In this episode of MarketFoolery, host Chris Chill and analyst Bill Barker go through some of today's business headlines. Zoom Video (ZM -1.69%) had a significant jump in revenue, but didn't meet the market's expectations. Burlington Stores (BURL 1.29%), meanwhile, is cautious on guidance. Finally, we have the results for American Eagle (AEO -0.08%), and the guys discuss the merits of owning fashion stocks. They also answer listener questions -- and plenty more.
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This video was recorded on March 5, 2020.
Chris Hill: It's Thursday, March 5th. Welcome to MarketFoolery. I'm Chris Hill, with me in studio Mr. Bill Barker. Thanks for being here.
Bill Barker: Thanks for having me.
Hill: We've got earnings. We've got the latest on the breakfast wars. Let's start with Zoom Video. Fourth-quarter revenue for Zoom Video grew 78%. One of those interesting stock moves, because initially the reaction on Wall Street was, "Well, that was good, it wasn't ... we're looking for a little more." And I realize, the stock has had a run-up, but Zoom Video was down at the open; it's bounced back up, it's up about 7% so far.
Barker: It is at the moment, yeah, but wait a little bit. [laughs] I mean, you're not closing the books on that, are you?
Hill: Right. No, we still have several hours to the trading day.
Barker: Yeah. That was a great quarter, and it's not only been another great quarter for Zoom, which is in what now more likely appears to be the early part or the middle part of a great growth story, but it's doing well at this very moment in time, which distinguishes it from a number of other companies. And is not going to be one of the companies reporting, "Hey, you know, this is how we did last quarter, but we need to temper expectations for the future." Just the opposite for Zoom.
Hill: Just the opposite. And similar to what Jason Moser and I were talking about the other day with Teladoc, you know; this is Eric Yuan, the CEO at Zoom Video, being very measured and not saying something like, "Boy! This coronavirus, holy cow! Is this good for our business." He would never say that. You would not want him to say that, but holy cow! Is this whole situation like...
Barker: He wouldn't say that, but you're theoretically putting those words into his head.
Hill: You don't think he's had those words in his head?
Barker: I'm just saying that... [laughs]
Hill: ... he's a smart guy, he's absolutely had those words in his head. He's also smart enough not to say them out loud on a conference call.
Barker: Well, if we got him online right now, we say, "Hey, have you been thinking that?" Then he would be smart enough to say, "No, of course not. We're managing our business for the long term." And so, I think what they are getting is a lot of people signing up for free trials right now, which ultimately have a good chance of being upgraded into part of the more expensive parts of the system, the paying and subscription part.
And I think that a lot of businesses are being forced to try either Zoom or products like Zoom, the competition and...
Hill: ... Cisco Systems has a competing video platform, right?
Barker: Yeah. Did we used to use that?
Barker: We used to use it -- [laughs]
Hill: And it went so well that we switched to Zoom Video.
Barker: And so, I think a number of places are going to find just as one of the dangers for airlines right now is not just that they're losing current trips, but as businesses find, "Oh, we can do many things just as well over Zoom as sending people around, and in fact it's a lot cheaper. That is what, I think, people buying Zoom stock today are thinking, because it's certainly not cheap on almost any metric that you would come up with.
Hill: Not on traditional valuations, no, but I'm glad you mentioned the airlines, because for all the talk we've had about the cruise lines and those stocks, in some cases down 40% or more, the airline stocks are getting hit today. And I think you're absolutely right, I think a lot of businesses, including ours, are saying, "We're going to stop the travel for now and then we're going to reevaluate." And I think a lot of them are going to, when they reevaluate, when we are clear of this crisis, whether it's later in 2020 or into 2021, my hunch is that a good chunk of businesses are not going to return to whatever levels they were at before in terms of air travel.
Barker: Yeah. And I think that in future generations we'll be explaining, "Oh, yeah, we had these technologies to do teleconferencing business meetings all the time, but we were kind of used to getting on a plane and going and, you know, the personal thing, the contact. And all of which is true to a degree and the degree may not be sufficient to justify as much of that expense as most businesses are just attuned to putting into the budget, and therefore, spending. And now, if there's a prolonged trial and things go well from the perspective of getting those kinds of businesses, those meetings done and saving money, then I think you may reset some budgets out there to the detriment of airlines and to the benefit of Zoom and other competitors.
Hill: Earlier when you referenced companies that are cautious with their guidance, that brings us to Burlington Stores, because Burlington Stores, they wrapped up the fiscal year in a rock-solid way. Fourth-quarter profits came in higher than expected, but their guidance for 2020 was somewhat cautious. Its fourth quarter was really good, though.
Barker: Fourth quarter was really good. The year was good. The past years have been good. This is a, really, I think, under-the-radar, superlative stock and has been since coming back into the public markets about, I want to say, five, six years ago, something like that.
Barker: And just up today, in a tough day to have your stock go up or at least as we talk right now. Things may be different by the time you listen to this, but up 3%, the market is not. And it's because it had, I think, it was the 20th consecutive quarter in a row of positive comps. And they are opening stores. They're not getting destroyed by being in malls. They're mostly not. So, they've got a business model which is not nearly as susceptible, both to the mall traffic problem and to online competition as most of the other retailers are.
Hill: Burlington Stores is maybe the best example of how discount retailing can work. You mentioned the comps. Same-store sales in the fourth quarter were up nearly 4%; that's particularly strong when you consider for them it's the holiday quarter and just all of the competition from retailers of every stripe. So, to put up nearly 4% comps in Q4, I thought it was pretty great.
And, yeah, one more way that I think this is a smart business is, they're not crazy with their overall store footprint. So, you know, they're making this work but they're not then going out and saying, "Oh, yeah, we're going to ramp up our store count by 20%."
Barker: No. But they are increasing their store count slowly in a measured way. Their margins are holding up. Part of their press release noted that they had decreased inventory by 20%, total inventory, which shows the speed with which things go in and out of their stores as compared to most other retailers, they're just turning over merchandise much faster, much more efficiently, they have a better distribution center network than most retail stores. And they are, by being in the sort of the discount space, they are used to working on narrower margins which are less susceptible to online competition, which has to deal with more shipping costs than Burlington does. So, they are not being priced out of business.
On the flip side, American Eagle's fourth quarter -- well, I don't want to ding them too bad. The fourth quarter for American Eagle closed out, in terms of overall sales, a record year for the company, and yet, it's a reminder that fashion apparel is just such a tough business. And from an investing standpoint, I think it's one of the least attractive, not that there aren't periods of time when American Eagle, or for that matter, Abercrombie & Fitch and others of this category, they've had short stretches of time when you were thrilled to own the stock, but it's just that, it's short stretches of time. These are not businesses that you can look at and, say, "Oh, I'm just going to set it and forget it, American Eagle, I just want to own this thing for the next ten years.
Barker: No. And in fact, if you had owned it for the last ten years, your annual returns would have been 1%, so you would have trailed the market by about 12% a year; 15 years, your returns would have been less than 1% annually. So, I, like you, when reading this report and looking at the numbers, really was reminded more than anything else of the last lines of The Great Gatsby.
Hill: I've never read The Great Gatsby, so enlighten me.
Barker: Well, so -- [laughs]
Hill: Nor have I seen any of the movie versions of The Great Gatsby.
Barker: Oh, really?
Barker: Well, you see everything.
Hill: No, I don't.
Barker: And you love DiCaprio.
Hill: Well, I mean he is an American treasure, of course. We all love DiCaprio. Come on!
Barker: [laughs] So, I would have thought you would have seen it two or three times by now.
Hill: Just because I love DiCaprio, as all right-thinking people do, doesn't mean I see everything he does.
Barker: Yeah, well, I could quote the lines of Gatsby, not off the top of my head, but I could read them, which would make for boring radio, but it refers to the last line, the very last line, and the line before that. But the last line is, "So we beat on, boats against the current, borne back ceaselessly into the past." And it's about thinking that the future is going to be brighter and constantly being reminded that it is not and will not be. And so --
Hill: Well, thank you, Mr. Happy.
Barker: Well, that is for American Eagle. I mean, as we pointed out, there have been essentially no returns over the last 15 years for owning the stock. And they are not making any more money than they were 15 years ago. Sales move up a little bit, but the margins keep eroding because of the competition that we discussed, the retailers are up against, both, not getting the mall traffic that they need and not really able to compete effectively against the online crowd.
Something goes right in the case of American Eagle right now, that's Aerie, but that was up 26% in sales over the quarter, but that's not the majority of the business. The main business American Eagle Outfitters has lost 3% over the quarter. So, yeah, there's a little bit of hope that the decline of the strength of Victoria's Secret has given an opportunity for Aerie to expand and to grow, but that's as much is going right, everything else is going wrong. And the net outcome is, the future continues, although they point out, the restructuring is going well, the bottom-line keeps sticking around right where it's been for about 15 years.
Hill: And the restructuring may in fact be going well, it's just not showing up in the results.
Barker: And there'll be another restructuring again. If you just ignore the significant cost of restructuring, then our profits are about what they were last year, please agree with us to ignore those costs and then we're not really going backwards. Well, that's a lot of ifs.
Hill: That's the great thing about investing, every individual investor gets to decide whether or not they want to agree with management and ignore input costs.
Barker: Yeah, I think F. Scott Fitzgerald nailed this one about 100 years ago and they're still looking for that green light. It's a mirage, man. It's a mirage.
Hill: Do you think he had American Eagle Outfitters in mind when he wrote that?
Barker: More or less, it was the American dream, this American Eagle. I mean they're playing off the American dream pretty obviously there, right.
Hill: I guess.
Barker: With the eagle iconography. Come on!
Hill: Yeah. I mean a little bit more recently, it's the line from Hunter S. Thompson, you know, "That's where the wave broke and rolled back."
Barker: I need to read some more; it's been too long since I read any Hunter S. Thompson.
Hill: Oh, really?
Barker: I mean, I read it all back when I was teens and 20s, like everybody does, but...
Hill: Here's my recommendation. Read Fear and Loathing on the Campaign Trail, which he wrote about the 1972 presidential campaign. And the reason you should read is because, holy cow! Does it hold up in terms of he's writing about presidential politics in real time in 1972. And the parallels to every presidential election -- not all of them across the board, but there are a bunch that really hold up. So, that's -- of all the things that he wrote.
But if you're looking for something shorter, something you can knock out in 20 minutes or so: "The Kentucky Derby Is Decadent and Depraved," which is a long-form article he wrote for a sporting magazine which no longer exists, but he wrote about the Kentucky Derby. For me, that was the gateway drug of Hunter S. Thompson. That was the first thing of his that I read and I thought, "Holy cow! What else has this guy written?"
Barker: Didn't start out with Fear and Loathing in Las Vegas? Now, there's something that they could redo for, like, a Netflix series, instead of a movie, don't you think?
Hill: Yeah. I would think there are a bunch of things of his, that you could redo. Since the movie adaptations largely haven't worked.
Barker: No. And I think that the CGI is better now, too, which would serve the Steadman drawings better.
Hill: Absolutely. Our email address is [email protected]. Great email from Kordell Zielinski, who writes, "Love the show, one of the best parts of my day." Thank you, Kordell, I appreciate it. "I did some boots-on-the-ground research of Wendy's (WEN 1.50%) new breakfast." And I'll just add parenthetically a bunch of people have written in about Wendy's new breakfast saying essentially, "Are you going to talk about this?" So, here we are. He writes. "Sacrificing my daily caloric intake twice on Tuesday, I had the Maple Chicken Bacon Croissant, on Wednesday I had the Breakfast Baconator. I wasn't a huge fan of the syrup used in the former, but the chicken and bacon was impeccable. Regarding the latter, the mayo was too much for 8:00 AM, and it was the size of a burger, not a biscuit, but the bun was good. Overall, it's comparable to other fast food breakfast offerings. The best part was not the sandwiches but the seasoned potatoes and the Frosty-ccino, they definitely underplayed these. If you had to make an investment choice based only on the taste of fast food breakfast, which company do you go with?"
I love this question. I'll also point out that it's interesting to me that he played up the coffee beverage there, the Frosty-ccino. And it'll be interesting to see to what extent Wendy's new push into breakfast in this way affects their earnings. But one of the big drivers for McDonald's for years was their coffee. And not just the coffee, which is good coffee, but the coffee drinks.
Barker: Yeah. And what are we going with here? The relative coffees or which company we would bet on based solely on the taste of breakfast?
Hill: The taste of the fast food breakfast. What are you going with? And for me, it's McDonald's. And, I also like that Kordell was sacrificing his daily caloric intake, because if you're going to do fast food breakfast, you are absolutely saying, "Well, I'm going to knock out most of my daily caloric intake with this one meal here."
Barker: Well, I think, if you're going strictly by taste of fast-food breakfast, you still got to go with Dunkin' to win.
Hill: OK, you can do that.
Barker: Because the sugar to rest of the food ratio is higher at Dunkin', therefore it wins the taste contest. If we're excluding all other considerations. And they've got the new bacon thing going. It's just here, here's bacon. We're not messing around, with like, "Oh, it's not like bacon sprinkled on your donuts." No, it's a bag of bacon. So, I mean if there's one thing that tastes better than sugar, it's bacon.
Hill: That's true. And I could see you sort of mixing. You go in and you say, "I'll have the bag of bacon. I'll have a couple of maple donuts. I'll go from there." But I mean, that's you, and that's fine, like, you're buying shares of Dunkin' on that. For me, it's McDonald's.
Barker: I'm representing right-thinking people here. Who are you representing? [laughs]
Hill: [laughs] I'm just representing my taste buds, because that was the question.
Barker: Well, so I'm a big fan of the McDonald's hash browns, which are great and they are leaning heavily on salt, one of the great competitors to sugar when you get down to taste. So, I mean, McDonald's takes a backseat to no one in its use of salt.
Hill: I think that's true.
Barker: I mean, Morton's maybe.
Hill: Right. Not the steakhouse, you mean like the actual --
Barker: ... the actual shaker of salt. They're in the front seat.
Hill: They're in the front seat; they're driving the bus. That's where McDonald's is getting their salt probably.
Barker: And Wendy's is playing with salt; they're playing with sugar. They're going to do well, because when you add breakfast to your restaurant in an efficient way, then you're just adding sales. You're not really taking away from anything.
Hill: So, Kordell's email had me spend a couple of minutes on Wendy's site to look at, well, what are the things that they're offering? And the Breakfast Baconator, that's a burger. Which is an interesting choice to me that Wendy's is saying, "Yeah, we're going to do breakfast, we're going to have potatoes, but we're also offering up burgers. That's like, OK, I don't know that I necessarily want that. I'm looking more for eggs and bacon in my breakfast sandwich. I'm not looking for ground beef. But, OK, it's nice that you're offering it. And who knows, maybe that's going to be the big driver.
Barker: Some people are just looking for permission to eat a burger for breakfast and Wendy's has now given it to them. Think of all the people, "I just wish I could start with a burger." You know, that's got to cover a couple of million people out there.
Hill: It's there on the menu.
Barker: Exactly. Now Wendy's, they're not like McDonald's, "No. No, I can't give you a burger until 10:30." Wendy's like, [laughs] "What are you doing? Order that burger."
Hill: That should be their whole ad campaign, it's just like, "Unlike McDonald's and Burger King, we believe in you! We believe you should have whatever you want." [laughs]
Barker: [laughs] It's not just all-day breakfast, all-day burgers. Well, Wendy's runs a pretty sharp Twitter. Do you follow them on Twitter?
Hill: I don't follow them. Every once in a while, it pops up, so whoever's doing their social media is doing a good job.
Barker: Yeah. They're doing a lot of attack. They're playing offense all the time.
Hill: I think, if you're anyone but McDonald's, you have to play offense all the time, because you're just trying to catch up to McDonald's, aren't you? In store count, in size, in execution? Unless we're talking about chicken sandwiches, everyone's playing catch-up to McDonald's.
Barker: In terms of the bottom line, certainly.
Hill: Bill Barker, thanks for being here.
Barker: Thank you.
Hill: As always, people on the program may have interests 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 Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday.