In this episode of Market Foolery, Chris Hill and MFAM Funds' Bill Barker talk business news, tied-together industries, bothering CEOs for fun and profit, and more. Goldman Sachs (NYSE:GS) hits a 52-week high on its earnings report, but the big bank's performance over the past 3, 5, 10, and 15 years hasn't been as nice -- for shareholders, at least.
Target (NYSE:TGT) dropped almost 10% on a weaker-than-expected quarter and dragged down a slew of related companies with it, too. And Bill and Chris discuss which CEO they would shadow if they had their choice. Tune in to hear more.
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This video was recorded on Jan. 15, 2020.
Chris Hill: It's Wednesday, January 15th. Welcome to Market Foolery! I'm Chris Hill. With me in studio: Mr. Bill Barker. Thanks for being here.
Bill Barker: Thanks for having me.
Hill: Earnings season, I wouldn't say it's heating up, but it's getting started. We're going to get into a little bit of earnings. We've got some more holiday sales. And we've got some CEOs to discuss. But let's start with Goldman Sachs, because shares of Goldman Sachs are hitting a 52-week high this morning after fourth-quarter revenue came in just shy of $10 billion. That is 23% higher than a year ago. It was not all sunshine and rainbows for Goldman Sachs, though, because on the downside, they have a legal bill somewhere just north of $1 billion that they're paying. Is that run-of-the-mill legal stuff? Or is there some big thing going on with them where they need more lawyers than usual?
Barker: Yeah, it's the 1MDB, whatever the acronym is for that scandal. When you say that it's hitting a 52-week high, it sounds like this is mostly a sunshine-and-rainbows story. Just looking over where Goldman has been and how the stock has done, this is a company that, it's underperformed over the last 3-, 5-, 10-, and 15-year periods. Now, you go back 10 years, you're still heavily in the financial crisis era, so underperforming the market by nearly 10% a year over that period of time might be the effect of where the stock was. But this has really not been something thing that has benefited shareholders over the long term. I would say the miss on earnings was attributable in part to a higher compensation ratio. What Goldman Sachs has done well is compensate its employees, more so than its shareholders, and also its litigants now, too.
Hill: [laughs] So you're saying, if you work for Goldman Sachs --
Barker: It's been a good 10, 15 years. [laughs]
Hill: -- either as a lawyer or some other type of job, then you're probably happier than the average shareholder who has owned this stock for the past 5, 10 years.
Barker: It was Michael Lewis, friend of yours, close personal friend of yours --
Hill: Not a close personal friend. Someone I've interviewed a few times.
Barker: And it's been friendly.
Barker: The interviews have been friendly.
Hill: Well, he's a friendly guy.
Barker: Yeah. So, he's a friend of yours, in a sense. Anyway, he wrote back in the day, I believe in Liar's Poker, that Goldman Sachs and other bond traders were in the blessed part of the economy of people who could charge whatever they wanted for their services. I mean, it was a pithier line than that, but that summed it up. He, having worked there, and having succeeded, as that being his first job out of college --
Hill: Was he at Goldman? I thought it was at Salomon Brothers.
Barker: Oh, he was at Salomon Brothers. Now I've messed up the whole story by misusing facts.
Hill: I would say we'll edit this out, but I think longtime listeners know we're not editing this out.
Barker: No. I mean, I've corrected you a few times. You've let me correct you. So, yes, you're right. But it's the same category, the employees of Salomon back in the day, Goldman, up to present, of well-compensated people whose compensation did not make sense to Michael Lewis based on the work that he was doing for them.
Hill: But it's nice work if you can get it. You can charge whatever you want.
Barker: Well, it's the compensation part. Now, there are long hours. Don't want to make it seem like there is a free lunch for that. But nevertheless, again, compensation was part of the equation here on the missed bottom line.
Hill: It really does seem like, when you step back and you look at Goldman Sachs and the other big investment banks -- you can throw Citigroup in there, Bank of America, whoever else you want -- investors, if they're interested in owning shares of some business in the financial industry, that you really are better off, not just from a clarity standpoint, because you can understand businesses like Visa and MasterCard with greater clarity than you can with investment banks like Goldman Sachs, because there's always that black box quality to their earnings, but you do better as a shareholder. It's not just, "Oh, I can understand this business better as a nice little bonus." You'd much rather have been a shareholder of Visa or MasterCard over the past 5, 10 years than of Goldman Sachs.
Barker: Yeah. Goldman is addressing that, in part, I think they're having their first investor day in a couple of weeks where they're going to go over financial targets and try to correct the black-box-ness of their model, which has mostly been to just say, "Look, we're doing our thing. Don't ask us a lot of questions."
Hill: I'm not going to hold my breath on that one. I'm not going to hold my breath on the Goldman Sachs investor day being some amazing amount of sunshine into how they do business.
Barker: But I bet the food's good.
Hill: Oh, yeah, the food's probably great. Yeah.
Shares of Target down 7% this morning. CEO Brian Cornell called Target's holiday sales disappointing and said, and I'm quoting, "The company faced challenges throughout November and December in key seasonal merchandise categories." I'm a little surprised by this, for a couple of reasons. The larger one being that Target has been a very good operator in the retail space over the past year or so. The second, more specific reason is that going into the holiday season, if you were going to bet on any retailer when it came to toys, you were going to bet on Target. They were opening the mini-Disney shops within some of their locations. They were powering the Toys R Us website. If anyone was set up to succeed with toys, it was Target. So the fact that toys were one of the areas where they had disappointing results, that's a little surprising.
Barker: Well, you may be right to have bet on Target if you were going to bet on toys, because the data that they shared was, for the month, toys were approximately flat year over year, but that still represented market share gains. So they were doing better, according to their numbers, which are taken from the industry trade group on toy sales, than the competition. Not by a lot, but they took a little bit of market share. You're seeing Hasbro get hit by this report as well, because the implication here is, if you're flat and you're getting market share, then the total number for toys is down year over year, and that includes not a lot of inflation but a little bit of inflation, so that is not a good sign for Hasbro. And I think everybody's just lamenting the fact that baby Yoda wasn't out there.
Hill: [laughs] It really does seem like a miss. It seems like an avoidable miss.
Barker: But here we are, talking about it. We're just giving more fuel to The Mandalorian by talking about, "Wow, think of the baby Yoda toys you could have sold." And now, people who are listening are thinking, "I have to go watch The Mandalorian." That's the only way to get any baby Yoda, which everybody wants.
Hill: You know what? All evidence to this point is that a lot of people have already watched The Mandalorian and have seen baby Yoda. Worth pointing out that Walmart shares are down a little bit. You mentioned Hasbro being down. Best Buy shares are down on no news. Walmart is down on no news. It's, I'm assuming, related to Target being as big as it is and having this kind of...it's not a big stumble, but it's enough of a stumble. When the CEO comes out and says, "This is disappointing," then I think it's reasonable to see a little bit of a sell-off. But I'm now even more interested to see what Walmart's holiday sales look like when they announce them.
Barker: Yeah. The category breakdown that was provided in the November-December comp sales by Target showed electronic sales down 6%. No surprise that Best Buy is going to be down on that news. Other things were up. It's a diversified business in the sense that there are a lot of different categories there. Beauty was up 7%, apparel was up 5%. Those numbers aren't too bad. You're not seeing apparel retailers getting clubbed today. But they were exposed to all the different categories. Some were up, some were down. The thing is, Target is down, the stock is down 7%, something like that, at the moment. It's still up 75% over the last 12 months. More than doubled from the Christmastime lows of last year. So, all right, stock takes a little bit of a breather.
Hill: Well, and also, Jim Mueller and I talked about this the other day, comp sales to this point are still positive. The expectation ws that it was going to be north of 5%; instead, it's like 1.5%. Target did reiterate, they expect to have their 11th straight quarter of sales growth. That's probably going to hold up. But, as Jim Mueller and I were talking about the other day, even just from an optics standpoint, there's a difference between, "Well, we were expecting comps near 6%. Instead, they're at 1.5%." That still is better than, "We were expecting comp sales of plus 3%. They're going to come in negative 2%." When you go from positive to negative, it's just worse than the actual number.
Barker: Yeah. And the details are interesting here, of course. I think the broader story, they talked about their digital sales, comparable digital sales up 19% year over year. So it's a part of the larger story that people are getting more online, less in person; or, if they are in person, they're doing it through order online, pick up in store, that sort of thing. So Target is making the right transitions. But it is hard being a retailer.
Hill: We talked about this on Motley Fool Money last week. We got an email question from a listener. You get the chance to shadow a CEO for a month. Who do you choose and why? Emily Flippen talked about Jack Dorsey, because she said, "I feel like I would get to study two companies in Twitter and Square." Andy Cross talked about Elon Musk. Ron Gross mentioned Warren Buffett. Who would you shadow if you got the chance?
Barker: Well, first, I'm just trying to figure out whether to take the bait on the respective size of living space.
Hill: No, no. Don't take the bait. Be bigger than that. Be bigger than me.
Barker: I'm leaning toward being bigger than that.
Hill: That's the move.
Barker: But I'm working through where to go with that in my mind.
Hill: Let's move on. Listeners will know you're the bigger man.
Barker: I'll probably work something in along the way here. I'll try to be subtle about it. Who'd you go with? I'm putting you on the spot.
Hill: I didn't mention anyone on Motley Fool Money, but in thinking about this --
Barker: Are you now thinking about it for the first time?
Hill: No, I'm thinking about it for the second time. I thought about this earlier today. The first person who popped into mind was Kevin Johnson from Starbucks. But if I followed him around for a month -- first of all, if I got to shadow a CEO, they would need to be very patient and indulge lots of questions from me. And so I'm worried that if I shadow Kevin Johnson at Starbucks, a stock that I have owned for 20 years and business that I love, I feel like pretty much every day, I would not be able to stop myself from asking him about the food. Just asking questions about, "Really, what's with the food? What else have you tried? What are you working on? What's in the lab? Don't tell me about the Roastery, I'm not interested in the Roastery." Once, we can go by the Roastery and check it out, but I'm more interested in the food. And I think he'd get sick of me pretty quickly.
So, the other two people I thought of were Jeff Bezos -- because I feel like Bezos would be an exercise in both retail, studying retail, but also how he views the future. And the other one -- I don't own shares of Ulta Beauty, but the job that Mary Dillon has done leading Ulta Beauty is one of the most impressive bits of corporate leadership I've seen in the last few years. Because, as you said about Target, retail is hard, and Ulta Beauty is an amazing business succeeding, in terms of traditional bricks-and-mortar store count, they also have the membership model. I feel like, in terms of learning, I think I would learn a lot from Mary Dillon, and hopefully I wouldn't bug the hell out of her in the way that I absolutely would bug the hell out of Kevin Johnson.
Barker: So you're weighing it based on how annoying you would be to respective CEOs.
Hill: That's part of my calculus, yeah. Really, with Kevin Johnson, every single day, at some point, we'd be talking about food.
Barker: "Have we talked about food today, Kevin?" He's like, "You want to get lunch?" You're like, "No. Not at Starbucks, no."
Hill: "No, I'd like to revisit the La Boulange incident, the acquisition of La Boulange, the promises that were made, and the ultimate failure of that."
Barker: "And can we talk about Krispy Kreme no longer being available? What's up with that?"
Hill: Yes. And he would rightfully say, "You know I wasn't CEO then." I know.
Barker: Krispy Kreme still exists, though, and you could partner with them. What about that? Ask every day.
Barker: About how many donuts do you eat in a year?
Hill: In a year?
Hill: I would say less than 200. I was going to say less than 300, but probably less than 200.
Barker: Over/under line is like 185?
Hill: Hold on a second. Are we counting Munchkins? Are we saying, if you eat four Munchkins, that's a donut? Because that's basically how the math works. Because if we're doing that, then the number's higher. Because I don't eat a lot of donuts. I eat plenty of Munchkins.
Barker: All right, well, to answer the question --
Hill: [laughs] No one's listening at this point.
Barker: We say that, and then the two people who are listening always chime in. "I was still listening," and it's usually the guy, or the woman, who's still listening. To him or her, we say --
Barker: Thank you. I'm going with Oscar Munoz.
Hill: United Airlines?
Hill: Do tell.
Barker: Well, first of all, my hope is that by shadowing him, we're getting on the planes a lot and going to some fun places. I say that in part because he's about to retire in May of this year. And so I think that seeing somebody go through the transition from CEO to chairman and handing over the reins, that would be an interesting part of it, especially if a lot of it occurs at exciting places around the world that you can get to by plane, preferably by flying first class on United or its partner airlines. So that's a big chunk of it.
But he's been very successful. He was noted by PR Week as Communicator of the Year. Now, that was right before United got into the headlines for the passenger incident where somebody was dragged off the plane, and they did terribly on the communication of that. So I think somebody who has both received the accolades and the criticism, at the end of this part of their career, and is walking off the stage, I think from a winning position, nevertheless, I'd like to know some of what he learned from that experience.
And I think that the industry as it relates to government regulatory bodies and dealing with unions and dealing with customer service and the cyclicality of it and the Boeing issues -- I think that the number of different things that you would be exposed to would be a lot more than your coffee and donuts thing with Starbucks. I mean, I'm drinking coffee right now. I'm not flying. People know I'm a fan of coffee, but I think that the diversity of topics that you would get to see would be fascinating.
Hill: I agree with all of that, but I am wondering if 2% of the reason you would want to follow Munoz is, you have it in your head that you would get frequent-flyer miles for all of the flights you take with him.
Barker: But I'd be frequently flying, according to this vision of mine. Whether I get the miles to fly more -- I'd be sick of flying by the end of it. First of all, I'd have been everywhere. [laughs] According to my vision of Oscar Munoz's job of telling me about his work. He'd be like, "Hey, Buenos Aires tomorrow?" "Sounds good."
Hill: Even if that's true, even if this vision of yours comes true, how do you think that would fly at home?
Barker: Much jealousy.
Hill: You finish your month with Munoz, and it's like, "Hey, next year, I was thinking we could take a trip to -- " and you'd be like, "Ah, I've been there." [laughs]
Barker: [laughs] "I've been there. That's a place you only want to go to once. Once a year, anyway." Yeah, I don't know. You're just bringing me down, man. I thought my idea was pretty good.
Hill: No, no, I think your idea is really good. I absolutely agree with what you said about Munoz from a communications standpoint. There are plenty of CEOs across a range of industries who could learn a lot from Munoz, just purely from the standpoint of how to interact with the media, how to put forth a message for the public. It makes sense to me that he got that honor from the PR people --
Barker: Then they tried to take it back. You can't really take it back; all it is is an article in the magazine. But I think they said afterwards, "Hey, if we were giving this now," after the incident where United really didn't do a good job on communicating regarding this passenger being hauled off, and the social media elements of that, and they said, "We would not have given it to him at this point." So he's seen both sides, of doing the job well and suffering the consequences of missteps.
Hill: I don't disagree with that, but I do think that Munoz as a communicator had far more wins than losses.
Barker: Right, yes.
Hill: Bill Barker, thanks for being here.
Barker: 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's going to do it for this episode of Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.