On today's episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Jason Moser about some business headlines. Nordstrom's (JWN +0.00%) quarter was good, but was it "14% pop in one day" good? At least they're managing their inventory better than Dick's Sporting Goods (DKS +0.12%). Jason presents a case that the Dick's story probably won't get much better from here -- that, in fact, sports retailers as a whole might be going the way of the dodo. Apple's (AAPL +0.33%) Card, meanwhile, is generating some scorn for being incompatible with certain fabrics, such as leather, but the move fits the company's big-picture goals. Plus, the hosts answer some listener mail about how to invest for new kiddos in the family.
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 Aug. 22, 2019.
Chris Hill: It's Thursday, Aug. 22. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Jason Moser. Thanks for being here!
Jason Moser: Hey, hey!
Hill: We've got a couple of retailers, we have a couple of thoughts on Apple's latest news.
Moser: Couple of thoughts.
Hill: Couple of thoughts. And, we're going to dip into the Fool mailbag. Let's start with Nordstrom. Second quarter profits from Nordstrom came in solidly higher than expected. The stock is up about 14% this morning. Last week on Motley Fool Money, you and Ron Gross and I were talking about the retail industry in general. And the last thing I asked you guys was, "What's a retailer you're keeping your eyes on for the next six months as we right now are in the thick of back to school shopping, and then at the end of the year, you've got Thanksgiving, Christmas all the holidays?" And Ron said Nordstrom. When you look, among other things, at how Nordstrom is managing their inventory, they're doing it the right way.
Moser: I think so. I'm glad that you said results came in solidly better than expectations as opposed to just solid, because I would not say these were solid results. This was an expectations game. I think that's the market's reaction today. It wasn't as bad as it probably could have been. But when you look across the board, sales are down, net income is down, earnings per share, all down. Modestly. But, that's not terribly surprising in today's retail environment.
But to your point, I do think they are managing inventory in a very good way that is helping keep things going in the right direction. Inventory is down 6.5%, and that's good. For listeners who want to know the difference there, if you have a company where inventory levels are rising at really rapid rates, that can be inventory that then sits on the balance sheet for a long time if they don't sell it. And a lot of times, when it comes to selling retail, you've got to offer low prices, and that hits margins and profitability. So, you like to see those inventory levels kept in check, particularly when you compare them to sales growth. In this case, sales fell a little bit, so it's nice to see inventory tracking down a little bit as well.
So, the reaction, probably the appropriate one, but it's not a business that I would say, as Ron might, is firing on all cylinders.
Hill: [laughs] Here's another part of their business that's definitely not firing on all cylinders: digital sales were only up 7%. I'm not saying that's a red flag, but holy cow, they've got to figure out a way to get that least twice as high.
Moser: It's difficult to say how far they can take their digital strategy. I guess every retailer is a little bit different in that regard. Digital sales up 4%, as you mentioned, representing 30% of the business overall. I feel like they're probably around saturation there. I don't know that digital sales are going to represent much more going forward. This is a physical retailer still at the end of the day, and I think it's going to rely on that physical presence to a degree. Gross square footage was actually down modestly from a year ago as well. I think you've got a business here that's trying to find its place in the world and how big it can actually be. I don't know that it really should or can get much bigger. It's worth noting, they don't have the best balance sheet in the world. Net debt around $4 billion. When you have a business that is shrinking -- and by all metrics, this is a business that's shrinking to a degree -- they're going to need to make sure they keep fiscal fitness as a main priority.
They tightened their earnings guidance a little bit for the year. The stock's trading around 9X full-year estimates. That's probably a fair price today for this retailer. It's a good brand, good name. I don't know that I find this to be a stock that I'd want to own. We were talking about Macy's last week. I can see where Macy's might be a value play from the sell-off. I think the opposite here. This is probably one where you might want to sell and take the gains and find other opportunities.
Hill: One more thing that complicates things, not just for investors like us, but also for, probably, institutional investors -- and I'm not saying the company should necessarily manage their business just for the sole purpose of impressing institutional investors, but for a couple of years now with Nordstrom, we've had this on-again/ off-again -- this is a family run business. So, the idea of, "We think we're going to sell the business. Hmm, we're not sure. We've decided not to." That's gone on for a couple of years. And I think that uncertainty goes in the negative column.
Moser: I agree. It's a "will they or won't they." You can't figure if they're all-in on a given strategy or not. They're playing a "wait and see" game, it feels like. And we're in the face of a consumer that, by all accounts, is in very good shape. I think most entities out there, banks and retailers, are telling us the consumer is feeling pretty good about things. Nordstrom, again, they have a fairly big presence. They're going to generate their fair share of traffic. They're bringing in $15 billion in sales per year, so it's not like they're not doing anything. But, yeah, some certainty as to what the long-term goal is there would help.
I do want to give them credit. They have been able to grow their loyalty membership. We know that's a powerful lever in retail. I like the name. The Nordy Club. Did you know that was the name?
Hill: I did not know that.
Moser: Yeah, it's The Nordy Club, so it sounds like maybe it belongs in Annapolis or something. But, 12 million active customers now, and that was an increase of 12% over last year. And they represent 64% of sales. We know that those loyalty memberships can generate some powerful sales over longer periods of time. It sounds like they've got that going in the right direction.
Hill: Dick's Sporting Goods' second quarter profits and revenue both came in higher than expected. They raised guidance for the year. The stock isn't going crazy. This is not a stock that's been on fire lately. The shares are up about 5%. When you look at this, do you think to yourself, oh, they're starting to turn the corner? Or do you think, this is nice, but they need to do even better?
Moser: It's all a mirage, Chris.
Hill: [laughs] Wow, a mirage?!
Moser: [laughs] OK, maybe not a mirage. Let me explain. The good news is, I don't think you should sleep on how good of a quarter this really was for this company. It was a good quarter for them, given the competition and how this space is changing over to where consumers in sporting goods and equipment and apparel are much more focused on building a relationship with direct brands themselves, whether it's Nike or Under Armour, Adidas. For Dick's to grow sales 3.8% for the quarter, and comps 3.2% for the quarter, pretty darn good given the challenges they're facing. And that comp number was driven by an increase in the average ticket and transactions.
The problem is, though, if you look at the profitability of the business, they talk about earnings per share, the earnings-per-share growth here is completely manufactured. When we look at actual net income, which is the total number, not worried about the actual per-share number there, net income for the quarter up $112.5 million. Last year, that number was $119.4 million. The reason why the earnings per share number is going up this quarter is because they're buying back shares and reducing that share count. So, that's the mirage. And I think that's what you need to be concerned with if you're considering investing in this business. It is another one where I feel like maybe they are running into a bit of a wall as far as e-commerce and how much that can account for the business. E-commerce sales were up 21%, but still only represent 12% of overall sales, and it feels like that number's hit a wall. It's not really in growth mode. They opened two new stores, they closed two stores. They've got $3.5 billion in debt. They're repurchasing shares with that kind of a debt load. Inventory... man, you want to talk about, for what Nordstrom did really well, Dick's inventory is up 19%, and that's intentional. We saw how that strategy worked out for Under Armour. So, I think there are a lot of reasons to be concerned about this one. I don't know that I buy into the market's enthusiasm today.
Hill: We're a couple of years removed from Sports Authority going out of business. Is this just an industry that... I don't want to say shouldn't exist, but is this just an industry that no one can do well in?
Moser: Pretty close. I wonder if it really should exist at this point. Even Dick's Sporting Goods is going toward a private label strategy. They did make the point on the private label strategy in the call that it's doing OK. They don't have a lot of very compelling brands under that private label umbrella. I don't know how far they can run with that. There are some concerns there in the near term regarding China and the tariffs that are coming to play. Hard goods vs. soft goods, they're a little bit diversified their in their supply chain, so it's not really killing them. But, again, when you go back to their private brands, and you think, "I don't know how much sway they really have," particularly in the face of companies like Nike, Under Armour, and Adidas, I do wonder why these companies even exist at this point. It's not to say that Dick's is headed to zero, but I certainly would not be buying shares today. The guidance today puts the stock at 10X full-year estimates, and I think that's probably even a little bit optimistic.
Hill: It's interesting -- anytime we talk about Bed Bath & Beyond, as you know, I say something along the lines of, "There's a business here," because Bed Bath & Beyond is selling stuff that people actually need. When I looked at Target's most recent quarter, a light bulb went off for me, and I just thought, "Oh, wait. Target is the one that is disrupting Bed Bath & Beyond," or maybe not disrupting them, but basically, Target is selling the same stuff, and they're doing it in a better and smarter way. I say all that because I don't see Target -- or Walmart, for that matter -- doing the same thing to sporting goods that I see them doing to home goods. That's why I asked, is this a business that maybe shouldn't even exist? For the moment, I don't see anyone doing it in a very compelling way.
Moser: I agree with you. I don't think there is anyone out there doing it in a very compelling way. One of the things we love about the sports equipment and apparel market is that it is fairly insulated due to the nature of the products and the brands that pursue those markets. There is a brand credibility that matters when it comes to sporting apparel. Nike, Under Armour, Puma, Adidas, all of these companies, they've done a great job over the years of developing those brands as reliable and trustworthy. You'll see, whether it's Walmart or Target or Dick's Sporting Goods or wherever, they're going to have sporting equipment and apparel and stuff like that there. It's not a key part of the strategy, it's just something that they offer. So, you might buy it if you're there. But, more and more, sports enthusiasts know what they want, and they're going to go directly to the source in more cases because that source continues to get closer and closer to the consumer.
Hill: Or, are they going to go to the specialty retailers? Yesterday, Seth Jayson and I talked a little bit about -- well, I was listening, Seth was talking -- a running store that he goes to.
Moser: [laughs] I heard that.
Hill: Locally, there's a chain here in D.C. called Pacers. One here in Old Town that I go to.
Moser: I played golf with Chris Farley, by the way, the guy that owns Pacers.
Hill: Oh, really?
Moser: Yeah, back in the day. Several years ago. I played golf with Chris and J.P. Flaim of The Sports Junkies, and I think Erik Wade might have joined us that day, too. But yeah, I played golf with Chris Farley. What an amazingly nice guy! He's a good soul.
Hill: Is he also a good golfer?
Moser: I mean, it's not really where he shines. He's by far and away a better runner than he is a golfer. It was a very enjoyable 18 holes of golf with him because he was such a good, good guy.
Hill: Well, that's good to hear! Not surprising to hear that he's that nice of a guy. But it was going to be really disappointing if, in addition to being an elite runner, he's also an above-average golfer.
Moser: [laughs] Double threat.
Hill: But, back to Dick's Sporting Goods, I'm wondering if that is the future of bricks and mortar retail, is the specialty store. If you're just doing general stuff, you can get general stuff in a lot of places. But if you're a runner, you're going to go to a local running store. If you're a golfer, there's a pro shop you're going to go to. Not too far from Fool HQ, there's a lacrosse shop. It's all things lacrosse. So, I'm wondering if that's what the future of sporting retail looks like.
Moser: I can understand why it would go in that direction. I think that's very much akin to these big brands creating more direct relationships with the consumer. It's essentially creating that long-term relationship of trust in the consumer, knowing what they want. If you play a specific sport, then I think it even makes more sense to go -- and, listen, we live in a time now where not only do people want to support their local businesses, but technology has enabled those local businesses to succeed thanks to all of these tools out there, whether it's coming from something like a Square or a PayPal, or getting real estate, however it may be. It's an environment where it's easier for smaller businesses to succeed today, which makes it even more enjoyable to support them as local citizens.
Hill: Apple's new credit card is available. This is the one announced earlier this year that's backed by Goldman Sachs. I have not seen an actual card. I've seen pictures.
Moser: I've seen enough. [laughs]
Hill: It is a gorgeous titanium card that comes with a couple of warnings, including this one, and I'm quoting straight from Apple's website: "Some fabrics, like leather and denim, might cause permanent discoloration."
Moser: Sounds like a problem.
Hill: Thank God wallets aren't made of leather.
Moser: [laughs] Exactly!
Hill: A decent amount of blowback and ridicule coming Apple's way. And yet, I don't know, I look at this, I've thought about it over the last 16 hours or so -- because last night, you and I were going back and forth on Twitter a little bit, I've been reading some more stuff today. I don't know. I think I've already changed my mind. Initially, I thought, "This is ridiculous." And maybe in some ways it is. But it seems in some ways on brand for Apple. And by that, I mean Apple is a premium brand, it wants to remain a premium brand, if part of the cost of doing business is getting ridiculed for stuff like this, they're going to say, "Well, that's fine. It's important to us aesthetically that we have the nicest-looking physical credit card."
Moser: You said it exactly right. It's something that is very easy to make fun of. That's one of the best parts of this job, is having fun.
Hill: Which we always appreciate.
Moser: Yeah. I love the idea that Apple's pursuing the payments business. They've obviously done it for a little while here with Apple Pay, and they're going to continue that relationship on through Apple Card. I like that strategy. It makes sense. I agree with them pursuing it. This is one of those things that we get to make fun of. It is, more or less, on brand for them. It is one of those things that makes you feel like, alright, this is about as much as I can take. It's almost like they're trying to present this reinvention of the credit card, which to me seems very silly.
Now, I had a lot of questions regarding the card, and actually, people saying, "Why bother with the card? Just use your phone, pay with your phone." And I appreciate that. Apple Pay makes it very easy to pay with your phone. You have to remember, there are a lot of people out there in the world that really prefer to use contactless payments, taking your credit card and just swiping it right by the device, plunking it on top of the device there, and it reads it, and you go about your merry way. I personally would prefer probably a contactless over an Apple Pay, but I use both. It's not a matter of saving time, one vs. the other. It's a matter of, what do you find easier at the given time? So, I think it's going to be key that they continue putting a card out. I don't think they should be eliminating the card. I like the fact that they want to put out a piece of art as a card. I really don't think there's any problem with it. It's just easy to make fun of it, and every once in a while, you need to do that, right?
There is a spot on the website, there is a page on the website titled "How to Safely Store and Carry Your Titanium Apple Card; How to Clean Your Apple Card." It gives you a lot of instructions there. It's for real. It does feel like it could be straight out of The Onion, but it's straight out of Apple instead.
Hill: Let's give them credit, because certainly, when something like the iPhone came along, the iPad, and people said, "I'm paying a lot for this device, so I want to spend a little bit more money to protect it, get an iPhone case, an iPad case," someone right now is hard at work on the Apple Card case.
Moser: Or, the Apple Card cleaning kit. The spray and the little shammy that comes with. Anything can happen, right? But I do agree with you. This is right on brand for them. I don't fault them for it. You have to take the good with the bad. We can make fun of it. But hey, I have to believe this is probably the prettiest credit card out there. Now, that matters to you? Cool. If it doesn't? Well, there are plenty of choices.
Hill: Our email address is [email protected]. Question from John Voss, who writes, "I'll be an uncle for the first time in a month or so." Mazel tov! "I'm interested in purchasing some sort of investment for my new niece or nephew. I would appreciate any recommendations on the most cost effective way to do. Since the new family member won't need money or access to it for a long time, I was thinking about a bond fund that would yield a yearly dividend that will grow over the next couple of decades or so. Any help would be appreciated, especially if you could recommend the specific type of account I should open for them."
Congratulations, John! Great question! Great that you're going to do this for your niece or nephew. Someday, they will thank you. I think it's safe to say that anytime we're thinking about investing, and we're thinking in terms of decades -- and the younger you are, the more decades you have for investments to grow -- we're moving away from bonds.
Moser: Yeah. That would be my initial reaction there. We talk a lot about, you're one of two stages in life as an investor. You're either in grow your wealth mode, or you're in protect your wealth mode. Grow your wealth mode is when you are younger and you have a lot of time in front of you to focus on growing your wealth. That's when stocks make the ideal investments. So I would certainly go stocks over bonds 10 times out of 10 in this case, because you're right, he or she's got a couple of decades to go before they can even consider owning this gift that you're going to give them. So, I would go stocks, I would go with the Vanguard S&P 500 ETF. The ticker there is VOO. You can look it up, check it out, go to Vanguard's site directly. The fees are very, very modest. Are there other vehicles to mimic the S&P? Absolutely. I just try to keep it simple, and Vanguard is a name that we trust and we talk about all the time here. This fund is built essentially to mimic the returns of the S&P 500. And when you're talking about 10, 20, even 30 years, all you have to do is look at the S&P 500 chart over the course of that stretch of time, and you'll see what we mean. Those gains are just there for the taking. So, I would go S&P 500 index fund, VOO is a good one.
Then, I would also make sure -- you can do this as the uncle, or you can do it in conjunction with the parents -- open up a custodial account for the child. The main reason you want to do that, No. 1, it takes a lot of the thinking out of it. It is the child's account, you're just the custodian until the child's of age. But then also, if you actually own this and then think you're just going to give it to the child at some point when they're older, you'll have some gifting ramifications there. The tax bill that comes with gifting what hopefully will be a substantial sum of money in that timeframe could come back to bite you. So, do a custodial account for the child. Very easy to do. I have one for each of my children. It makes you or the parent the custodian and the child the beneficiary once they reach the appropriate age.
Hill: I think John should be the custodian.
Moser: I think he should have that conversation with the parents. Have the conversation with the parents. I'll leave it at that.
Hill: A couple of quick notes. This afternoon, Jason, Ron Gross and I are doing a live Q&A on YouTube, how to get started investing. You can check it out at The Motley Fool's YouTube channel, which is free to subscribe to. Like this podcast, it's free. Just go to youtube.com/themotleyfool. I think this is one of those that's going to hold up over time, because the questions we get from the audience in the second half of the Q&A that we're doing, those will be more time stamped, but the first half of this is going to be good nuts and bolts for anyone who's really just getting started.
Moser: Yeah, I'm excited about it. I always enjoy doing these things. It's one of the reasons why we exist, is to help people and get going in the right direction. I think today is going to focus on that precisely.
Hill: And last but not least, if you're looking for even more stock ideas, if you're not already a member of Stock Advisor, which is our flagship service here at The Motley Fool, you can check out Stock Advisor. You get stock recommendations from Tom and David Gardner. You get their Best Buys Now and a lot more. You can go to stockideas.fool.com. I will put that in the description of this podcast. We've arranged for a generous discount for the dozens of listeners. Check it out! Jason Moser, thanks for being here! I'll see you in the other studio in a little while.
Moser: Can't wait!
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 the Iron Man, Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you next week!
