C-Suite Musical Chairs

In this episode of MarketFoolery, host Chris Hill chats with analyst Jim Mueller about some market news. CEOs are changing seats at Under Armour (UA 1.70%) (UAA 2.02%), Nike (NKE 0.71%), and ServiceNow (NOW 1.77%). The timing of the announcement on Nike's end is a little suspicious, but at least the new CEO pick has some very promising credentials. Chipotle (CMG 1.99%) shares fell despite the company reporting yet another fantastic quarter. Where can the burrito slinger grow now that things have turned around? Plus, WeWork continues to make headlines, and SoftBank keeps propping up the struggling business despite it all. Tune in to find out more!

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This video was recorded on Oct. 23, 2019.

Chris Hill: It's Wednesday, October 23rd. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Jim Mueller in the house. Thanks for being here!

Jim Mueller: Hey! Thanks for having me!

Hill: We've got a few headlines to get to. We're going to start with what I like to call the CEO version of musical chairs. Tuesday morning, Under Armour announced Kevin Plank is stepping down as CEO in January. And then later in the day on Tuesday, late afternoon, Nike announced that CEO Mark Parker ,also stepping down in January. He's going to be replaced by John Donahoe, who is a board member at Nike. He is also the CEO of a software company called ServiceNow. He's been CEO there for nearly three years. He's going to be leaving that. Bill McDermott, who a couple of weeks ago stepped down -- or was forced out, depending on which version of events you decide to believe -- left SAP after being CEO for nearly a decade. He's now going to be the CEO at ServiceNow. The musical chairs continues. 

Let's start with Nike. Shares down a little bit on the news. Probably not a surprise when you consider Parker has been running this company since 2006. If you're a shareholder under his tenure, you have done very, very well.

Mueller: Oh, yeah, you're quite happy. Parker was the second CEO at Nike following Phil Knight. He took over in 2006. I know there have been rumors, at least, that CEO succession at Nike was being thought about. For instance, three years ago, China chief Michael Spillane was promoted to president of product and marketing, and that was his fifth promotion in nine years, so he's moving up the ranks pretty quickly. People were wondering, "Oh, is he being groomed as the next successor?" But there was also COO Eric Sprunk and brand president Trevor Edwards. The latter gentlemen especially was seen as the primary contender. But then, a couple of years ago, Edwards was forced out in March of 2018 amid allegations of inappropriate behavior, and we'll leave it at that. 

Parker's comment yesterday during an interview that, "Hey, this has been months in the planning, you don't do this in just a couple of weeks," is probably true, but I'm kind of wondering what the timing has to do with it. Under Armour announces Plank stepping down, and Nike says, "Oh, maybe we want to get in on that news, too." Or, is it more related to the drug doping thing that's been coming out, and whether Parker knew about it or not, and the speculation there? Or is it just today happened to be the same day that all this other stuff was coming out?

Hill: The drug doping thing you mentioned, that's related to Alberto Salazar, running coach tied to Nike. Over the last few weeks, some stories have come out about that. The extent to which Parker knew about that, there are some questions around that.

I find the timing fascinating. I just thought, you're going to have a very hard time convincing me that this is a coincidence. All things being equal, because Nike has been the clear leader in the category for so long, and Kevin Plank has been very clear in his time at Under Armour, running the company, he was gunning for Nike the whole time -- in most situations, I would believe that Under Armour maybe got wind of this and they moved up their announcement. I actually think, in this situation, it's the reverse. I think that Nike may have decided, "You know what? We were going to announce this later this week, or maybe tie it to our earnings report, but let's just do this right now."

Mueller: So maybe when Plank says, "OK, I'm out," Parker says, "Score column! Win column!"

Hill: [laughs] Yes. So, let's talk about Donahoe for a second. I don't know a ton about him. What I do know is that his experience as an executive is very much in the tech space. As I mentioned, ServiceNow is a software company. He was an executive at eBay. 

Mueller: He was the CEO of eBay. 

Hill: Yeah, the chief executive.

Mueller: For years.

Hill: He made a bunch of acquisitions there. So, I think, if you are a Nike shareholder -- again, it's only down a couple of percentage points. I don't think that's necessarily a knock on Donahoe. I think that's more just, Parker's done such a great job, it's natural to see it drop a little bit. But I think if you're looking at the elevation of Donahoe, it's with an eye toward his tech experience, and Nike increasingly relying on technology to move product.

Mueller: Right. I think, again, the narrative is that's why he was named. He's been a director for a couple of years at Nike. He was the CEO of eBay for eight years, until 2015. He's been the chairman of PayPal. He oversaw the spin-off of PayPal from eBay, but that was forced upon him and eBay by Carl Icahn's activism. He's expected to come into Nike and use this tech savvy to probably continue the digital transformation that has been driving some good results for Nike. They've got their Nike-plus membership. They're able to get more personalized in their advertising for that. They're seeing some big responses to that. Along with that, some product tracking and inventory management. So, a lot of good things are happening with Nike from a tech perspective. I think Donahoe is going to continue that.

Hill: Yeah. Maybe a better indication for Nike shareholders is what's happening with shares of ServiceNow. That stock's down about 10% since it was announced that --

Mueller: "No! Don't let him go!"

Hill: [laughs] Let's move on to Chipotle. Another great quarter for Chipotle. Same-store sales, such a crucial metric for any restaurant out there, up 11%. That's nearly 2% higher than expected. The stock is down close to 5% today. Is that just because of the run that it has had to this point? Because it's been on an amazing tear.

Mueller: It could be that. Let me hit some of the points and then come back to that, alright?

Hill: Yeah, there were other numbers.

Mueller: Comps. I think that was the biggest number, and really surprised me. 11% is huge when you're a restaurant. 7.5% of that was on transactions. That's more people buying more stuff. 3.5% was on average check, with about 2.5% of that coming from price increases last year. But the fact that they're getting more digital orders, and digital orders tend to be larger size, checks for that. 11% comps is higher than what they've had all year. 9.9% Q1, 10% Q2, now 11% Q3, though this will certainly make next year harder to beat.

That aside, their digital thing is really going up. They saw an 88% increase in sales of digital orders. Now that's like 18% of total sales. That's pretty good. The rewards club is beginning to play into that. They also said they're going to open some more of their drive thrus. And literally, that's a drive thru. You don't stop to order, you just drive up to the window and pick up the stuff. That's tied into their digital sales as well. 

But why are the shares down 5%? The company's shares have had a fantastic run. They're up 20% since the beginning of June. Maybe investors are just saying, "Hey, that was a great quarter. Thank you very much. I'll take some money off the table." Maybe it's a bunch of the analysts not raising their expectations. A bunch of analysts came out with higher price targets, but nobody actually moved their thing from hold to outperform or market perform to overweight, or whatever the language is. 

Hill: You look at the job that Brian Niccol has done as CEO, and yeah, quarter after quarter, Chipotle has delivered under his leadership. It may be that the stock has entered that territory that we see from time to time, when businesses have a great two to three-year run. And it's essentially, "This was a phenomenal quarter, but it wasn't perfect. We're greedy now, we want to see you beating on everything and raising guidance."

Mueller: They almost did beat on everything. But, actually, I think I know why the shares were down. It was announced that their limited-time carne asada meat product is going to run off in November. Everyone's disappointed.

Hill: [laughs] Everyone's angry. Let me couch this by saying, I don't think there's any pressure whatsoever on Brian Niccol, given the job that he's done. But I'm curious where you think the growth for Chipotle comes over the next three years. There was a point in this business's history when they were doing so well with the namesake concept that people were looking to the ShopHouse Asian cuisine concept as well as, "That's where future growth is going to come from. We're not going to get as many locations as we have Chipotle, but we're going to get a few hundred." Those have essentially been closed down. Do they begin to resurrect some of those ideas? Or do you think it's just more digital, more locations, and finding ways to bump up the average ticket price?

Mueller: I don't think they're going to go into other concepts quite yet. Given their experience, they're probably a little gun shy right there. That might come to pass down the road. I think they're going to push more into digital and get more people ordering so they can just walk in and walk out and pick up their stuff. That, as well as the drive thru, what they call Chipotlane. Yeah, terrible name, right? Actually, it's kind of funny, but judging by your reaction --

Hill: It's no worse than the Zestimate that Zillow forces on us.

Mueller: [laughs] Setting the name aside, I think that's going to be a good driver for the company. And that means they can open a second product line of fulfilling orders through that and through more digital sales, as well as having more customers come through the door. I think that's where the growth is going to be. Trial of various things. Carne asada apparently did very well. Are they going to bring in some breakfast at some point? Probably. I think they're going to continue expanding what they're working on, focusing on their core Chipotle thing, and then, maybe a few years down the road, might start thinking about other concepts.

Hill: WeWork continues to stay in the headlines, despite the fact that --

Mueller: This is the most entertaining story of the year.

Hill: It really is. With every passing part of this story, I find myself thinking about the end of the year, when we do an episode of Motley Fool Money, where we look back at 2019. WeWork is absolutely going to be a part of that episode. 

The latest headline is the admission that now that SoftBank has taken it over and it's Softbank's problem now, because they've sunk so much money into it, that WeWork was going to be out of cash by this Friday.

Mueller: Well, now we know why they were pushing hard to go public, right? Because they needed the money!

Hill: Right! I know you have a couple of thoughts, but I'll just say that one of my thoughts when I looked at this is, it's a great reminder, for as exciting as it is when companies go public -- and, as investors, we always get to some level of excitement. Sometimes it's a business where we've read the S-1 and we know, "Oh, this is going to be great! I can't wait to be a part of it!" Sometimes it's just like, "Let's just see how they do," it's more of a curiosity.

Mueller: And then there's companies that have an S-1 that makes totally no sense at all, and shares are coming public, and everyone's excited. Why are you excited?!

Hill: It's always good to stop and ask the question, why? Why is this company going public? Do they need the money? In the case of a company like Facebook, they reached a point where it's like, "Technically we have to because of the number of shareholders," and all that sort of thing. In the case of WeWork...

Mueller: Well, now we know why.

Hill: Now we know why! Because it was a house of cards!

Mueller: Yeah. As I hinted at, the IPO process actually worked out in rejecting a company that had no business going public, especially since they were losing money hand over fist, and they were doing all kinds of weird stuff. I'd use stronger language, but this is a family show, right? 

Hill: [laughs] Yes. Always appreciated!

Mueller: [laughs] So, that's one observation. A couple of other thoughts about this whole process. I don't think tech can change the underlying economics of whatever market you're in. WeWork was pushing itself as this tech solution of real estate, but real estate is not tech. It's capital intensive. You have to lease or buy a bunch of properties, then you have to find tenants to rent the space, and you make money basically on the spread between the cost of your lease and the money you get from your tenants. Those tenants are not going to magically appear. You're not going to magically pull them from other lease spaces where they have five-year commitments or what have you. It's a really tough business to be in. Tech itself won't solve the problem. 

I'm reminded of a story Warren Buffett told years and years ago about not investing in brand-new technology for the looms, back when Berkshire Hathaway was --

Hill: A shirt maker.

Mueller: -- a shirt maker, fabric maker. He was saying, "We could do that, but then everyone else is also going to be investing in that same tech, so any advantage we get out of that is going to disappear real quickly." I think the same is being found out for a lot of these companies that are doing tech for manufacturing, or tech for real products having to be built and sold to customers. You come up with some technology advantage, and your competitors are going to come up with it and follow you right along, and any advantage you have disappears. That's point No. 2. 

No. 3. I think SoftBank, by doing this, is going to end up being hurt pretty badly. I think they're making a mistake. But, one of the hardest phrases to say in whatever language you're speaking, be it English or Japanese, is, "I was wrong." I think Mr. Son should come out and say, "I was wrong, we need to cut our losses and get out of this." Let the company fail. Let the capital markets do their thing in destroying companies that don't deserve to live. But they've put in so much money. I've seen reports anywhere from $10.5 billion to $18 billion, depends who's talking. They've sunk so much, and now they're putting in $5 billion or $7 billion more into this thing, and it's only worth $8 billion. They've lost a lot of money already on paper, and they don't want to realize it. But, SoftBank itself is also raising funds for a new Vision Fund, so they don't want to scare away investors for that by saying, "Oh, we made a huge mistake. By the way, we're going to make mistakes with your money, too." [laughs] 

Hill: Going back to the S-1 filing, I talked to one analyst this morning who said that when he read WeWork's filing to go public, he got incredibly excited because he couldn't wait to short the stock. He just thought, "Oh, my gosh, if they're actually going to go public at a valuation of $47 billion, I will short this to every extent possible." [laughs] 

Mueller: [laughs] Yeah, definitely. I was thinking the same thing, but didn't get the chance.

Hill: Sorry! Maybe next time. Jim Mueller, thanks for being here!

Mueller: Thanks for having me!

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. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!