In this episode of MarketFoolery, host Chris Hill talks with MFAM analyst Bill Barker about some of today's business news. Home Depot's (HD +0.82%) earnings were a little bit disappointing. Bill explains what shrink or shrinkage is in the retail world, and how it's been affecting the home improvement company. Kohl's (KSS +1.37%) dropped almost 20% on its earnings, which is just another step in a long, slow, downward staircase for the stock. Roku (ROKU +4.33%) fell a little after announcing plans to sell up to a million shares, but long-term investors shouldn't worry. Plus, Chris reads some listener mail, and the guys give listeners a sneak peek at the next Apropos of Nothing episode.
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This video was recorded on Nov. 19, 2019.
Chris Hill: It's Tuesday, Nov. 19. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the highly caffeinated Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: Roku needs some cash. Kohl's needs a Christmas miracle. And one of our listeners, I think, probably needs some new footwear. We will get to all of that.
But we're going to start with Home Depot. Third quarter for Home Depot, this was literally the profits beat by a penny, but revenue was lower than expected. Same-store sales was a full 1% lower than expected. Couple that with the fact that shares of Home Depot were at an all-time high, not a huge surprise that the stock is down about 5% this morning.
Barker: Yeah. It seems like the message today was that the investments that they've been making into technology and initiatives to improve efficiency are taking longer to produce the benefits than was previously promised, which was to get about 100 basis points, 1%, of improved profitability off of this investment. So far, they've realized about half of that. Still think they're going to realize all of it over time, through next year rather than all in this year.
Additionally, as you pointed out, same-store sales. This is a company that is used to 5%, 5.5%, sometimes 6% same-store sales over the last half decade. So, being more in the 3% range, not what the market wanted to hear.
Hill: Again, look at where the stock was. Even with the drop today, the stock's up 30% over the past year. This is a business that's performing very well. Given the track record of Home Depot, I think if you're a shareholder, you're probably not too worried about this. This seems more like a speed bump quarter.
Barker: They're a company that has produced phenomenal results by doing a lot of little things right. They haven't grown the store count. They increased profitability quite a bit over the last decade. They have done that without growing stores. They're reliant on that same-store sales growth to supply most of the top line growth. They're not opening up new stores, and getting more people to come in, charging them a little bit more, and then improving on the margins. As I mentioned, the same-store sales were a little bit less than we've come to expect, and the margins are not improving at the rate that they indicated they expected to do so. And, additionally, a couple of other problems.
Hill: Let's talk about the other problems. We were talking this morning. You listened to the conference call. You mentioned a retail metric with which I was unfamiliar, and that was causing some problems for them, at least in the latest quarter.
Barker: Yes. Shrinkage.
Hill: Shrinkage?
Barker: Shrink.
Hill: Yeah.
Barker: Shrink. [laughs]
Hill: You mentioned, "Yeah, they talked on the call about, one of their problems this quarter was shrink."
Barker: Both terms are acceptable.
Hill: I was like, "What is that?"
Barker: That is the amount that a store loses to disappearing merchandise that it does not charge money for.
Hill: Also known as employee theft?
Barker: Not only employee theft.
Hill: Regular theft.
Barker: Usually shoplifting. Historically, shoplifting has been the greatest chunk of this. You can get estimates that, across the retail industry, stores lose about 2% of their goods through five different avenues. One, shoplifting. Two, employee theft. Three is bad paperwork. Four is things failing to be delivered that were supposed to be delivered. And then there's the mystery bucket of everything they can't explain.
Hill: I can imagine, certainly I've experienced this in grocery stores, and I imagine it happens in places like Home Depot and Lowe's as well, where you hear a crash and something has broken. Merchandise that has broken before it has been purchased, that probably contributes to shrink as well.
Barker: Yeah. I think they lost about 31 basis points, about a third of a percent over expectations in the most recent quarter. It's been trending in the wrong direction. They were asked on the conference call, since they brought it up, that this was the major contributor to the miss on the margins for the quarter, what's going on with that? Is employee or other? Management didn't really point the finger at any individual or group, but they referred to a large chunk of it being malicious. [laughs] Rather than mistaken shoplifting or employee theft, I guess. The benign category. "Oh, this person's hungry, so it's OK."
Hill: It would have been great if they'd named one employee.
Barker: "Dave."
Hill: "We're not sure, but we're pretty sure it's Bryce. He works in Atlanta."
Barker: [laughs] So, yes, the categorization wasn't nailed down. The ways in which the company is responding to it were not set forth. But, they said they've got initiatives.
Hill: Well, yeah. That's perfectly reasonable, that they would not necessarily outline, "Here's the ways in which we're going to cut down on employee theft." Why make that public?
Barker: No. They didn't specify that it had to be employees. Look, every retail operation of any size, and certainly the size of Home Depot, knows that's part of the business. Whether it's employees, whether it's shoplifting, whether it's your suppliers not giving you everything that was supposed to be in a shipment, whatever it is, they've got top men working on it.
Hill: They should be fine, then. That always works out.
Shares of Kohl's down 18% this morning after third quarter profits and revenue came in lower than expected. Kohl's also cut guidance for the full fiscal year. Boy, they look like they're in trouble. It's amazing to me that Kohl's is still a $7.5 billion company.
Barker: This is a long, slow crash. They maintained about the same level of sales. They're doing about $18.8 billion over the last 12 months. You compare that to $15 billion, $16 billion, 2007, 2008. They've opened a few more stores, they've increased their sales online. But the number of people coming into Kohl's dwindles all the time. What they've done in response to that is buyback a lot of their shares, increase their dividend. The bottom line is not improving. Even with the rather significant number of shares that they've bought back over the last decade, they're basically just treading water on the earnings per share, what they've done since a decade ago.
Hill: It's pretty remarkable. We just got done talking about Home Depot, which has methodically improved its profitability while not really increasing its store count. Then you have Kohl's, that's floundering. Some of their new locations may work out, but it seems like they need a complete overhaul if they're going to survive.
Barker: They're getting more direct competition from Amazon. Of course, a lot of Home Depot's goods can be acquired from Amazon, but tend to be things that people are more likely to go to, maybe because of the success of Home Depot in getting people to think this way, people go to Home Depot. People go to Kohl's, but they go more to the competition, whether that's Amazon... Koh's has increased its internet presence, but really, that's just helping them tread water. Buying back the shares, increasing their dividend. After today's decline in the share price, it's yielding about 5%, which might be attractive to some portfolio managers that need some dividend in their portfolio. But you don't look at this and say, "This is a story that is likely to get better over time."
Hill: Also, we have a nominee for corporate euphemism of the year. When talking about their pricing strategy, someone on the call for Kohl's said, "We leaned into our value equation," which I'm pretty sure means, "We cut prices." [laughs]
Barker: [laughs] Yeah. "We sent some coupons out."
Hill: You leaned into your value equation? Come on!
Barker: "Sounds like you really thought that one out. Was it more than discounting and coupons?" "Well, it... it was more. More of them than usual. We leaned into those things."
Hill: Roku announced a plan to sell up to one million shares of stock. Roku said they plan to use the money to cover operating expenses, capital expenditures, and to throw a really big party in Las Vegas. OK, not the third one, but certainly the first two. Not surprisingly, shares of Roku down on the news.
Barker: Yeah, they're issuing up to a million shares. They're not saying exactly when, but I would think sooner rather than later, given that this is a smart move from a capital allocation standpoint. The stock is up over 400% for the year. Taking advantage of a much more expensive stock. What is the dilution here? A million shares is less than 1% of the outstanding shares. They're trading less than 1% of the equity of the company for some $157 million. I say that's probably a good trade.
Hill: Good move?
Barker: Yeah. I think it gives them, whether it's paying down their debt -- they say there's a whole bunch of things they might use this for. You've added in just partying with it. That wasn't in the press release.
Hill: Again, if you're Home Depot, why are you announcing, "This is our plan to stop employee theft"? If you're Roku, why would you publicly announce, "Yeah, we're going to throw a really big party in Vegas"?
Barker: Probably the stock goes down more, if that's what you say you're doing.
Hill: That's why you don't put it in the press release.
Barker: That's like 10% down. This is just 4% down as of intraday movement so far. With all the people who are cutting the cord, moving to additional streaming services, Disney+ out, being a yet another choice, with Apple, people are adopting Roku's platform and will continue to do so. I think they've got continued growth ahead of them. This will give them some cash to maybe make some more acquisitions.
Hill: Our email address is [email protected]. Got an email from Travis Smith, who writes, "I just finished a 2,192-mile hike of the Appalachian Trail. This podcast kept me informed on market happenings despite being in the wilderness and mostly disconnected from the outside world. I'm a member of your Stock Advisor service and love all the great insights everyone at The Motley Fool consistently offers. Thanks for everything."
Thank you, Travis! Thank you for listening! Congratulations! Holy cow! Did that ever occur to you? You hear that -- "When I graduate from college, I'm going to go on an adventure. I'm going to backpack through Europe, I'm going to hike the Appalachian Trail." That one particular adventure never crossed my mind in any serious way.
Barker: When I was reading A Walk in the Woods by Bill Bryson, great author --
Hill: Great book!
Barker: -- many good books, that being one of them. A forgettable movie. A movie which apparently was made. I think that's what we can say about the movie. Lends itself more to literature than movie. They probably had to insert some sort of plot into a movie to justify it.
Hill: It was Robert Redford and Nick Nolte, and there were wacky adventures hiking the Appalachian Trail.
Barker: Yeah, it was a mismatch buddy thing.
Hill: Sure. Probably with a bear at some point.
Barker: I thought you were going to ask, did it ever occur to me that somebody might listen to this podcast while doing that. I was thinking, whereas I wouldn't have thought that, I think the dulcet tones of Chris Hill work better for the outdoors than, say, the competition. A Jim Cramer, perhaps, a little bit more of a jarring experience, listening to him while trying to enjoy a walk through the woods. Although, usable in many other media. He doesn't go with the Appalachian Trail the way you do, is my belief.
You don't know what to say. [laughs]
Hill: Yeah, I don't know. I don't how to process that one.
Barker: Have people ever referred to your dulcet tones before?
Hill: Not in relation to the Appalachian Trail, no. Congrats to Travis! Hopefully he's got some new shoes. I have to believe you wear out a couple of pair of hiking boots if you're going the entire trip. You're going 2,000 miles. Our colleague Matt Koppenheffer -- I don't know if you spent time with him at our annual meeting last week?
Barker: Did not get to, no.
Hill: Spent a little time with Matt. Matt is someone who is a prolific runner. Because he is highly organized, Matt also tracks his pair of running shoes by how many miles he's run on each one. And once he hits a certain point, and I think that point is like maybe 300 miles, that sort of thing, he ditches them. The tread wears out. I'm assuming the hiking boots Travis was rocking were more durable than your average pair of running shoes, but it wouldn't surprise me if he went through a couple of pair.
Barker: Not if they were L.L.Beans.
Hill: By the way, Appalachian Trail, you divert off the path, walk into the original L.L.Bean in Freeport, Maine, you're like, "Hi, can you hook me up with some new boots? I have to finish the Trail."
Barker: And get a new pair because you're L.L.Bean and I'm bringing them in. You have to give me new ones. It's how that works. Except they've gotten rid of that program.
Hill: Well, no, it's now a one-year thing as opposed to a lifetime. Ditching your bad customers is a smart business move. Always.
By the way, quick shout out to Jared Lynn, who is a listener I mentioned back in October when we were talking about overrated/underrated candy. Jared had mentioned Twin Bing, which is a cherry-flavored nougat wrapped in a chocolate peanut covering that you can get in the Midwest. I think I mentioned on the show, we're not anywhere near where this is sold. He very nicely put a few in a box and sent them. Going to give those a try after the show today.
Barker: How far do you think you have to drive from here to get to the Midwest?
Hill: To get to this candy?
Barker: The Midwest. Your version of the Midwest. Where do you think you hit it, traveling west from here?
Hill: Indiana, don't you think?
Barker: I don't think you have to go that far.
Hill: Ohio? Do we consider Ohio to be the Midwest?
Barker: Sure!
Hill: OK, not everybody does.
Barker: Really? What do they consider it?
Hill: Not the Midwest. [laughs] The Rust Belt? I don't know, some other part. We're going to get emails on this one.
Barker: They're wrong. It's the Midwest.
Hill: Real quick. Since the last time you and I were in this studio, I believe we were here with a third colleague. Do you want to provide a sneak preview? We do have an Apropos of Nothing episode of MarketFoolery coming probably in the next 10 days. A little bit of editing will need to happen to this episode.
Barker: 10 days of editing? [laughs] If that's not a preview, I don't know what is!
Hill: That's why we'll do the editing, because we don't want the listeners to suffer through --
Barker: Historically, there's very little editing.
Hill: Sometimes there's little editing. Other times there's a little bit more. There'll be some editing to this. Is there one thing from the conversation you want to share with the dozens of listeners?
Barker: As you know, what I found to be the most exciting part of it was my idea for a future offshoot of Apropos of Nothing, which would treat -- are we going to go into this?
Hill: I don't know where you're going.
Barker: Fictional stories?
Hill: [laughs] Oh, yeah!
Barker: A straight-up episode --
Hill: Of MarketFoolery.
Barker: -- of MarketFoolery. It'll have a little bit of branding around it so that people would know that these weren't real stories. But, stories ripped from what should be known-to-everybody movies, which involve stock, publicly traded companies, stock scandals of some sort or another. And how, if those were real headlines, and the facts were in the press that you know by the end of the movie, how would MarketFoolery cover it?
Hill: Right, and the example I believe you used was, for anyone familiar with ESPN's documentary series 30 for 30 , someone, maybe it's College Humor, did these short five to seven-minute mini 30 for 30s about treating sports movies as though they were actual news events. Rocky for Rocky, Rocky Balboa ends the Cold War. They have Max Kellerman being interviewed, and other people who are actors, but have actual news people, sports media people, talking about these things as though they're real.
Barker: Yeah, throw up a link or something.
Hill: I'll put that out on Twitter.
Barker: And shout out to the actual 30 for 30 podcasts. This is the reason why it occurred to me. The 30 for 30 podcast, which is great and sometimes covers 30 for 30 movies, but also does some original audio content, had an episode on the spoofs of itself. And it was a serious treatment of the spoofs.
Hill: [laughs] That's very, very meta.
Barker: Very meta of itself. I think they respect the work that went into this, and the direction that the producers who put them on College Humor, and now have got some bigger gigs, that I think in part extend from that. There's a lot behind looking at spoofs of yourself. It occurred to me that, if there was something that could be easily spoofed, it would be MarketFoolery. And who better to do it? You don't want anybody else to do it. Beat them to the punch, I say.
Hill: That sounds tiring. That sounds like a lot of navel gazing for me, which I'm not interested in.
Barker: No, no. It'd be humor -- look, if you're going to cover the way the movies, which have on occasion, as part of the movie, had some stock manipulation, there is education to get from treating that as a real story, and what we speculate would be the effect on the stocks from this kind of news getting out. If there are any recommendations for movies to cover, we've got a few.
Hill: [email protected]. We're always open to feedback, including lambasting this episode. Bill Barker, thanks for being here!
Hill: Thank you!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That'll do it for this episode of MarketFoolery! The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
