Leading pizza chain Domino's (NYSE:DPZ) has been on a decade-long growth tear, but its third-quarter report didn't bring the usual extra cheese: It missed on revenue and profits, and cut guidance. Yet share prices rose. Meanwhile, Helen of Troy (NASDAQ:HELE), the housewares, personal care, and beauty products company behind better-known names like Revlon, OXO, Pur, and Braun, beat on profit and revenue, and raised its guidance. And yet, after a very brief spike, its shares spend most of the day in the red.
In this MarketFoolery podcast, host Chris Hill and senior analyst Ron Gross dig into the details and background to explain both of these companies' share price moves, and consider where they're headed. They also answer a timely listener question: Are dividend reinvestment plans still a smart choice now that stock commissions have fallen to zero?
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 8, 2019.
Chris Hill: It's Tuesday, Oct. 8. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Ron Gross. Thank you for being here, sir!
Ron Gross: It is literally always my pleasure!
Gross: Not literally. But today, it's my pleasure!
Hill: I'm glad! Yeah, let's be honest. We've known each other a long time. There have absolutely been episodes in the past where you're like, "Alright, I'm going to do this, but you owe me," because I was coming to you at the last minute. We're going to talk Drip investing today. We've got a company that isn't really a household name, but I feel like it should be.
Gross: It should be, yeah.
Hill: We're going to start with Domino's Pizza. Third quarter profits in revenue came in lower than expected. They cut their revenue guidance. Why is this stock up 4%? This is a company that has performed so well for so long, this was not a great quarter, and anytime you're cutting revenue guidance, that doesn't go in the plus column.
Gross: It's interesting you say that. The last time I looked at the stock, it was actually down. It must have rebounded for reasons unbeknownst to me. [laughs] This is a personal one for me. I know we're not supposed to get emotional about our stocks, but I've been with this company, both professionally and personally --
Hill: Oh, yeah!
Gross: [laughs] -- for a really long time, like a decade. What a wonderful story. They really did everything you would want a company to do. Everything from being honest about the menu, revamping the choices, to embracing the digital world, great leadership over the years. And the stock reacted. Really great performance.
But now, lately, we're seeing -- through no fault of their own -- competition come in to play. It's the folks like Uber Eats and DoorDash and Postmates and Grubhub, those guys. What do you do when you're doing everything right, and through no fault of your own, something comes in to shock the system, and either disintermediates or disrupts what you've been doing pretty darn well?
So, even though you're not supposed to get emotional about your stocks, I feel bad that this is impacting Domino's business. And it is, and it will continue to do so. Pizza, and perhaps Chinese food, is not the only game in town now when you want to get food delivered. That really will impact the business. I feel like it's almost a new normal. The company will continue to do well. They will continue to innovate. They will continue to make pizza that I don't think is amazing, but that people like. It's just not going to be the robust growth that they had over the last, let's call it three to six years, because competition has come in.
Hill: I think the growth goes back even before that. The person leading all that was Patrick Doyle. Did a phenomenal job over the past decade. As you said, starting with the whole campaign where they came out and basically said, "Yeah, our pizza is not that good. We're going to work to make it better." The digital revolution, embracing all of that. Patrick Doyle is no longer running the company. Rich Allison took over in July. Look, it's early days for him as a CEO, but it's not off to a great start. This is probably a little unfair, but --
Gross: It's still no fun.
Hill: It's the combination of, it's a really tough act to follow, because Doyle did an amazing job leading this company. Maybe that's part of Doyle's brilliance, is deciding to leave at the right time. But the next couple of quarters, if they look like this, where it's, "Yes, we're growing same-store sales quarter over quarter, year over year, but not to the degree that we did in the past. We're doing good, not great," then Rich Allison's first year is probably going to be frowned upon.
Gross: Yeah. Looking into my crystal ball, I think that is what we're going to see. In fact, the company is telling us that with their guidance. They replaced their three to five-year forecast with a shorter-term outlook, saying, "It's harder for us to actually look out that far, so we're only going to look out the next two to three years." But they've reigned in their growth. They're looking at 2% to 5% same-store sales in the next two to three years, rather than 3% to 6% over the longer term. They're signaling to us that the writing is on the wall. Competition is real. That will impact numbers.
Is 2.4% U.S. same-store sales, which they just did this quarter, is that a bad number? No, that's not a bad number. It's just not as good as it was, and it looks like the days of the 4% to 6% same-store sales numbers could be behind them, unless they pull a rabbit out of a hat and come up with something that's pretty exciting. What those things usually are promotional. For example, they offered half off online orders for a week in August. They launched a 20% offer for late night orders in September. You can do that. But what that ends up doing is impacting your margins, because you're making less per pizza, per unit of food. That impacts your margins, that impacts your profitability. You might get a boost in revenue, but it'll be less profitable revenue per dollar.
Hill: It's interesting that a lot of the talk -- I think you're right in this regard -- is about the expanded competition in the world of, anything can be delivered. DoorDash, Uber Eats, etc. That being said, Rich Allison also has the misfortune of taking the top job at Domino's at a time when year two of Pizza Hut's sponsorship with the NFL kicks in; Papa John's may be turning the corner?
Gross: "Maybe" is a good word.
Hill: I think over the next six months, it'll be interesting to watch those two as competitors. And, this whole issue of third-party delivery. Domino's continues to toe the line and say, "Look, we don't think the economics work. That's why we're not doing it." It'll be interesting to see, six to 12 months from now, if they're holding the line on that, and in fact it works out for them; or if they decide to maybe strike a deal with someone, and then they can't fight the tide.
Gross: Remains to be seen. I have a feeling the answer's no. We'll see. Companies like McDonald's, I think McDonald's might be the No. 1 Uber Eats brand. I guess that's not surprising. It's cheap. I guess it tastes good, if you like that kind of thing. People just want their burgers and fries. But again, there's so many offerings now. You want BBQ? You get BBQ. You want Indian food? You get Indian food. You can have anything you want. It has really changed the game. It would be completely surprising if that didn't take a bite out of market share or revenue from companies like the traditional pizza companies. We'll have to see what the new normal is, and what stock price makes sense for the new normal. This stock on the face of it is not necessarily expensive here, even with the reduced guidance. It's returned 23 times forward earnings. Look at Papa John's, which is 42. Papa's struggling, obviously. Starboard Value is coming in --
Hill: It's 42?
Gross: Yeah, forward earnings. The earnings are depressed, that's why. We'll see if Starboard can right the ship there. They have a great track record. I wouldn't sleep on them, they're going to get stuff done. But the 23 of Domino's is more in line with a McDonald's at 25. On the other side of the coin, you have Chipotle, over 50. That's pretty expensive here. Not such an expensive stock, but it's hard to get excited about a company that is signaling to you that weakness is coming.
Hill: Shares of Helen of Troy briefly, oh, so briefly, hit an all-time high this morning after second quarter profits and revenue came in higher than expected. Helen of Troy is the parent company, they've got household and beauty products, where the brand names are probably better known. Hydro Flask. You were telling me, I was not aware, those kitchen tools, OXO. That's Helen of Troy. Also things like Revlon, Shed Head. The stock was up 6%. It's actually come down. It's basically flat. I don't know, this seems the opposite of Domino's. This is a really good quarter.
Gross: It was a very good quarter. Maybe the stock is just getting away from itself just a little bit. It's actually not that expensive. Would be a little bit surprised if that was the reason. But the market is very weak today. That could be the reason. It's a consumer products company, which doesn't necessarily command the highest multiples when you're looking at valuation. But it's a wonderful company. The stock's up about 175% over the last five years. Crushed the market. As you mentioned, it's an accumulation of some really nice brands in the housewares, health and home, and beauty divisions. All doing pretty well, except health and home was a little weak this quarter. Comps were down around 10%, sales were down around 10%. But they had some really tough comps last year that they were up against. It was a really strong quarter this time last year.
As you have to nowadays, they've embraced the online world. Online channel net sales were up 25%, now make up about a quarter of their overall sales. They were able to widen margins because the product mix leaned more toward housewares this time around, which has better margins. You had adjusted earnings up 13%. They raised guidance. It's a nice little company that most people haven't heard of.
Hill: Yeah, that's the thing. On top of this great quarter, Helen of Troy comes out, they raise guidance for the full fiscal year, and this is not a big company. It's about a $4 billion market cap. I don't know the management, so I don't know the degree to which they are adamant about staying on their own, but it really seems like a business that's running really well, that someone much bigger, obviously, would look to acquire at some point.
Gross: I think that's right. There's some impressive brands here; 18.5 tiems forward earnings right now. Consumer products companies can't demand much higher than that. In fact, most of them are somewhat lower than that. Some significantly lower than that, more like 10 to 15. So not a cheap stock, but a company that continues to put up these pretty impressive growth numbers. I could easily see them becoming part of a bigger company at some point.
Hill: You can always drop us an email, firstname.lastname@example.org. You can also hit us up on Twitter. @MarketFoolery is our handle. Question on Twitter from Rod in Albuquerque. Very timely question from Rod. "With trading conditions at zero, does DRIP investing make sense anymore? Should we all just use our dividends to invest in our best idea at the moment?" Great question, obviously, in the wake of last week's news. Schwab, Ameritrade, E*Trade just saying, "It's free, everybody!"
Gross: It's a consumer's world out there.
Hill: As someone who has had his money with Ameritrade for a long time, I was very happy to see them follow suit with Schwab. Drip investing, for those unfamiliar, dividend reinvestment plan investing. What do you think of Rod's question?
Gross: It's a good question. There's two kinds of Drips. One, the company itself offers it, the ability to reinvest the dividends they pay you into more stock.
Hill: You go right to the IR department of the company.
Gross: Exactly. That's commission-free. The other kind is offered by most, if not all, brokerages. You just click a box and they will automatically reinvest your dividends for you. That is also commission-free. Either way, you're able to add to the companies you already own. Hopefully they're your favorite companies. Slowly quarter by quarter, in little drips and drabs -- get it? Drips. [laughs] I didn't mean that. But, it's commission-free. That's great.
So, here's the question. Instead of doing that to get around the commissions -- it's a way of investing in companies without having to pay commissions -- in the new world we've just entered, where you can invest in any U.S.-listed company for no commissions the question Rod asks is, what about now? Maybe we should be taking those dividends in cash and reinvesting them into our new and favorite ideas. There's a lot of merit to what he says. I've always had this up and down opinion of this.
Professionally, when I used to manage funds, I always took the dividends in cash because of exactly what Rod says. I always wanted the cash available to redeploy into my favorite positions, whether they were new or even old. The small amount of commissions, I would have to pay if I did invest more money in stocks I already owned was not a reason not to do that.
However, personally, I always tell people, it's just so much easier to automatically reinvest your dividends. You start off with 20 shares of something, and you look 10 years later, and all of a sudden, you own 25 or 30 shares of the company. It's just a great way to not have to constantly think about redeployment of cash. Not everyone actively manages their portfolio in such a way. This is a really great way to set it and forget it.
Either way, if you are the type of person who manages your portfolio pretty actively, I see no problem at all in taking cash and reinvesting it at no commissions in whatever your favorite idea is. If you're a person that doesn't want to look quarter by quarter like that, reinvest those dividends. It'll add up over time.
Hill: I also think that, you can look at some of the companies in your portfolio, and the ones that you are the most confident about, that you have the greatest affinity for, if they're paying a dividend -- this is how I do it in my own investing -- I'm just putting it right back into that stock.
Gross: Yep, for sure. But not every company pays a dividend, obviously. Some of your favorite companies may not pay a dividend. Then it would be nice to have some cash to increase your position just by buying shares. You can do a combination. Maybe invest some automatically and take some in cash. It just depends what kind of investor you are, how much time you want to spend looking at your portfolio.
Hill: It's a great question! Thank you, Rod! Keep the questions coming on Twitter and through email, and also on YouTube. We started this a few months ago, doing live Q&As a couple of times a month on YouTube. You can find The Motley Fool's YouTube channel, youtube.com/themotleyfool. They went well, and now we're doing them every week. This Thursday afternoon, Ron, you're going to join me. Emily Flippen is joining us as well.
Hill: We're going to be taking questions from the viewers. We're also going to be talking about something that is right up your alley, which is cheap stocks.
Gross: Are there any cheap stocks anymore, Chris? [laughs]
Hill: There are cheap stocks out there. We'll also be talking not just about cheap stocks, but also about the perception.
Gross: Yeah, the theory behind it.
Hill: There are stocks that cost hundreds of dollars, but on a valuation basis, they're cheap. But then there are some stocks out there that are under $20 where it's like, "Yeah, this is one to put on your watchlist."
Gross: Can't focus on the stock price. Have to look at the whole company.
Hill: So, check that out every week on our YouTube channel. You can check those out. You can submit questions. We'll take them live. Ron Gross, always good talking to you! Thanks for being here!
Gross: Thank you, sir!
Hill: As always, people on the program may have interests 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 Washington Nationals fan No. 1, Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!