Retail Earnings: High-End Watch Woes and Dollar-Store Greens

In today's episode of MarketFoolery, host Chris Hill chats with MFAM Funds analyst Bill Barker about some market news. Discount dynamic duo Dollar General (DG -0.41%) and Dollar Tree (DLTR 0.04%) both reported earnings, and both popped on some great trends. Meanwhile, luxury watchmaker Movado (MOV -1.18%) is hitting a 52-week low after a very poor earnings report.

It's hard to picture much of a growth story ever playing out for Movado, and the guys explain why. Plus, Bill talks about his recent trip to Singapore, some impressions from an all-Asia business conference, why the tutoring market is taking off like crazy in China, and more.

A full transcript follows the video.

This video was recorded on May 30, 2019.

Chris Hill: It's Thursday, May 30th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, he's back from Singapore, from MFAM Funds, it's Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: We'll get to your trip and maybe a thing or two that you can share from the conference you attended. We're also going to talk luxury stocks. We've got to start, though, with discount retail. Discount retail is doing better than certainly the retail stocks we talked about yesterday. Dollar Tree and Dollar General both reporting rock-solid first quarters. Shares of both are up. Shares of Dollar General hitting a 52-week high. 

Barker: Yeah, I think that it's just the experience of compounding growth and continued ability to expand the operations, opened some new stores. They're getting decent same-store sales. And they don't have to do anything super tricky to keep that going. There is plenty of competition in the discount-retailer space. Some brands are doing a little better than others. Family Dollar is struggling. But I wouldn't say it's good times so much just continuing good operations for Dollar General.

Hill: The fact that they're opening locations at a time when the number of retail closures that have just been announced so far in 2019 have already surpassed what we saw all of last year tells me that, among other things, they're doing a good job of managing their growth in a smart way. 

Barker: Yes, and they're not tied down to the malls. People are not going to the malls in increasing numbers. Companies have made investments in mall stores on the basis that -- not that those are the only operations that are closing stores, but stand-alone operations or things that are not mall-based are in better shape. People go specifically to Dollar General, to Dollar Tree, rather than going to the mall and then seeing what happens. They have to go there for consumables to a large degree. It's a place they regularly go to. They are going to continue to do that as both operations expand what they are delivering into things like adult beverages and more coolers. They just have more opportunities to deliver the things that people use every day. 

Hill: You and I were talking this morning a little bit about commercial real estate. On the show a couple of weeks ago, we talked about how Planet Fitness is taking advantage of the fact that Toys R Us went out of business and was essentially fueling their expansion partly through these now-vacant Toys R Us locations. It sounds, though, based on what you just said, that Dollar General isn't necessarily taking advantage of mall-based store closures because they're mall-based, and that's not really their business. 

Barker: Right. And there are plenty of Toys R Us stores that were outside of malls, so they may find themselves in some of those, although I'm not sure they need quite the square footage, at least at Toys R Us units that I was familiar with took up. But as things open up, yes, their costs of expansion decrease. There are fewer competitors for that space. And the ones who are competing for it are operating more on the lower-end segments of the market in terms of -- there aren't a lot of luxury brands that are going to be moving into those spaces. 

Hill: Speaking of luxury brands.

Barker: Yes.

Hill: Shares of Movado are falling today and hitting a 52-week low after a bad first quarter. This is the luxury watchmaker. Movado executives said that the retail environment remains challenging and that economic uncertainty is a potential headwind. I will point out, however, that they didn't change their full-year guidance. So while they were putting a lot of caveats out there, they didn't change their guidance. Maybe they have confidence that those caveats will just remain caveats and not turn into actual problems for them. 

Barker: The whole luxury watch space confuses me. Why anybody would spend money on a luxury watch is the thing that I'm most confused by, although I understand that it happens. 

Hill: Yeah, you and I are of like mind about this. Not only do we not wear watches, we certainly don't wear luxury watches. I don't even know what I would do with a luxury watch. 

Barker: I was given a luxury watch once by my wife. I had already declared that I would never wear jewelry or wedding ring or anything like that. So as a wedding present, she got me a watch. It was a very nice watch.

Hill: And where is that watch? It's clearly not on your wrist.

Barker: It's in a drawer somewhere, I believe. I believe that if I had to find it, I would be able to go back to my parents' house and find it. 

Hill: Let's go back to Movado for a second. Is there a price at which you would buy this stock? It's not unreasonable to imagine that people don't need this particular thing. Look, it's a luxury watch. People don't need it, period. It's a, "Well, I want to have that." Some people use it as their version of jewelry or that sort of thing. I don't know, though. You just strip it down to its core, the function of a watch is to tell you what the time is. It's really easy to know what time it is. If you have a smartphone, [laughs], if you have a laptop computer, if you're pretty much anywhere, it's pretty easy to figure out what the time is. 

Barker: Yeah, the internal clock works pretty well, too. Have you got a pretty well developed internal clock?

Hill: No.

Barker: I've always had one. I've never worn a watch, but I could pretty much always know what the time was within about five minutes. Now that I have a smartphone, I can no longer do that because I've become dependent on that. But this is not a hard thing to develop or to have internally. And one of the proofs of that is the fact that my dog wakes me up between 5:57 and 6:03 every morning. He does not have a watch.

Hill: It sounds like your dog has a good internal clock. I don't know if you have a good internal clock.

Barker: I mean, not as good as his. But anybody can do this. You can wake up if you need to, pretty much when you need to wake up. If it's important enough, you'll do that. 

Hill: Let's go back to the question. Is there a price at which you would buy shares of Movado?

Barker: Sure.

Hill: This is a $500 million company. I think it's more likely to go to zero than it is to go to $1 billion.

Barker: Well, it was $1 billion not that long ago. The stock price has been cut basically in half over the last year. I don't know about going to zero. I would invest in it kind of like a bond. It's kind of a stable business, you just don't invest in it in terms of growth business. The sales are up a little bit right now because they acquired a couple of brands, but they're not making more money. If you take those acquisitions out, it's really about the same level of sales as five, six years ago, and not all that much more interesting than where sales were 13 years ago. The problem with luxury watch brands is, to maintain exclusivity, you just can't keep selling more and more and more. It doesn't make any sense. The experience of, "Ooh, I've got something that other people don't have, that's why I'm willing to spend all this money and advertise that on my wrist," can only work if it continues to be true that other people don't already have it or aren't going to acquire it after you. They have to stop from growing to a large degree. The only growth, then, comes from buying more brands, which they've done, but that doesn't really translate into significantly more profits. 

So is there a price at which I buy them? Yeah. If they declare, "We're going to run this business, create a certain stable amount of money," I could treat that like a bond and there was a dividend that was exciting, and maybe at about half the price it is today. Then I would be very interested in it. I mean, there's a price at which anything is worth owning, even if it's just going to be run as a business to make cash now and not reinvest in the business. 

Hill: Yeah. Just, of all the luxury items one could buy... I don't own a luxury car, and I don't know that I necessarily ever want to own a luxury car, but I'm getting more out of a luxury vehicle than I would have a luxury watch. 

Barker: If someone gave it to you, you would use it. 

Hill: Right.

Barker: Whereas the luxury watch, if somebody gave you a luxury watch --

Hill: It would be in a box in a drawer.

Barker: Yeah, speaking from experience. So, we were talking about a scene that you brought up from a major movie. Talk about that, and then I'll say something.

Hill: I was actually thinking about two scenes when we decided we were going to talk about Movado. One is, more recently, the movie Doctor Strange, the Marvel movie. There's a scene very early in the movie where Dr. Stephen Strange is getting ready to be given some awards, so he goes to some black tie dinner and they have these shots of him getting ready in his luxury apartment, this gorgeous apartment he's in. And at one point, as he's putting on his tux, he goes over to his drawer and opens it up, and there's something like 30 luxury watches inside. And I remember watching that for the first time and thinking to myself, "Well, that's just crazy!" [laughs] Like, if there were five luxury watches, that would seem excessive. This guy has 30? But I suppose it served the point of, this is who this person is -- he's someone who wants to have 30 luxury watches. 

The other scene I thought of, to go back to one of your comedy heroes, Bob Newhart. On the old Bob Newhart Show. There was an episode where it's his birthday. His wife buys him some luxury watch. And he, like you, doesn't know what to do with it, so he puts it in his briefcase. And at one point he says to her, "I understand why you bought this for me, but my old watch does the same thing that this watch does, but my old watch costs $10 and this one costs $1,000." And that's where I always end up with Movado. It's like, yeah, at the end of the day, it's a really nice timepiece. 

Barker: Yeah. The Bob Newhart clip is 35, 40 years ago, and it is as true today as it was then, which is part of the problem here. Another part of the problem is, when Doctor Strange opens it, he literally is a strange man, to have so many of these luxury watches. Whereas if this were a woman in a movie who went to her jewelry collection and had lots of different necklaces or earrings or anything like that, it wouldn't be that surprising to see 10, 20 choices of luxury high-end jewelry that a woman would own. So it's a better market. There's more opportunity to sell to a larger purchasing audience for that kind of thing. 

Another movie moment that you could have mentioned regarding the luxury watches is the scene in Trading Places, where Dan Aykroyd has to pawn off his watch. Really, you should just load the YouTube clips of all these important cinema scenes onto the Twitter feed or something. I think the Doctor Strange scene is on YouTube, a little clip of that.

Hill: That's such a great scene in Trading Places. He's in a pawn shop, and he's like, "Look at all this! It tells times, all these different time zones!" And Bo Diddley is just like, "Yeah, it's worth $50."

Let's talk about Singapore. You went for a conference. How was the conference? 

Barker: The conference was good. I got to meet with a number of companies and their management and hear the stories. It was an all-Asia conference, so there were companies from a lot of different places. Met with some management from Vietnam. A lot of casino companies had stories to tell, which largely revolves around Macau and Cotai. It was a good experience, as it always is. 

Hill: Were there any common refrains you heard from them? When it's earnings season, a lot of times, we'll hear a word or phrase pop up frequently among different companies in different industries. I'm curious if there was any common refrain from anyone you talked to.

Barker: There was more of a common refrain of their business revolving around the whims of government. In the Macau casino operations, everybody runs a business, but the number of tables that they are allowed to open up -- and that's not necessarily different from the way that Vegas or other people run the regulatory environment on casinos, where you have to get approval for this, and your ability to predict when and how these things will be allocated is just different than most. It's not like Dollar Tree. They know how many stores they want to open or close and they'll be able to do it, and they'll be able to do it in different jurisdictions, and nobody has that much power. If, for some reason, some state made it difficult for them to operate, they've got 49 others. When you've got all of your business in Macau and you're an American-based company, or not -- the China trade situation was a common refrain, affecting not just whether the Chinese government would look favorably upon American-run casino companies in Macau, but in a number of other different industries. It was sort of the topic, was China and U.S. trade.

Hill: Did you walk away more bullish about casino stocks and businesses? 

Barker: No. But what I did walk away more bullish on, I met with a number of Chinese companies that are doing after-school tutoring, college counseling, combinations of both, or vocational schools. The money being spent in China on educating kids is stunning. 

Hill: Large?

Barker: Yeah, yeah. I mean, if you believe the data -- and I need to go back and double-check some of it because everybody's got their story to tell -- and if, in the major cities in China, 95% of the kids are getting large amounts of after-school tutoring already, and that this number is spreading to the cities outside of the top tier, and then there's still growth among all the more isolated parts of China. But the tradition there to spend money on education is flourishing. The desire to get kids into international schools and to spend the money to get their applications looking the way they need to look to get into top U.S. schools... there are plenty of Chinese that are spending $100,000 on that, on a package of four years of tutoring, test prep, the counseling, how to navigate the, as we know, bizarre application process of U.S. colleges. 

Hill: Do you think any of those parents in China have seen the headlines recently in the United States and thought to themselves, "Well, maybe I could just pay $75,000 to a rowing coach and get my kid in that way"? 

Barker: Yes, probably. [laughs] 

Hill: [laughs] Or, "I'll just put $100,000 in a paper bag and give it to the soccer coach and they'll get my kid in?" 

Barker: I'm not sure any more or fewer Chinese are looking at that story and saying, "How do I riff on that? How does that apply to me?" than happens in the U.S. I mean, the story as it comes out in the U.S. is designed to not so much educate people about the entire system as to create outrage that this is going on. I think outrage is an absolutely appropriate response, but probably, the outrage part is less of what is focused on in China and more like, "Alright, if that's part of what's being done, then how do we negotiate the system?"

Hill: Before we wrap up, I want to mention, we have a bonus episode of MarketFoolery coming this weekend. It is not another Apropos of Nothing. 

Barker: I thought that was the only type of bonus episode.

Hill: No. We actually have a couple of other bonus types. Last spring, I did an interview with Jim Miller, best-selling author. Part of that interview played on Motley Fool Money, but I enjoyed the conversation, so I thought, I'm just going to put the whole conversation out in the MarketFoolery feed. That happened again. The guest on Motley Fool Money this week is comedian Greg Fitzsimmons. He was in D.C. doing some shows, and I went to his hotel and sat down with him in a conference room. Part of that conversation is going to be on Motley Fool Money, but the whole conversation is going to be on MarketFoolery this weekend. 

Barker: A much better listen, one imagines, than Apropos of Nothing. 

Hill: Oh, yeah, certainly!

Barker: You're dealing with a professional. 

Hill: He's a professional! It's much shorter than the last Apropos of Nothing. Yeah, he's a pro. Very much enjoyed it! Bill Barker, welcome home! 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 Austin Morgan because our man Dan Boyd is down in New Orleans for his bachelor party. New Orleans, please don't hurt Dan Boyd! Please send him home in one piece!

Barker: I'd say that's a fair fight, New Orleans vs. Dan Boyd.

Hill: You know what? You're right... that is a fair fight! I'm Chris Hill. Thanks for listening! We'll see you on Monday!