Five Below and the Bad Holiday Sales

In this episode of Market Foolery, Chris Hill talks with Fool analyst Jim Mueller about some business news. Five Below (FIVE 0.21%) tanked by about 16% after reporting some bad comps and lowering guidance. At a 52-week low, does Five Below have a strong enough long-term story to make this a buying opportunity? Meanwhile, Amazon (AMZN 0.54%) turned up the petty by bashing Honey the moment its PayPal (PYPL 0.99%) acquisition went through. And Chris and Jim look through a survey of four generations and their brand loyalties. Tune in to find out what the generations surveyed have in common, where they differ, and how new investors might want to borrow from this survey for their own portfolios.

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 Jan. 13, 2020.

Chris Hill: It's Monday, January 13th. Welcome to Market Foolery! I'm Chris Hill. With me in studio today, the one and only Jim Mueller. Thanks for being here!

Jim Mueller: Hey, Chris, how are you?

Hill: I'm doing all right. I'm doing better than Five Below. We're going to get to Five Below. We also have a really interesting survey about brand and trust. We will get to that. Let's start with Five Below.

On last week's episode, one episode last week, we talked about Costco coming out with their sales numbers for the holiday, for December. Five Below, the discount retailer, came out this morning and lowered guidance for its fourth quarter and for the entire fiscal year, and that's because their holiday sales -- I think I have this right, that it's covering basically all of November and December -- were terrible. Or is "terrible" an overstatement? The stock is down 16%.

Mueller: Well, the stock was down 20% first thing in the morning. "Terrible" I don't think is an overstatement. They certainly were not good. Comparable sales, which is same-store sales, that is sales from stores that have been open at least a year...the guidance update is down 2% to 2.5% for the quarter. That is a big swing from the guidance they gave at the end of the third quarter of up 2% to 3%. So that's probably what's driving a lot of the action today in the market. They also lowered revenue guidance for the fourth quarter, down 5.2% at the midpoint, and the new guidance range being well below the bottom end of the previous range. But, interestingly, they didn't change the earnings-per-share number. That's still expected to come in about $1.95 or so. I don't know why that is. But yeah, the numbers are not good.

Hill: I know that, just the standpoint of pure math, you mentioned the same-store sales and the drop in guidance. Let's just say it's 5%. We'll just round it to that, 5% lower than expected. I know there is no difference in terms of math between "We were expecting a comps of plus 10%, and now it's going to be plus 5%" -- there's no difference between that and "We thought it was going to be plus 3%. It's going to be negative 2%." It's the same number of percentage points.

Mueller: It's the same difference, right?

Hill: And yet, from an optics standpoint, I feel like this is so much worse.

Mueller: It is. Because while going from plus 10% to plus 5% is not good -- it indicates that management was off base -- at least it's still growing. Optically, this is much worse for approximately the same amount of change, because you're going from increased same-store sales to decreased same-store sales, and that raises questions. Why are fewer shoppers coming by? Etc., etc. Five Below certainly is not the only one having a rough time over the holidays. JC Penney, they're still around. [laughs] Down 7.5% for the holiday season. Kohl's down just slightly. L Brands, which is Victoria's Secret and Bath and Body Works. Victoria's Secret was down 12%, while Bath and Body Works was up 9%. On the other hand, Destination XL Group -- the big and tall shop that I go to -- they were up slightly, 0.4%. Lululemon said this morning they're up mid- to high teens. So, good and bad everywhere. But in general, I think it's the retail locations that are seeing big drops, because online sales were up 19% for November and December.

Hill: Two things with Five Below, and then we'll move on. First, Joel Anderson, CEO. I think there's a lot of respect inside Fool headquarters for the job that he's done leading this company. I don't own shares of Five Below. I question, though, the wisdom of him, or at least a quote being attributed to him, as saying that part of the problem here with the last two months has been the shortened holiday season. The reason I say that is because of some of the companies you name-checked. Whether it's Costco or Lululemon, other retailers are dealing with the same environment of, yes, there are six fewer shopping days compared to the year before. Everybody's dealing with the same environment. So I just question the wisdom of using that as an excuse.

Mueller: Yeah, it's like restaurants using the rain, right? Yeah, I agree with you.

Hill: A second thing, and we'll end here. This stock's at a 52-week low. As you said, they maintained their earnings-per-share guidance. And they also reiterated, "We're opening another 120 locations in 2020." They've got about 900 stores right now. So they're going to boost the store count by 20%. Is this a buying opportunity for this stock?

Mueller: If you believe in the long-term story. I like what they're doing. I like the price point that they have. Not everything in the store is $5. They have a few items up to $10. But that's still a really good price point for a lot of the things they do. They've been very smart in getting packaging better, such as deflating basketballs. That was the big example when went to visit them a couple years ago. And discount retailers are an important part of the economy and an important part of retail. And so I think, for the long haul, this could very well be a decent purchase price.

Hill: Last week, PayPal completed its acquisition of Honey, the shopping rewards platform. It was a $4 billion deal, PayPal's biggest ever. Apparently not everyone is happy about this, because CNBC is reporting that Amazon has been warning some of its customers that using Honey as a browser extension could be a security risk. Amazon further goes on to urge customers to uninstall Honey. Worth pointing out, as CNBC does, that Amazon has their own shopping rewards program that they're trying to push.

Mueller: This story just makes my day. It is so funny. It's the timing of the whole thing that makes it so rich. Amazon's been letting Honey run for the last seven years and hasn't said a word against it. Now, all of a sudden, because PayPal bought it, it's now a risk for tracking your shopping cart data? Stuff that Amazon itself does? Really, guys? [laughs] It's just hilarious.

Hill: Safe to assume that if Honey were still a stand-alone company, this would not be happening.

Mueller: Yeah, you wouldn't have heard it.

Hill: I own shares of both PayPal and Amazon.

Mueller: So do I.

Hill: And I look at this, and I'm like -- [groans]

Mueller: Really, guys? Can't you play nice?

Hill: Yeah. Kids, can't you just play nice? Can't you be good to each other?

Mueller: I think it's a holdover from the days when PayPal was still part of eBay. And eBay was and is a direct competitor to Amazon. And so Amazon's still saying, "No, we don't like it, PayPal! We don't like it!" But PayPal has become such a popular way to pay for things. Amazon doesn't offer it as one of its payment options. Just credit cards, debit cards, and its own Amazon Pay, plus gift cards. I think Amazon might find it beneficial to eventually bring PayPal on as a payment method. But then they'd have to go back and say, "Actually, with Honey, we were a little wrong. Sorry, guys." [laughs]

Hill: It will be interesting to see if this escalates. Let's just assume that this move by Amazon to encourage people that this is a security risk, you should uninstall -- let's assume that the number of people who uninstalled Honey as a result of this is greater than zero. I feel like that's a safe assumption, just given how many millions of people use it. I don't know the exact number. Amazon's not going to tell us. Neither will PayPal. So it'll be interesting to see, does this continue, the messaging that Amazon is using about Honey? If so, does it escalate in any way? I don't have a preconceived notion of how it could escalate. But, to your point, it really does seem like there's an opportunity here for Amazon to sit down with PayPal and say, "OK, look, let's figure out a way to bring you on board our platform." By the way, I don't begrudge so much this move by Amazon. Yes, it's clearly, as you pointed out, this is a long history with eBay and PayPal and Amazon. But if they're trying to push their own shopping rewards program, I see the logic in it. But, just sit down and figure out a way to get PayPal on board. Maybe it's not going to be at the terms PayPal necessarily loves, but it could defuse this situation, and it could be a win-win situation.

Mueller: I think it would be a win for Amazon, definitely, and would benefit PayPal as well. I don't see it happening quite --

Hill: Oh no, no.

Mueller: I'm not holding my breath over this. But more broadly, I think this highlights a little bit of what Amazon is facing. They're not as monolithic as people have commonly assumed. We've heard reports of several companies removing their products from Amazon. Most recently Nike in November, but Birkenstock before, and IKEA decided not to pursue any further relationship with Amazon. That is from concerns about counterfeit goods, which Amazon has a problem with, and they're not doing as much as some brand companies like Nike want them to do.

Hill: The Wall Street Journal reporting this morning on the latest from Morning Consult, which is a tech survey company. Morning Consult is out with a very detailed survey about the most trusted brands. I'm going to try to include a link to the survey in the description of this podcast. We've been having some issues with links, putting them in the description of the podcast. Hopefully that'll work. But I'm curious what you think about this. What I like about the survey, surveying thousands of people, asking basically your level of trust with a given brand, is that they break it out in total, the total results, but they also break it out by generation. We'll go to the generation stuff in a minute here. But the thing that surprised me right off the bat is that No. 1 on the list is the U.S. Postal Service.

Mueller: [laughs] Well, I think that comes down to...the quote from one of the people running the survey, this is what the gentleman said. "When it comes to trust, factors relating to reliability are far more important to consumers than ethics." And you've got to admit it, the U.S. Postal Service is reliable. They deliver the mail to day in and day out, they deliver it to your address at home. And some of those places are really crazy to get to. Come rain, snow, sun, whatever. And they don't lose the mail that often, which is amazing, too. I wish they delivered less junk mail. But that's not their issue.

Hill: So, here are the top five. U.S. Postal Service, followed by Amazon, Google, PayPal, and the Weather Channel. And that right there gives you a sense of, throughout this survey, they've got the top 25, some of them are stand-alone companies. Some of them are stand-alone public companies. And some of them are brands underneath -- for example, Tide detergent is among the most trusted brands. Dove soap. Those are stand-alone brands. They are part of larger public companies.

Mueller: I'm glad to see two toothpaste brands are on this list.

Hill: Absolutely.

Mueller: What's interesting with toothpaste, if we do the generational stuff, is Crest is on the older generations, and Colgate is the younger generations.

Hill: Right. Let's get to the generational stuff. They break it out. The four generations that they touch on -- baby boomers, Gen X, millennials, and Gen Z adults, so, people who are 18 to 22. And you see some consistency across these brands in terms of trust. Amazon is up there for the majority of these generations. Google is as well. It's interesting to me, though, that Disney is a trusted brand for millennials. It is not in the top 25 for Gen Z, although Marvel Studios and Pixar are there.

Mueller: I think that's an effect of what you are exposed to as you're a young person. I think that's a true statement for a lot of this. Product loyalty sets in early. I've used Crest toothpaste my entire life. That's because that's what my parents bought, and I've never bothered to change it. Other parents buy Colgate. So I went through and tried to pick out the ones that were on all four generations. The USPS, some sort of toothpaste, PayPal was on all four, which I think was pretty cool. M&Ms. Gotta love those little chocolate candies, right?

Hill: Absolutely.

Mueller: And Chick-fil-A was on all four. I probably missed a couple, but it's a little hard when you're jumping from view to view to pick them out.

Hill: Well, it's interesting when you think about -- we get this question all the time for people who are just starting out investing. It's, "OK, I've set up my account, I've got some money. Where do I start? How do I start?" You could do a lot worse than to start with the companies that are on this list. I'm not saying it's foolproof, because there are certainly some companies on here -- Campbell Soup is one of the most trusted brands for baby boomers. Campbell's Soup, not a great stock over the last five plus.

Mueller: Yeah, not today. Maybe skew toward the younger generations, Gen Z and the millennials. They're more tech. The boomers have a lot more of those consumer brands. They have Cheerios, Campbell's Soup, Kellogg's, Heinz ketchup, Scotch Tape, for goodness sake. Gen X has several of those, but they're starting to add some of the newer stuff like Netflix. The millennials and Gen Z, much more tech. Google, Netflix, Amazon and so forth. So, it's a really interesting way of looking at it, in that how old you are now and what brands you think will do the right thing -- that was the question. How much do you trust each brand to do what is right? What is right can mean being reliable or being ethical. Gen Z are more toward ethical, while the other generations are more toward reliable, possibly. It's a really interesting report. I'm really glad you brought this to my attention this morning.

Hill: So, just as this could be a good place to start, it's also worth mentioning that there are great companies that have been huge out-performers as stocks that are not on this list. Microsoft and Facebook, just to pick two, appear nowhere on the broader list --

Mueller: Microsoft's on the Gen Z list, number 16.

Hill: Oh, that's right. OK.

Mueller: But it doesn't appear anywhere else.

Hill: Doesn't appear anywhere else. I don't see Instagram on here. Just thinking of Disney with Marvel and Pixar.

Mueller: And Facebook isn't on there. You're right.

Hill: Yeah. But, certainly a decent place to start if you're looking to start building out your portfolio. Because trust is one of those things that doesn't show up on the balance sheet, but can matter a whole lot.

Mueller: Definitely. And trust means you're likely to continue buying from them, and that's good for business, and that's good for stocks generally.

Hill: Jim Mueller, thanks for being here!

Mueller: Thanks, Chris!

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 Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.