt -- the modern-day example of that is Sears, when you just look at, plenty of people have made money shorting Sears over the last decade. It's because of, among other things, their mounting debt problem. But in the case of the companies that Sean lists, just to pick two, GoPro and Fitbit, it's entirely possible that those two companies get acquired. It would not surprise me at all if Fitbit was bought in the next three years by someone else. Now, maybe they don't get bought out at some massive premium. But maybe it's enough of a premium -- I don't know what his short price is, but you definitely need to be able to answer that question like, if you're wrong and something propels this stock higher, what is the most likely reason for that?
Barker: Yeah. Somebody could acquire Fitbit really just for the data that they could acquire there. That might have enormous amounts of value to somebody. GoPro, a little bit less so, I think. GoPro, like Fitbit, is a consumer tech device. Those have a history of flaming out, whether it's Blackberry, Palm Pilot -- Apple is really the exception to the rule. More of these very, very hot consumer tech devices end up facing competition more rapidly than the enthusiastic investors thought they would. And certainly, that's been the case for GoPro as well.
Hill: Let's bring in our man behind the glass, Steve Broido. Steve, you've shorted one stock in your life? Do I have that right?
Broido: I think so. I had a nasty experience with United Airlines. And I was like, "I'm going to get them back! I'm going to short the company!"
Hill: [laughs] Wait. As a customer?
Broido: As a customer. I had a bad experience. I held shares at the time --
Barker: You're the only one, I think.
Broido: I think I am the only one. Boy, talk about No. 1 bad reasons to short a company, because you personally had a bad experience. "Boy, I'm going to learn them!" Well, no. Did not happen.
Barker: "I'm going to send out a tweet, tell them I shorted their company!"
Hill: Before we wrap up, it's opening day. One of the things I like about opening day for Major League Baseball is walking around the office here at The Motley Fool. In the case of Austin Morgan and our friend Roger Friedman, looking at their empty desk and saying, "Oh, I know where they are. The reason they're not here in the office is they're at the game." But also, just seeing people flying their team colors. Over in member services, there are a couple of guys wearing the Yankees jerseys. Someone in the investing group wearing a Washington Nationals shirt. Rex Moore has a St. Louis Cardinals hat on. I like to see it!
Barker: Nice as it is, it's also a reminder of the absence of Bob Bobala, who would dress up --
Hill: [laughs] Yes! Longtime editorial powerhouse here at The Fool, Bob Bobala. No one did opening day like Bob.
Barker: No. He came in full Red Sox gear. With cleats?
Hill: With cleats.
Barker: Not just the jersey.
Hill: Not just the pants.
Barker: Cleats and bat. I'm not sure if he had a batter's helmet.
Hill: He had both.
Barker: Did he have both the cap and the batter's helmet?
Hill: Yes, he did. [laughs]
Barker: [laughs] OK.
Barker: Nobody did opening day like Bob Bobala.
Hill: Nobody did opening day like Bob.
Barker: No. It's the beginning of spring. It's on the very short list of great days of every year.
Hill: Yes. I think the old adage that hope springs eternal is true, I was going to say for all teams and their fans, but realistically, let's face it, there are some teams out there where it just...oh, boy, they're just in for a world of pain. And, yes, Baltimore Orioles fans, I'm looking at you. I sympathize with you. It's going to be a rough 2019 for that team.
Barker: I was looking at opening day rosters and the salary schedules that are paid out. The Red Sox are still paying Pablo Sandoval $19 million this year.
Hill: Are you kidding?
Barker: No. [laughs]
Hill: Well, it pales in comparison, at least in terms of contract longevity, to the New York Mets paying Bobby Bonilla from now until the end of time.
Barker: In that category, in the 2019 deferred salary column for the Red Sox, is Manny Ramirez. Getting $2 million.
Hill: You know what? Manny got us 2004, so...
Barker: [laughs] He can have it? Unlike Sandoval, you're not going to begrudge him that money?
Hill: Manny Ramirez earned his money. The Panda Man, not so much.
Barker: The Yanks are still paying Rodriguez $4 million this year.
Hill: Oh, good! I'm glad something finally worked out for Alex Rodriguez.
Barker: The Yanks got $60 million on the injured reserve list right now.
Hill: You and I talked about this earlier, just to bring it back to investing, just as you can evaluate a company, you can look at their books, you can look at the industry they operate in, and you can be right on all of the numbers things, there are always going to be things in investing that go wrong. There will always be the intangibles. When it comes to sports, it doesn't matter if you're a fan of baseball, basketball, soccer, if you're a fan of any sport, you know that in sports, it's injuries. The X factor for so many teams in so many sports in a given season is injuries. You can look great when the season starts, and if key injuries happen to certain people, then your season is lost.
Barker: Yeah. I know all about lost seasons due to injuries [laughs] at the moment. But, no, on a day like today, it's nothing but optimism, I think.
Hill: OK, let's end on that. Let's end on an optimistic note. 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 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 Steve Broido. I'm Chris Hill. Thanks for listening! We'll see you on Monday!
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