In this episode of Motley Fool Money, host Chris Hill and Motley Fool analysts Andy Cross, Ron Gross, and Jason Moser chat about the week in the market. Casey's General Stores (CASY +0.34%) had a fantastic quarter, and its stock shows it. Dave & Buster's (PLAY 7.89%), not so much. Also in the news: lululemon athletica (LULU 3.65%), RH (RH 0.89%), Chewy (CHWY 3.07%), Blue Apron (APRN +0.00%), SunTrust (STI +0.00%) and BB&T (BBT 0.97%), and more. And, as always, the guys share some stocks on their radar this week. Plus, stay tuned for an interview between Motley Fool co-founder David Gardner and 2U (TWOU +0.00%) CEO Chip Paucek about the future of digital education, why 2U's stock fell off a cliff this year, and what comes next for the company.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on June 14, 2019.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, Andy Cross, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street. We've got a conversation between David Gardner and CEO Chip Paucek. And as always, we'll give you an inside look at the stocks on our radar.
But we're going to start with some retail earnings. Shares of lululemon athletica basically flat this week despite a good first-quarter report, and they raised guidance, too. Andy, what gives here?
Andy Cross: Well, the stock's at a near all-time high at about $175. It's up 143%, Chris, over the last three years. Compare that against Nike, which is up 55%. I won't even mention about Under Armour. We'll leave that go. This is a really impressive company, what they've been doing, especially in the omnichannel. But just overall for the first-quarter results, the sales were up 20%. That was ahead of analyst expectations. Earnings per share up 35%. Again, ahead of analyst expectations. Comp store sales were up 14%. That was a little bit down from last year. But about even if you look at constant currencies. The digital sales, Chris, continue to really be the driver for Lululemon. Those comps were up 41%. The direct-to-consumer was up 33%. A little bit slower than all of last year, which was up 49%. But that's really the driver. It's a higher-margin business. Lululemon continues to really do very well when they think about their store presence, as well as their digital presence. They're linking those two together in more and more ways. That's really impressive. And they're rolling out more and more of the buy online, pick up in store. They get that store traffic in there, that's really profitable for them.
Ron Gross: They're talking more and more about men's apparel, yes?
Cross: Yeah, they are, definitely. It's one of their three pillars of growth, Ron.
Gross: It will surprise no one at this table that I went to try on some Lululemon apparel and it did not fit my body type. I hope they have more success with the more fit gentlemen.
Jason Moser: Maybe you should do some more yoga.
Cross: There are more than 10 million men now who do yoga. It's a growing space for them. I happen to own a few pairs of Lululemon pants I like very much. I own a beanie as well, too.
Gross: What do you mean, beanie?
Cross: Like a little skullcap that you wear when it's cold or when you go to the yoga studio, Ron, you work out. It is a growing presence. That along with international, when they laid out their growth plans. Looking at international, looking at men's. It's a market that is growing overall as we get more and more health conscious, and Lululemon is benefiting from that.
Hill: I'm glad you mentioned international. Calvin McDonald's been CEO for less than a year. He's talked about how they're looking to grow men's and digital. Those seem to be pretty modest goals, achievable goals, over the next few years. He's talking about growing international sales by a factor of four.
Cross: It's only about a tenth of their sales, Chris, overall, so it's a small part of it. Men's, they're looking at more than a double. Same with digital. Those are larger businesses for them. The international market, China was a really bright spot for them as their e-commerce sales in China more than doubled last quarter. Considering the health trends around the world, Lululemon is playing in a really nice spot right now.
Hill: Casey's General Stores wrapped up the fiscal year in style. Fourth-quarter profits and revenue came in higher than expected. Shares of Casey's General up nearly 15%, hitting an all-time high, Ron.
Gross: An all-time high for a store I've never even seen. Beat expectations. EPS up 33% in the quarter thanks to opening up new stores. 5.7% increase in same-store sales. That's a pretty big number. Expanding gross margins. All combined to, as I said, an increase in EPS of 33%. Fuel sales were weak, but they made up for it in strength in grocery and prepared foods. They just launched an e-commerce site. Welcome to the 21st century, Casey's General Stores! Nice to see! They've got a fuel fleet card program that's working really well, and they're launching a mobile app. The company is executing.
Cross: Ron, you've got to get outside of the East Coast, man, now that your son's going to be going to school in the Midwest. Maybe you can go to a Casey's there.
Gross: That's true.
Moser: They're well-known for their pizza, right?
Cross: Yes, very much so.
Moser: We need to get a little boots-on-the-ground research, Ron, to Andy's point. Let us know!
Gross: This company has increased their dividend for 19 consecutive years. It's a very impressive company.
Moser: On the way to becoming a Dividend Aristocrat.
Hill: All kidding aside about Ron's travel, are they talking at all about it expanding outside of the Midwest? I mean, you look at where their stores are located, and the coasts are completely excluded.
Gross: They're not talking a lot about it. They've got 2,150 stores. Let's say there were 70 new stores over the last year. They continue to put up stores, but in the same relative geographic area. We'll see you in a couple of years what they say.
Hill: Another week, another hot IPO. Chewy, the online business of PetSmart, went public at $22 a share Friday morning, and promptly shot up more than 75%, Jason.
Moser: Just another day in the market.
Cross: That's it? Only 75%?
Moser: It's pretty impressive! It gives it around a $15 billion market cap here at the end of the day, which is impressive given the company is only bringing in about $3.5 billion in revenue and it's still unprofitable. But it is growing. You know I love the pet market. It's a huge opportunity, has a lot of tailwinds. More and more people, particularly younger generations, are finding they're taking to having pets. In the S-1, they list the total market opportunity there at $70 billion. The breakdown of 42% in food and 22% in supplies and over-the-counter meds really is in Chewy's wheelhouse. That's the immediate opportunity.
This makes me think a little bit of Wayfair back in the day when it went public. It's a neat business. You see the merits of it. But then you immediately ask yourself the question, what keeps Amazon at bay here? Amazon definitely sells the same kind of stuff. I mean, they're chalking up more than $1 billion annually in pet food and supplies sales, and that number is growing as well. It really does all come down to customer centricity, I think, with both Amazon and Chewy. They both claim to be very customer-centric. They hire to keep customers happy by giving them great customer service. That's terrific! I don't know how well that's going to protect them as they continue to get bigger. But the numbers don't lie. I mean, from fiscal year 2012 to now, revenue grew from $26 million to $3.5 billion. Net sales per active customer grew from $223 to $334. They're doing something right, obviously. I think firing in on a big market opportunity and where people are doing most of their commerce. It is worth noting that PetSmart will be the majority owner of this business with the IPO.
Hill: When you draw comparisons to Wayfair, it's probably worth remembering, for anyone who's looking at Chewy and thinking about the opportunities here, it's worth probably reminding folks that Wayfair has spent a lot of money on marketing, and it's probably reasonable to expect that Chewy is going to be spending a lot of money as well.
Moser: I think that's a very fair statement. Customer acquisition costs are huge in the early days. It's imperative that once they get those customers, they keep them. It does seem like they've built a pretty loyal customer base, but time will tell.
Hill: RH, known to the rest of us as Restoration Hardware, having a good week. Shares of RH up more than 20% after a strong first-quarter report. They also raised guidance, Ron. They kind of needed this one because it's been a little rocky lately for RH.
Gross: Another store I've never been in. I should get out a little more. [laughs] Yeah, they're off 30% from their late-February high due to some soft revenue last quarter. But this quarter looked good. Let's not forget they went public again in November of 2012 at a price of $24 a share. The stock stands now at $109. Nice run since going public after having been taken private in 2008.
They've reinvented themselves, showrooms into galleries. They changed and updated their product offerings, added a loyalty program. All those things are showing up in the numbers this quarter. Revenue up 7%. Operating margin's really strong. Adjusted net income up 48%. That's a huge number. They have taken steps to mitigate the impact of tariffs. They've put some price increases in place. They've renegotiated product costs, and they've shifted some supply chains out of China. Good to see that they're being proactive there. A substantial increase, as you mentioned, in guidance for the fiscal year.
The company's only trading at 12 times earnings at this current price. But the industry only trades at 13, so not necessarily cheap.
Hill: You mentioned how they have been selective in increasing prices. It really does seem, though, like if they are smart about that, they can continue to do that, because look, they sell expensive stuff.
Gross: Yeah. They've turned themselves into a really a luxury brand, a luxury company. To their credit, not always an easy thing to do. So they probably do still have room. Really interesting comment from the chairman, the CEO, actually; he says his company remains undervalued. Actually said those words. They're buying back stock to prove it.
Hill: Can I just say, I would watch the heck out of a reality series called Ron Goes Shopping?
Gross: [laughs] You'd see me at my computer.
Hill: No, no, someone takes Ron across America going to publicly traded stores that he's never been to before. I would watch that.
Moser: Incorporate a little yoga at the end of each episode. Downward value dog.
Cross: A little meditation, Ron!
Gross: I can't touch my toes! You want me to go do yoga?
Hill: Dave & Buster's first-quarter report featured the company's first profit miss in five years. Shares of Dave & Buster's fell 20% this week, Andy. Was it that bad?
Cross: Well, the comp trend, really, when you look at the last few quarters. This quarter, they reported they were down 0.3%. That was vs. a 2.9% growth in the previous quarter. The trend really had been improving, and then it reversed. I think, when you look at what investors were looking forward to with Dave & Buster's, they continue to do well in the amusement, so in the gaming, which is about 60% of the business. But it's really the food and beverage, Chris, that just continues to drag them down. And the costs there continue to increase, so their profit margins are dropping. Overall, I think investors are just not really impressed with what they were seeing in Dave & Buster's, and clearly reflected in the stock price.
Hill: Well, one of the things they mentioned in this report was how the new locations are doing pretty well. The comp locations that have been open for more than a year are falling off a little bit. I don't care what retail business you're in, you never want to see that.
Cross: Yeah, from just the category of walking in, the walk-ins, they call it, on the comp side, that was down 0.6%. Special events was up 3.3%. But the walk-in is the biggest part of their traffic. So you add this all in, and they lowered their guidance for the year, both on revenue, comp growth, and net income. They might actually show a net income drop this year, so investors punished the stock.
Gross: For the record, I have been to a Dave & Buster's. Several times.
Hill: [laughs] Shares of Blue Apron fell more than 10% on Friday, but the stock price is going to soar on Monday, guys! That's because Blue Apron announced a 1-for-15 reverse stock split that takes effect at the market close on Friday. Jason, of all the red flags for investors, this one seems like it might be the reddest.
Moser: Yeah, Chris, you know I like to keep an open mind when it comes to investing. Rarely do I try to look at things in absolutes. There's always some gray area.
Gross: For sure! There's two sides to every trade, for sure.
Moser: In this case, I think I'm going to have to make an exception. It is hard to imagine this isn't a one-way ticket to bagel town, as I like to call it. This is all really based on New York Stock Exchange guidelines. I'll read you the guideline here real quick so the listeners will understand. It says that "a company will be considered to be below compliance standards if the average closing price of a security as reported on the consolidated tape is less than $1 over a consecutive 30-trading-day period." That tells you, really, all you need to know. Blue Apron's stock is in the tank, and it's hard to imagine it really is going to come back, reverse stock split notwithstanding. I mean, this is just basically financial engineering.
I've made fun of Pandora for a long time as having some of the worst financials I'd ever seen. Blue Apron really is right up there. I think the problem is that they're caught in this situation where the meal-prep business is somewhat of a fad, and it is a market where there is no real distinct or sustainable competitive advantage. We're watching that story play out here.
Hill: In February, SunTrust and BB&T announced a $66 billion merger, the largest bank deal in a decade. This week, the merged entity announced their new name: Truist! Not Truest as in the most true. No, this is Truist, like someone took trust and then misspelled it by inserting the letter I. Unanimously, the reaction was negative. Jason, for the life of me, I don't know how they came up with this and why they didn't check with us.
Moser: My first impression was that this was a typo. I thought, "That can't be right. It must be Trust." The only thing I can fathom is, maybe this is a play on the word altruism, and they just think they're serving God, man, and country, and everyone else in between being just the best bank in the world. I don't know. It's hard to imagine why they wouldn't go with just SunTrust or BB&T.
Gross: I want to see a video of the PR agency, everyone's sitting around the table, one of the account guys suggests Truist, and the whole place lights up. "Yes! That's our name! This is amazing! Promotion for that guy!"
Hill: "Terry nailed it!"
Moser: It seems like that would come straight from an episode of Family Guy or something.
Gross: The same firm that came up with Mondelez or Capri for Michael Kors, or Tapestry for Coach.
Hill: We don't have video, but I did get an email from one employee, who requested anonymity, and said that when the video announcement was live-streamed for employees, there was no applause in the room because they thought the name was a joke. They thought, "Oh, this is the joke name, and then the real name is going to come." If you're with SunTrust or BB&T management, that's not a good sign! Your own employees --
Gross: Terry might have gotten demoted!
Moser: We're having fun with this, and it's all fun and games here now, but if they decide to go through with this, I think the chances are very good that probably, in a couple of years, they decide they maybe need to rebrand to another name. There are a lot of costs involved with that beyond just the cash that you're throwing out there for marketing and sales and whatnot. I mean, you've got a brand reputation. There's brand equity at stake here. I just have to believe they're rethinking this.
Hill: Even the people at Tronc reversed course when it came to Tronc.
Moser: History is on our side, Chris.
Hill: All right, let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron, you're up first. What are you looking at this week?
Gross: I'm gonna go back to Hill-Rom Holdings, HRC. They're a medical equipment company. They're focused on monitoring patient support, surgical solutions. New opportunities in connected care should lead to revenue growth, margin expansion, lot of untapped potential internationally, particularly in Asia. A 2015 acquisition of Welch Allyn really increased their exposure to medical diagnostics; 15th consecutive quarter of double-digit earnings growth announced in April. They've raised their dividends for nine consecutive years.
Hill: Steve, question about Hill-Rom Holdings?
Steve Broido: You bet! How does the virtual-doctor trend play into this business?
Gross: It actually is a risk to this business, which is why they spent $2 billion in 2015 to acquire a company to do outpatient services to reach the person at their home rather than just relying on the hospital bed.
Hill: Jason Moser, what are you looking at?
Moser: Sure, taking a look at Axon Enterprise, AAXN. They are responsible for those Taser weapons and on-body cameras and the software to run all those systems that law enforcement uses around the country. The company initially got on my radar in my building research for the AR service that we just launched. Back in early 2018, Axon hired on a team of imaging engineers to incorporate AR, VR, and AI into the fold. Whether it's in the form of training, or perhaps even creating holistic scenes of incidents as they are happening in real time, there are a lot of possibilities here as they bring more technology into the mix there. And I think honestly, we want police to be able to do their jobs, but we also want more transparency in what's going on. That really is what Axon is playing into. Solid fundamentals. Seems like they're growing. Could be good opportunity here.
Hill: Steve, question about Axon?
Broido: I'm a shareholder. How do they deal with all this footage? I mean, they must have just thousands of hours of footage to go through. Where do they keep it all?
Moser: It's all on the cloud, Steve.
Hill: Andy Cross, what are you looking at?
Cross: I'm looking at Adobe,Chris, the software company that provides Photoshop and Acrobat, Illustrator, Lightroom, creative cloud solutions. Reports earnings next Tuesday; $134 billion market cap. Stock's done really well over time. Since we recommended it in Stock Advisor, it's up more than 700%. They announced a really interesting partnership with Microsoft that merges together the cloud solutions. I'm looking to see what they say more about this partnership with Microsoft to go after Salesforce.
Hill: Steve?
Broido: Are you buying or selling PDFs?
Cross: [laughs] Just the electronic versions, I'm keeping them, I'm buying them, Steve.
Hill: What do you want to add your watch list, Steve?
Broido: Well, I own Axon and Adobe, so I'll go with Hill-Rom Holdings.
Gross: Nice.
Hill: All right, guys, thanks for being here!
[...]
Hill: Last week was Fool Fest 2019, our two-day investing conference, complete with breakout sessions on a wide range of investing topics. One of the featured guests on our main stage was Chip Paucek, the co-founder and CEO of 2U, an educational tech company based here in the Washington, D.C., area. He sat down with Motley Fool co-founder David Gardner to talk about corporate culture, disrupting education, student debt, and much more. David kicked things off by asking Chip about the business of 2U.
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David Gardner: Let's start first, Chip, with 2U, your company. I know a lot of us own some shares out there. It's a Rule Breaker pick. It hasn't had a great last year, we're going to talk about that a little bit later.
Chip Paucek: Or a good month, this month. I'm thrilled to be in a room of long-focused investors. [audience laughs] Over the last 30 days, I've been in a room of the other type quite consistently. We'll talk about that.
Gardner: Let's talk first about the business, though. For anybody who doesn't know what 2U does, brief overview from the CEO, please.
Paucek: I started the company 11 years ago. We partner with top universities to build what we believe is the world's best digital education. We recently took the word "digital" off that because we've gradually expanded the number of blended opportunities. But the whole idea here is, why should you pick up your life, quit your job, and move to attend a great education experience like grad school? We have many different program examples that are on our degree side. Over the last two years as a public company, we built a really large market-leading segment called alternative credentials, where you're getting a certificate from a school like Oxford to learn artificial intelligence, or you're taking a boot camp from a school like Georgia Tech to learn how to become a full stack web developer. That's all brand-new, but this community of people has been around us for a long time. We were just noting, I think I met you for the first time in like '98. That was a long time ago. But with 2U, the business that we've built, our legacy business, has been our graduate degrees. That business is still growing really nicely.
The company overall, the reality is, the world today is still mostly not digital in higher ed. The estimate is that about 2% of the world's higher education is digital. When you start thinking about what that means long-term, and you think about how big higher education is and how few large companies there are, what makes me very proud is we're the market leader in a variety of ways, and I don't mean our stock price. I mean, what the business actually delivers, I think you can argue, is a social mobility engine. As the world goes more and more digital, we're in a prime position to drive a Mack truck through that opportunity. That's what we're trying to do.
Gardner: Chip, what is the economic model? How does 2U make money?
Paucek: We share tuition revenue with our university partners over long contracts -- 2U takes somewhere in the ballpark of 60%-plus of the tuition. The reason for that, we provide a comprehensive operating system called 2UOS, which is a combination of people, technology, and data, to build, deliver, and support these programs. It ranges from everything from finding the students for the university partner to supporting them to putting them in clinical placement experiences. As an example, one of our programs is a Master of Science in Midwifery, where you wouldn't want to go to the midwife to deliver a virtual baby, so we actually find a placement for you to deliver 30 babies, and that's part of your curriculum. Things that might not be exciting, but are really important to the university partner like accessibility, cyber security, privacy. With the world of GDPR and the complexities about privacy law, we provide a privacy practice to our schools. So it's a comprehensive approach. The university does all academic functions, does all admissions decisions. It's really their program, not ours. So you can think about it almost as a joint venture expressed through a revenue share, where I'm kind of the subservient partner.
Gardner: The way I've always seen your business, and what I really appreciate about it, is that it feels as if, for esteemed graduate degrees and universities, you're basically showing up, and you're saying: "Hey, we will give you more students than you have right now. You just have the ones on campus. We can bring them from anywhere. Let's partner up and let's share revenue over long periods of time."
Paucek: That's right.
Gardner: Simple as that.
Paucek: That's right!
Gardner: I saw it firsthand last weekend. I was at the University of North Carolina Business School, Kenan-Flagler, which was I think your first business school partnership?
Paucek: Yes.
Gardner: One thing I noticed about that, and I really enjoyed speaking -- I'm going to say there were 1,400 graduates so far over maybe almost 10 years now?
Paucek: Over 10 years, about 1,400 graduates.
Gardner: Right. About 250 of them had taken the time to come back to Chapel Hill.
Paucek: Which is pretty incredible! If you look at the percentage of students that have graduated from the school overall, in some recent period it was like 40,000, and they had a reunion and 400 came. In our program, 1,400 and 250 came. It shows. Online education done this way is super intimate. It's not what you think. You're not a random one or zero. You're not a random master's student. You're becoming a Tar Heel. You're not just a miscellaneous name without a face. They're very intimate. You saw it. It's super fun. The reason I know, and part of the reason that I was there, I was there the day before, David, is I graduated from that same program. We're both Tar Heels. I took the MBA program while I was running 2U. I didn't do it to eat my own dog food. I didn't do it for the Hair Club for Men effect.
I did it because I wanted it. I was a liberal arts major at GW. And I had read balance sheets for many years, but I'd never made one. I'd talked about regressions, but I'd never built one. I really wanted it. My wife and my board supported me, fortunately. They both thought I was a little crazy, but I went for it. I did an IPO while in the MBA program. We're not sure if anybody's ever done that before. It was complicated. You have live classes. I took live classes from Dublin, Dubai, Hong Kong, Cape Town.
Gardner: Let's talk about tuition rates. This is obviously something that you and your company deal with. It's a national issue. It's becoming a social issue, the idea that it's so incredibly expensive to go to college today. If tuition rates keep going up, whatever it is, 4%, 5%, 6%, 7% a year, the math just ends up not working out. How do you partner with universities? Do graduate school tuitions rise as much as undergraduate tuitions? I'm not quite sure the financial dynamics. How do you play within that realm?
Paucek: I would say first of all, we care about it deeply. We're spending much more time on it than would be obvious. You can think about it from a program design standpoint. How do you design the program up front to be more affordable to somebody? As an example, that undergrad program that I'm talking about is disruptively priced, that's part of the reason we think it'll be big news. It's an incredible brand, disruptively priced. So, some of its program design. But on an existing program, there's no question that figuring out how to hold back the tuition increases is a big part of our challenge over the next five years.
Gardner: Do you have any control over that?
Paucek: We don't, I would say. That's one of the one of the tricky things. We have influence but no control. One of the things that gets a little silly about the bear case that's out on the Street at times about 2U is that somehow, we're the puppet master with the marionette strings, and the school is in the middle, and they're doing everything I tell them to do. The schools are in charge of the program, and that affects things in our business. Tuition is one of them. Now, I will tell you that we've got a pretty receptive group of partners today in thinking about how to pull back costs. Maybe more than they were, let's say, even three, four years ago. We're working on a variety of things to do that. 2U participates very actively in scholarship plans across our portfolio. That's built into our business. We're going to talk about that more to help us on the bear-case side, because people don't realize that we actually do spend quite a bit on scholarships inside the system.
Creating more affordable options for people to enter is one thing. You also have to remember that online vs. campus, what makes it tricky, one of the aspects that's tricky about being public, for me as CEO, is that anything I say in a public earnings call or setting like this, I have to be comfortable with all of my clients hearing. That's tricky. Very often, the reason we curtail something that we might think it'd be easy to say is not because it's material nonpublic information and we can't say it anyway; it's because it could upset the client. So, conversations about how things happen at the client side, that's a very tricky place to be. I have to be careful about how much I say publicly.
An example of that is online vs. campus. We don't compare ourselves in our online programs to our campus programs, because in some ways, we are the campus program. We're just the online expression of it. An example of where that matters is debt burden. If you've picked up your life, quit your job, and moved, and you're physically at the campus, if you're taking out loans, you typically have to do it for both the room and board and for the opportunity cost of your lost income. Whereas in the online program, almost everybody stays employed. That's a big part of the value prop.
Gardner: Down at North Carolina, another thing I heard last weekend was the dean say, "Our model is broken, we know it. How we get paid just doesn't make sense anymore." This is a guy who's more from business, not from academia, and he's running a business school. It was really compelling, what he was saying. He was saying, "We're not able to change this next year. It's just too sudden." But he said: "It makes no sense in this regard: We're asking people who don't have money at that stage of their life for a lot of money. And then, later on, when they have money, we don't ask or get anything from them, unless they want to be generous and donate." So, he was saying, Dean Shackelford, it makes sense to move to a subscription model, where maybe you subscribe over a longer period of time, you have a longer association. That was very disruptive, that kind of thinking, and probably, it's overdue for all of higher education. I'm just curious what you think when he says something like that, and how you think about that for 2U?
Paucek: I get very excited. The Career Curriculum Continuum, if you look on our investor disclosures, you'll see that we think it starts with bite-sized opportunities for somebody to learn a skill, and goes to these highly certified longer-form degrees, and there's a lot in between. Longer-term, I would love to be able to provide ascription by discipline over the life of a student. We think it's very powerful. Now, we're at the early stages still of building all of the different product sets. Until you have enough, you really can't do that. But I think it's super powerful.
Another thing that relates to maybe what Doug was talking about is, you'll see more and more news over time about something that's called an income share agreement. Now, I hate that income share agreements have barely even launched, and they're already controversial. Anything in higher-ed finance tends to be controversial. But the idea behind an income share agreement is, instead of having a larger amount of tuition up front, you defer the tuition, and then over time, you pay a percent of your income. There are some start-ups and some traditional schools that are doing it. We take an approach to it as, deferred tuition can be a lever in improving the marketability of the program. And it does mean that you're willing to say, as a school, "Hey, the proof is in the pudding here. We're going to stand behind it." We think both of those, the notion of subscription and the notion of deferring tuition for a percent of salary, could be really powerful ways to improve affordability over time.
Gardner: It's really interesting. You have your two legs of the Colossus here astride time. Your first leg, you planted on how things have always worked, tuition share with traditional schools. And then the other part of your leg is on the future that you're hoping to create maybe. And in between is where we are, and there's a lot of shaking going on right now.
Chip, the stock was rocking along for us in Rule Breakers. It was up nearly 200%. And then last year happened --
Paucek: Yeah, last year, I could have walked in here like Vince McMahon.
Gardner: [laughs] But then last year happened. It's been cut in half over the last 12 months. We've seen, you guys are a wonderful local company. Great Glassdoor reviews. People love your culture. We're going to talk about that a little bit. You're doing good work in this world. Your growth in the business is very clear. Why is the stock price, in your mind, less than half where it was just 12 months ago? And yet, we're still up slightly for Rule Breaker members.
Paucek: We officially did in this quarter lower guidance for the first time. It's the first time that we had a financial number, not some implied number or whisper number, all that works. But we actually brought down guidance. We brought down guidance 2%. We brought down guidance, just on a pure financial basis, less than most people's ranges. Our ranges are pretty tight.
Gardner: And a two-and-a-quarter-billion-dollar market cap, for market cap fans. Just, if you didn't already know that. Chip's company, just short of $2.5 billion.
Paucek: You meet many folks doing this. Some of the investors you meet give you legitimately interesting insights. I won't name the person, but really good investor, very smart investor, and occasionally sees something. And he said to me on the road just two weeks ago, "We don't ever see it really, you're a value growth stock. Now, that is not necessarily good news." But, he said, "What's happened is, because of that guide down, people are now questioning whether there's something fundamentally wrong inside the business. And once they become convinced, like us, that there's not something fundamentally wrong, you just become really attractive." What we have to do over the next several quarters is just put points on the board. Nothing we say right now is going to matter. We're in that moment in time that you go through. And unfortunately, most companies do go through this as a public company. We just have to ride it out.
Now, I will tell you, this community of people, our team is long. The board is long. Why? This is a massive opportunity.
Gardner: So, you've won local awards, and probably nationally as well, since Glassdoor is a big online phenomenon, for the quality of your culture at 2U, in the workplace. Give a one-minute culture course to aspiring entrepreneurs about how to do culture right at a company.
Paucek: I would say culture at a company, I feel like -- my kids are now 17 and 15. But when they were younger, 2 years old, you go to the bowling alley, you push the button and the bumpers come up. And it's a rager, everybody has a great time because there's no gutter balls. I would argue, the culture at the company, or at any company, is kind of like the bumpers. You won't always get a strike, but it prevents the gutter balls. I feel like that is huge in a business like 2U. You have to own it, and you have to focus on it. It has to be intentional. You can't just let it be. I spend a lot of time on our culture. We have nine guiding principles. When you establish them, and you frame them out over time, there are moments where you can feel a little cheesy. One of them is, "Don't let the skeptic win." No, it's true. No is easy. Yes is hard. Figure out how to get to yes. Be bold and fearless. What does that mean in the context of a company? It doesn't mean go skydiving. It means, figure out how to do something better, instead of doing it the way that I did it four years ago, every day.
And so today at 2U, I'm pretty obsessed with not just ensuring the culture, but really demoting the authority within the company as far down as we can to make high-quality decisions. If we don't do that, I worry that over time, the risk tolerance that built 2U will decline. Pretty focused on that right now, just making sure people have clarity of role and clarity of decision making.
Gardner: I think you were impressed by the size of our gathering today.
Paucek: It's awesome, by the way!
Gardner: I am, too! It gets bigger every year. I love it! I'm impressed by the size of the number of employees that you're taking to Las Vegas later this month.
Paucek: We have an annual company meeting. We have two big tentpole events, I would love to argue that they're both about shareholder value. The company meeting's definitively about shareholder value. The other one, Halloween, one of our guiding principles is have fun. Halloween is just fun. And it's great! The company meeting, we bring the employees together, and it really is a day-and-a-half truly focused on the mission of the company. From a hiring standpoint, there's no question that the mission over indexes, we've done a ton of regressions over the years to figure out what matters to our employee base. It's so clear that it's mission, and then everything else, and it's a long list. So we do bring the employees together to talk about both what's new and thinking about the future, and to galvanize everybody to eliminate the back row in higher education. It moves every year. This year, it happens to be in Vegas. Last year, it was in New Orleans. The year before, it was in Long Beach. It does move. Next week like a very large wedding for me.
Gardner: I see a red number getting near flashing, Chip. Let's end the way we like to end this time of year. This time of year is the graduation time of year. [audience laughs] I think we all can appreciate the moving commencement speeches that kids get exposed to. Chip, with 45 seconds or so, wind up the clock, would you be willing to share what you might have said or would say to graduates of all schools right now, this time of year?
["Pomp and Circumstance" plays]
Paucek: I met an individual when I was out boating one time who was a former funeral director. True story. He struck me as a really nice fellow. I was talking to him, and he said to me, "Every day is a holiday and every meal's a feast." And I said, "What?" And he said, "Every day is a holiday, every meal is a feast." And I looked at him and I thought, "Wow, that's amazing!" And he said, "You know, I had a massive heart attack. And I woke up after 20 years of running my funeral parlor like a grade-A you-know-what. I woke up in the hospital and all I could do was count the ceiling tiles." And he looks at me and says, "Don't wait until you're counting the ceiling tiles to process that statement." And from that point on, I tried to make it my personal metaphor, my personal tag line. Every day is a holiday, every meal's a feast. If you can actually process it every day -- it's hard, because you wake up and you might spill coffee on yourself, you might be upset about something or having a stressful day -- but if you can actually process every day is a holiday, every meal's a feast, you're better, work is better, and life is better.
[audience applauds]
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Hill: That's going to do it for this week's edition of Motley Fool Money! Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!
