Why Dollar Tree Is Dragging

In this episode of MarketFoolery, Mac Greer talks with nalysts Ron Gross and Emily Flippen about some recent market news. Shares of Best Buy (BBY 1.41%) are up on quarterly earnings, but the retailer might want to tone down its cheeky reporting going forward. Bad day for Dollar Tree (DLTR -0.25%), which continues to lag Dollar General (DG -0.34%) in a huge way because of some dud acquisitions. Alibaba (BABA -1.14%) is now listed on the Hong Kong Stock Exchange, which didn't really affect U.S. investors that much. Finally, Starboard Value is getting involved at CVS (CVS -0.62%), which should mean some smart changes for CVS going forward. Tune in to hear more.

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 Nov. 26, 2019.

Mac Greer: It's Tuesday, November 26th. Welcome to MarketFoolery. I'm Mac Greer, and I am joined in studio by Motley Fool analysts Emily Flippen and Ron Gross. How are we doing? Happy early Thanksgiving!

Ron Gross: Happy Thanksgiving, Mac!

Emily Flippen: Hey, happy early Thanksgiving!

Gross: Getting excited for the big day.

Greer: The big day. Are you doing cooking? You're a cook, Ron. You've got the skills.

Gross: I am, I'm cooking up a storm.

Greer: Nice. Emily, how about you?

Flippen: I'm eating.

Greer: [laughs] OK, good, I like that. I'm more in the eating camp as opposed to the cooking camp.

Flippen: Oh, yeah, me too. I'm a much better eater than I am cooker.

Greer: You need some of both.

Gross: I'm good at both.

Greer: [laughs] Well, on today's show, we're going to talk some Alibaba, some Dollar Tree, and some CVS.

But we begin with a good day for Best Buy. Shares of Best Buy up 8% at the time of our taping. The retailer really getting it done on earnings, Emily Flippen. Best Buy also raising guidance thanks to some optimism over the holiday quarter.

Flippen: Yeah, Despite concerns from tariffs, it seems to be a good quarter for Best Buy. Although good is relative. I think Best Buy is still in the minds of many considered one of those dying retailers. But they actually had pretty great same-store sales growth, 1.7% versus the expected 1.3%. So, the company is still growing. Admittedly, that's significantly lower than where it was last year. Last year was just an outstanding year for Best Buy. The company is still in the midst of taking customers from Amazon that had to move to purchasing their electronics online by really leaning into the value of having a showroom where customers can come in and see the things that they actually want to purchase. Best Buy has done a great job turning itself around. This is just another good quarter in their pocket.

Gross: Yeah, I would like to apologize to Best Buy on behalf of myself and many other analysts in this building who didn't think they would get this done. We kind of left them for dead in a lot of ways back a couple of years ago. Kudos to them for turning it around, remerchandising, putting more services into their mix. They've done a wonderful job. This isn't over yet. Retail is a fickle beast, and these things go up and down. But for now, they've done a really nice job.

Greer: When you look at the stock, shares of Best Buy have nearly doubled over the last five years. What about the stock going forward?

Flippen: Yeah, I actually sold off my shares about a year and a half ago, and I don't think the stock's moved much since then. But hindsight being 20/20, we're never good at selling. I think Best Buy, when you think about traditional retailers, is actually probably one of the better positioned traditional retailers. Ron mentioned, they have a really strong services business. That might not mean much to people. Maybe it means Geek Squad, but that's still only a small part of it. Their in-home advisor system is really interesting. For free, they'll send someone out to your home, they'll look, be like, "You need this refrigerator, you need this system. This is what would fit in your house," and they'll do it for free. A lot of people are still confused when they make purchases. I think there's value that Best Buy can still continue to provide.

Now, I do think there are probably better places to put your money, just in terms of growth potential. Best Buy, like Ron mentioned, again, it's still a retail business, which is really fickle. But I do think it's a good business for the work that they're doing.

Gross: I have to mention one thing, which I've never seen before, I think, in all my years of reading press releases. This was the title of Best Buy's press release: Best Buy Reports Better Than Expected Third Quarter Results. I've never seen a company call out their own beating of expectations.

Flippen: [laughs] I saw that too!

Gross: Usually that's an analyst or a news organization. They called it right out, right in the title!

Greer: I like that.

Flippen: I dislike that.

Gross: Yeah, I don't like that at all.

Greer: I'm going to start using that. Like, Mac Greer Better Than Expected. [laughs] Yeah, that's a little ...

Gross: It's really interesting to me.

Greer: Yeah, like, we get to decide that. They don't get to decide that.

Flippen: I feel like all companies now should start saying that in their press releases, even if it was maybe worse than what analysts were expecting. Better Than Expected!

Greer: "Well, they said it." You mentioned fickle retail. A rough day for Dollar Tree. Shares of the budget retailer down 15% on earnings. Dollar Tree also lowering its outlook. Now, Ron, they cited tariffs on Chinese imports. They also pointed to higher wages in their distribution centers, higher sales of lower-margin items, and -- and we were talking about this before -- a global helium shortage.

Gross: Well, you don't hear about that very often, except actually, we did talk about it when we talked about Party City earlier this year. Yeah, until this, the company was having a fine year. Stock was probably up around 20%. Even after the sell-off, we're still in positive territory, but barely. 2019 has been a year of transition for them. They're working through renovating all their Family Dollar stores. They consolidated two support centers in Virginia. You mentioned they've had to fight through this global helium shortage, which, who knew? And tariffs are taking a whack out of profitability. Sales were still positive, up almost 4%. Same-store sales up 2.5%. That's fine. But you did see gross margins narrowing a bit due to higher freight, distribution costs, lower margins, mostly at Family Dollar. That took a bite out of profitability. You saw earnings per share fall 8%. And then, on top of that, you saw them having to lower guidance because they really do think tariffs are going to have quite an impact here to the tune of about $0.06 per share in the fourth quarter. I think that's mostly what folks are focusing on when we see the stock selling off, is that lowered guidance and the fear of tariffs.

Flippen: Yeah, it's interesting, because Family Dollar has always dragged them down a little bit. That was, I believe, an acquisition that they made a while back, and it was a pretty poor one. I think in their minds, they were thinking about acquiring what was essentially a higher-cost grocer aimed at lower-income communities. Family Dollar stores are put in places where there's maybe a lack of a Walmart, a Target, a Giant, I'm not sure what local grocers people have across the country, but whatever your local grocer is. When there's a lack of those, they put in a Family Dollar. It sells necessities. It actually ends up being more expensive for the consumers. But I did think it was interesting that that business seem to just be flailing for them. I'm not terribly surprised by it.

I am surprised by the fact that they thought tariffs were going to hit them this much, especially because, we just talked about Best Buy, and you would think tariffs would have a much larger impact on a business like Best Buy. And while they do think tariffs are going to have some impact, it was clearly not enough to hit their bottom line.

Gross: Yeah, it'll be interesting to see what Dollar General, which is actually crushing it, says about tariffs. They don't report until early December, I want to say December 5th. We'll keep an eye on that.

Greer: Speaking of Dollar General, I was doing some research. I did some research, Ron!

Gross: Wow! I didn't know we were supposed to do research!

Greer: Old fancy pants here. You look at Dollar Tree and Dollar General over the last five years, Dollar Tree's stock up around 35%. Dollar General has more than doubled. Not all budget retailers are the same.

Gross: No, for sure, Dollar General is better run. They don't have this anchor of Family Dollars, as Emily said, that's been dragging Dollar Tree down for quite some time now. Dollar General, definitely the better of the two companies.

Greer: OK, well, Emily, it was a party for Alibaba, and they didn't need helium-filled balloons. Big debut on the Hong Kong market. Shares of the Chinese e-commerce giant up around 7%. Now, Alibaba also, of course, already trading on U.S. markets. Shares not doing a whole lot on the U.S. markets today.

Flippen: No, and they honestly probably could have afforded the expensive helium, given the fact that they just raised around $10 billion on the Hong Kong markets. For U.S. investors, it really doesn't mean very much. Like you mentioned, the U.S. stock hasn't moved. While there is some shareholder dilution by the issue of new shares in Hong Kong, one ADR here in the U.S. is equal to about eight Hong Kong shares. That's why that dilution maybe isn't as great as people might expect it. I think it's estimated to be around 3% right now. So, really, not a big deal for U.S.-based shareholders, but it's a huge deal for Alibaba. It's a huge deal for the global markets.

It's interesting because we have a lot of geopolitical concerns around China right now, but the fact that Alibaba was China's largest company, and chose to be listed five years ago in the U.S., it was a testament to the strength of the U.S. financial markets. But now that they're moving to Hong Kong as well, I think it's a testament to the fact that they see a lot of political risk here in the U.S. to being listed in the U.S., being a foreign-listed company, specifically a Chinese-listed company in a foreign country where we see a lot of legislation -- whether it passes or not, who knows -- that's aimed at these companies. I think it's a political move. I think they're trying to give access to Chinese shareholders as well.

Something that I think is little known, and it's still developing, is a Chinese initiative called Stock Connect. It's connecting the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and the Hong Kong Stock Exchange. Essentially, if they are an approved company under Stock Connect, Chinese consumers could buy shares of Alibaba. Some examples of companies that are under Stock Connect right now include Meituan Dianping and Xiaomi. Meituan Dianping being the internet service provider. It's hard to explain in one sentence, but they do a little bit of everything. And Xiaomi being the phone producer.

Anyway, it's an exciting day for Alibaba as a company. U.S. shareholders won't see much movement.

Greer: And our final story. Ron, this is one that may be near and dear to your heart because of your previous life. Activist investor Starboard Value has taken a stake in CVS Health. Ron, I wanted to talk about this story because, well, we don't talk about CVS a lot. And, in your previous life on Wall Street, you worked with the guys who started Starboard. Now, Starboard is an activist investor, and they've gotten a lot of attention for some of their successes with Darden Restaurants, the parent company of Olive Garden. What do you make of Starboard and CVS?

Gross: Starboard has done a really good job over the years, whether it's Papa John's or getting involved in Staples and Office Depot, they even had a hand in the recent StubHub divestiture from eBay, along with Elliott Management. I did many deals with them back in the early 2000s. Really smart guys, thoughtful guys. They get the job done. They know what they're doing.

CVS is interesting because it's such a huge company. $99 billion. They'll obviously only take a small stake, one would think. It remains to be seen what they want to get done here, what their activist stance will be. Ever since CVS acquired Aetna, probably about a year ago, -- $70 billion transaction, I want to say -- things have been kind of shaky up and down. The pharmacy benefits business, the long-term care business have been shaky. It'll be interesting to see what they push for. Because of that acquisition, I think the board now stands at 16 members, which is pretty unwieldy. Maybe they'll fight for some governance changes here. Maybe they'll fight for some changes to some of the businesses, whether it's to expand some or pull back on others. It'll be interesting to wait and see, because these guys are pretty smart, and they do have a nice long-term track record.

Flippen: 16 members?! That's like a Thanksgiving party when you get the board together. Gosh, what are they doing? There'd better be a turkey, that's all I'm saying. If I'm on that board, I want a turkey. Yeah, no, I was actually a little surprised to see this, because CVS, while it hasn't been the best investment -- and I think it probably qualifies as one of those declining retailers -- they've actually been a little bit more innovative. They have a little bit more staying power than maybe company that would have warrant a lot of activist investor efforts. They've made an expensive acquisition. They're still paying that down. They have a lot of debt. So maybe Starboard's looking to improve corporate governance, improve financial management. But I actually think CVS in general is fine.

Gross: It's better than Walgreens.

Flippen: Yeah, it's better than Walgreens. The bar's low.

Greer: I love when Starboard goes in -- we mentioned Darden and Olive Garden earlier -- when they went in and took a stake in Darden Restaurants, one of the recommendations to Olive Garden was basically, back off on the breadsticks. So, Ron, when they get involved, they get involved.

Gross: And they said, "You have to stop salting the water," because it was lowering the life of the pots and the pans, because the salt was, I guess, corrosive. They get really granular! They don't always do that. We actually made a little bit of fun of them back in those days from those suggestions. But the breadsticks, you have a good point. There was a lot of waste there. They're pretty good at looking at businesses without emotion, because they're outsiders, and giving suggestions to management about what can be approved. And sometimes they feel the need to get board seats, and get things done from the inside when their suggestions are not necessarily taken by management from the outside.

Greer: Ron, I mean, telling Olive Garden to back off on the breadsticks, basically, don't you think that saved Olive Garden a bunch of dough?

Flippen: Am I the only one who thinks this is unacceptable? Why am I going to Olive Garden if I can't get unlimited breadsticks?! This isn't true!

Greer: You missed my whole dough joke.

Flippen: Oh, right over my head.

Greer: I'm sorry, but that joke's not going to make itself. Someone had to make it. [laughs]

Flippen: It's been a long morning.

Greer: I know, I'm sorry!

Gross: She's focused on being an analyst.

Flippen: Analyzing breadsticks.

Greer: I apologize. I feel bad but I also feel like someone had to say it.

Gross: But, keep an eye on this one. Starboard knows what they're doing. It'll be interesting to see what suggestions they make.

Greer: OK, let's move on. We've got the desert island question. Let's wrap up with, you're on a desert island, and for the next five years, you can only own one of these stocks. Are you going with Best Buy, Dollar Tree, Alibaba, or CVS?

Gross: Wow! By process of elimination, I'm going to say Alibaba.

Flippen: Is Olive Garden on the list?

Greer: No. We can throw Darden in there if you want Darden.

Gross: Every company we mention is on the list now? That's not how this game is played!

Flippen: [laughs] No. The answer is the same regardless, Alibaba.

Greer: Alibaba, OK. There you go.

As always, people on the show 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. Emily and Ron, thanks for joining me. A happy, happy Thanksgiving! We have plenty to be thankful for.

Gross: You too, Mac, thanks for having us!

Greer: That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening and we will see you next time.