In this episode of Industry Focus: Consumer Goods, Motley Fool analyst Emily Flippen and Motley Fool contributor Dan Kline take a look at what's happening with retail. Which companies/sectors are going to be impacted the most by the pandemic? What are some crazy valuations? What can you do to support local businesses?

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This video was recorded on March 17, 2020.

Emily Flippen: It's Tuesday, March 17th, and we're talking Consumer Goods. I'm your host Emily Flippen, and I'm joined by Motley Fool contributor Dan Kline. Dan, I'm not quite sure even where to begin right now. [laughs]

Dan Kline: [laughs] Yeah, well, let's start with, so, you and I were very excited, this was going to be an in-studio episode, I was actually going to be in the office for most of the week, I had concert tickets in the area on Sunday, I was going to stay through the week. And, of course, for reasons we're going to talk about extensively, that has not happened, but thankfully, you made it back from your trip, which I was a little bit worried about.

Flippen: I was also a little bit worried there for a while. Yeah, I came back from Tanzania, but I flew back via Zurich, so it was a few days of uncertainty there, wondering if we were going to be let back in the country, but they did, maybe against their better judgment, let me and my group back in. So, I'm just happy to be back.

Kline: Yeah. This would have been a lot harder to do if you were under quarantine somewhere.

Flippen: [laughs] Exactly. Well, I can only imagine that our listeners, maybe for the past couple of weeks have been a little bit confused, because the episodes that I pre recorded at the time seemed like great options, but in the last two weeks, obviously, a lot has impacted the retail industry, read, coronavirus/COVID-19, that we have not covered, so I'm excited to do a couple of weeks of retail virus catch up here with you.

Kline: Yeah. So, we're in a situation where, obviously, retailers across the country are severely impacted, unless they're a small, handful: Costco, Walmart (WMT 0.26%), Target (TGT 1.55%), grocery stores, places that sell essentials may see an uptick in sales, obviously, because people are stocking up. We've all seen the supply shortages, the inability to get toilet paper. And I'll point out that this varies depending where you are.

I live in Florida, I spent last weekend in the Orlando area and this whole week at home in West Palm Beach. And while there are shortages, they're not as pronounced as what I'm hearing from my Fool friends in the Northeast. New Jersey, New England, toilet papers next to impossible to get. Here, it goes out of stock pretty quickly, but it's not all that hard to find if you're getting up early in the morning. You're now starting to see too a chain of voluntary closures, Apple, Microsoft, Nike, they all decided to close. Because the reality is, other than repairing your computer, anything you do from Apple or Microsoft, you can do online. Nike certainly realizes that you're probably not out shopping for new kicks while the coronavirus is going on. And if you really need a new sweatshirt to sleep in, you can order it.

Flippen: Yeah, exactly. And I will say, having no contact, coming back and seeing that the first thing that was, I guess, flying off the shelves at the grocery store is not beans or rice, it was toilet paper, gave me a good chuckle there. [laughs]

Kline: Some of these shortages are very hard to understand and my hope, and sort of what I've been reading from retailers like Amazon (AMZN 0.83%), is that they're going to level-out, because if somebody bought a two-year supply of toilet paper for peace of mind -- next week, as Amazon starts to get it back on the shelves, and they're hiring a 100,000 people and cutting out non-essential deliveries from their suppliers, so -- they will get things back in stock. The people who didn't get things this week will probably get them within the next few days or next week.

All the products are out there, this isn't the case of hand sanitizer where they simply didn't have the manufacturing capacity to keep up, but even there, I think, you're going to see alternatives like hydrogen peroxide and, sort of, do-it-yourself kits be more available. As retailers really seem to be doing a very good job to catch back up under very difficult circumstances. I mean, other than a blizzard or a hurricane, which only impacts part of the country, we never had a period with, sort of, mass closures, in my memory, in the United States and I'm 46 years old, so quite a bit older than you. And this is just unprecedented.

Flippen: Yeah, I kind of want to talk about, in particular, those products that people seem to be buying up are existing stores of masks, hand sanitizers, cleaning products. When I look at the questions a lot of investors have had over the past few weeks, it's been questions about what's the best retail play for a virus-era? And companies like 3M popup a lot; companies that make those masks and those hand sanitizers.

Is retail, in regards to those types of plays, is that even feasible for investors or is this just something that's so short-term? I mean, these companies are trading at crazy valuations now because of this virus.

Kline: Yeah. Look, I don't expect behavior has changed, so you see throughout Asia, wearing masks has become common since the bird flu. And that, sort of, changed the behavior for consuming these things. I don't see that being how Americans typically respond. So, my people maintain a store of goods. I know that since moving to Florida, after we went through our first hurricane, we now have a hurricane preparedness box which has a stack of batteries we can charge and, you know, the crank radio and flashlights and all that sort of stuff. I've never been through one, so I didn't really know, but we made those purchases. And those were one-time purchases.

If I was looking for, sort of, safe haven stocks, I would look toward the retailers who have handled this well that were also strong businesses beforehand. Costco has shown its strength. Target, Walmart have shown that they have the supply chains to keep their store stocked, for the most part, and also deliver online and step-up curbside pickup.

I'd also look at retailers that are going to suffer, but have the ability to come out of this and probably face less competition. Sadly, a lot of local coffee shops might be destroyed by this. And Starbucks (SBUX -1.83%), which is now operating on pick-up and delivery and drive-thru only, they're going to be hurt, but they're going to come out of this just fine.

So, you really want to look at companies that were underlyingly strong, not companies that are doing well because of this situation, unless you truly believe there's going to be long-term consumer changes.

Flippen: Oh, I completely agree, and I agree with your analysis that, for the most part, I don't think people are going to change the way that they consume, I don't think people are, for instance, are going to permanently adjust to making their coffee at home instead of going to Dunkin' or going to Starbucks to buy it.

That being said, there are lots of companies, as you alluded to, that may not make it through this. There are companies -- and I don't think anybody should be invested in a company like this, but when you look for cheap plays on the market I think a lot of investors get exposure -- that cannot survive, I mean, financially cannot survive, through two quarters of an economic downturn. So, what retailers do you see as being so fragile that they may never make it out of the coronavirus time?

Kline: Yeah. It's the companies that were in real trouble anyway. The two most obvious ones are JCPenney and Sears. And while there's definitely going to be some government loans and some other programs to help businesses, I would urge the government -- you know, government, if you're listening -- to look at the underlying health of the company before you loan them any money. Because if JCPenney goes out of business in the next quarter, the reality is, they were probably going out of business two or three quarters from now. And it's not to say I don't like CEO Jill Soltau's turnaround plan, she doesn't have the money to execute it. So, companies that were already struggling are going to suffer.

On the other hand, there is one company, Rite Aid, that was really struggling that might get a cash infusion from this, because, obviously, that's a type of business that people probably first go to CVS then to Walgreens, but I'm sure Rite Aid sold all its hand sanitizers, sold all its toilet paper, its aspirin, all the other things people are buying. So, any retailer that was weak.

You know, this is going to be a blow for Macy's, but Macy's has remained profitable. So, even though it's struggling, it can probably get through a few quarters and probably has the capacity to borrow money if it needs to.

This is going to hurt a lot of brands, but the ones to really stay away from are ones that you said, "Well, their turnaround plan has less than 50% chance of working." Now, they probably have no chance of working.

Flippen: Dan, there's so many investors in retail. And retail itself has, obviously, been struggling for a long time now. The fact that there is essentially going to be zero foot-traffic to malls, to traditional retailers -- and while there are strong brands out there, I think you mentioned Nike being one of them, Apple being one of them -- they're missing a lot of customers. So, what does this mean for investors?

Kline: Yeah. So, I'll give you some personal experience. Some sales go away. Now, if your iPhone is broken, you're eventually going to replace your iPhone whether it's now or later, but discretionary sales -- when I used to run a very large toy store, at Christmas time if we had a snow day, we lost somewhere between $40,000 and $60,000 on that day, just being closed. And the next day, you might do 10% better, but some of that money is just gone, people elected to go online, they decided they really didn't need it. And I think that's what you're going to see.

If my sneakers are worn out, I'm going to go to Nike -- in my case, New Balance -- and buy sneakers, but I'm not necessarily going to buy that extra t-shirt that I might have purchased. So, you're going to see a lot of pain, but ultimately the strong companies will get through this.

We talked about Starbucks before. Maybe on the first day that they're reopened, I'm going to splurge and spend a little extra. I'll get a Frappuccino instead of a coffee, maybe I'll get a pastry too, but I'm not going to go in and drink one coffee for each day I missed, because that's not how people consume coffee. [laughs]

So, you know, I'm being a little silly here, but look at the underlying strength of brands. This is going to hurt, say, Lowe's or Home Depot. Construction is going to slowdown, though as Austin Morgan, our producer, pointed out before the show, he may do some extra gardening, so maybe they'll gain some sales in other areas, but probably sales of drywall and lumber and other big supplies are going to be way down and take a while to recover, but those chains are both very strong, there's no reason to believe that consumers won't eventually do those products. And I am one of the believers, and this is not what everyone thinks, that when this goes away, be that May or June, you know, whenever we can go back to having live sports, I think that will be the, sort of, coming out moment for the country, I think there will be a massive rebound spend and good companies will get strong quickly.

Flippen: That's really interesting. I don't think I've heard the argument of a rebound spend, but I know for myself, yesterday Maryland instituted a policy where they're closing down all bars, restaurants, gyms, movies -- and you get delivery, but for the most part, these experiences are going to be gone for the foreseeable future. So, I think that argument, the idea that people who have been deprived, let's say, for a long time, they choose to go out and consume.

Kline: Yeah. You know, casinos are closing. I know one of the ways I've been passing the time -- and I think more people are going to do this -- is I was supposed to be on a cruise in March, which is sort of typical for my travel pattern, I tend to go away once-a-month or so. I was supposed to be in a casino with Motley Fool's own Matt Frankel. In both cases, I've started planning trips, in the case of, with Matt, for the Summer, in the case of taking a cruise, maybe late June. And just the act of planning the trip has made me feel better, given me something to look forward to.

Obviously, we don't know when this will be over, so you want to plan far away, but I do think you're seeing a lot of companies are offering -- all the airlines are offering easy cancellations. Well, not all of them, I have tickets booked on Frontier and they haven't done that yet. So, you can say, "Alright, I couldn't go to Disney World now, maybe I'll go six months from now." And definitely, if people have been stuck in the house -- assuming there are people like us who can do their job from home, so they're still getting paid -- I know that the second I'm allowed to go out, the first thing I'm going to do is go to my favorite local restaurants, which I'm trying to support via takeout. And, yeah, I think you're going to see a big rebound.

You're also going to see, while people will lose jobs over this, you're going to see demand in areas right after this, where places have to staff back up, where they have to deal with sort of a surge. And it's also worth pointing out, that while we're going to see a lot of job losses, we do have 6 million open jobs in this country, so there's a lot of room to, sort of, absorb some of this. And I am not, as you can certainly tell, "This is a doomsday, it's going to plunge us into six years of bad." This is a pause that's going to shake out some struggling companies, and as a country, we're going to have to figure out how to support airlines and casinos and some other businesses with loans.

But eventually, I fully believe your gym will reopen, your restaurant will reopen and in a couple of months we'll be talking doing a post show in a bar, probably the Trademark near the office. And I do believe that investors should look for the companies that will still be around and doing well. This is not going to put Walt Disney World out of business, it's not going to close any one of their hotels. In fact, in that case, where it tends to be a once-in-a-few-years or even once-in-a-lifetime trip, this is simply putting off demand and they're going to struggle with crowds during the busier seasons.

Flippen: So, I've fallen into the trap a little bit myself, both, with the early onset of the coronavirus and with other things in life, about being a little too blasé with the risks that these types of issues, I guess, pose. So, I agree with your analysis that it's going to be short-lived. Obviously, you know, we're not all going to become home hermits [laughs] forever.

But when I think about a prolonged impact, it could be a quarter, it could be two quarters of what will equate to, for many businesses, many retail businesses even, like, very, very little, if no sales. And when you look at that, you can conceptually understand that impact right now. But financially, we're not going to start seeing these numbers start to roll out until a quarter or two quarters from now. How do you think the market will respond then?

Kline: Yeah. Look, I think it'll be priced-in, and what I don't think we've seen is the full impact of what the Federal government is going to do. Look, if you own an Auntie Anne's Pretzel or a Cinnabon, your sales are essentially going to go to zero. So, obviously, malls are not going to want widespread closures, so some smart companies are going to redo rents, are going to look at leases and ways to extend them and build out bigger payment periods, you're going to see federal loans to keep businesses afloat. And that's going to be based on, "Hey, before this happened ... " or at least it should be based on, " ... before this happened, was your business doing well? And if we can help you get through this time-period, will it go back to doing well and be able to pay back that loan?"

I know, well, my brother is in sports, he's a big-time sports advertising executive, and there are no sporting events. So, he can do theoretical business, but he can't do real business. And, obviously, there's going to be a major impact. I mean, look, they've canceled every sporting event. And while they may make up some of the seasons, there's going to be competition for arenas, there's not going to be venues to do certain things, we're not going to get March Madness back, so there will be an absolute long-term impact on some businesses, but hopefully those businesses, the better ones, can absorb the hit and move forward. And sad to say, we will lose some companies during this.

So, the competition for your restaurant dollar will be less when this ends, and that's sad. But I know the restaurants in my neighborhood that were struggling before this, and honestly, most of them were not particularly good concepts and weren't going to make it in the long-term. This is going to, sort of, make a lot of companies die faster than they would, but I don't know about you, but if I'm going to go, I want to go quickly, I don't want, like, a prolonged, painful death. I'd much rather just not wake up one morning. And I think a lot of businesses are not going to wake up one morning. And I don't want to be flip about that, but it was going to happen anyway for the most part.

Flippen: I think the last episode we filmed together was two weeks ago. I think it aired two weeks ago, obviously, we filmed it a bit before that. But you talked a lot about, if memory serves, the omnichannel brands and how the best-performing retail brands are the brands that have an omnichannel experience laid out. And you, kind of, alluded to it earlier with the Walmarts and Targets and Amazons, these brands that do have omnichannel presences. But how much is that really going to save them?

Part of me thinks that the consumption, in general -- as people aren't maybe getting paid as much as they were, as people aren't leaving the homes -- would fall. But the other part of me thinks, I mean, we have no choice now. My only option for eating, for the most part is, to go to a Walmart or a Target and pick up groceries or order something off of Amazon.

Kline: Yeah. I mean, look, is being wonderful at omnichannel great for Best Buy at the moment? No. A lot of people are probably not buying new televisions. On the other hand, they have the capacity to deliver certain things, so they probably are making some sales, which is better than no sales. But when you look at the Walmarts, the Amazons, they have the ability, and it will take days and weeks to shift their supply chain to getting more of what's needed now.

And, look, I can't do the math on whether Amazon will end up doing better, because it sold a ton of low-priced home goods, like, toilet paper and hand sanitizer and rice and beans and pasta and whatever. But their sales, the fact that they can do this, that Walmart can flip on a dime and have curbside pickup available that can deliver things. These are going to be changed behaviors.

I know that someone like my mother, who's pretty tech-savvy for her age, had probably never used Instacart or ordered through Flip for Target, and will now have to do those things. My guess is, once she learns how to do it, that might be changed behavior. So, this could push another portion of sales online. And that will be bad for grocery chains that have not invested in this.

So, if you're a Publix and you're fully integrated into Instacart, well, more people are probably going to use Instacart in the coming weeks, and more people probably already have. If you're a chain that hasn't done that, you might see an actual major change. So, again, if you're an investor, I would look for the companies that weather it was planning for these contingencies or simply seeing where the market would eventually go has built in these capabilities, the delivery network, the supply chain, the ability to ship something from a local store rather than from a warehouse, a thousand miles away. The best companies have invested in that, and the ones who haven't are really going to suffer.

Flippen: So, what I hear you saying is that, maybe the millions Walmart spent on that Super Bowl advertisement for their curbside pickup, wasn't exactly the most misplaced money anymore? [laughs]

Kline: No, it wasn't. And the hardest thing about all of this is adoption. You know, you look at something like mobile order and pay, which Starbucks pioneered. Once Starbucks got -- I don't remember the exact number -- let's call it around 20 million people in the U.S. to do it, it became that much easier for Dunkin' Donuts or Panera or whoever else, to offer similar technology. We've already used it.

And I think you've seen, pretty much every restaurant chain, not every major one, has some version of that. And it's really a question of how many apps you want to have on your phone. But all your favorites will have it. Once we train people to do something, if it's a good experience, they might do it. I use Instacart regularly, because I live in a building and I work from home and sometimes I don't have time to go out and go shopping. So, even though I know I'm paying a premium, I'm getting what I need and my time is valuable.

Once I learn to do that, I could very easily order from other things. I started with Grubhub and now I have about 17 different delivery apps on my phone, trying to figure out which one has the barbecue place I like.

So, I think there will be a shift there. And it might be too late for retailers that haven't made that investment. And do I think that Gap is going to do a lot of sales if they had a great digital capability? No, because there are some things you want to try-on, you want to look at. We're probably a few years away from true virtual fitting and things working well like that. But, if you're a general interest store that hasn't built that out, you're going to have a problem.

I mean, look, Barnes & Noble, no longer a publicly traded company, so hard to know their numbers, but they've lost out on the digital side of the business to Amazon. And something like this is going to make that even more pronounced, whether it's digital books, which basically they don't have, or sending you a physical book, people default to Amazon, because they've been trained that way and this is going to exacerbate that.

Flippen: I guess, as we wrap up this, I know you want to talk about this because you put it on our outline here. And thank you for, obviously, putting in way more time to prepare for this than I had the opportunity to, but it's local businesses. It almost feels like it needs to be a PSA for every listener out there across the country, like, what they can do during this time to support those local businesses that are the most threatened by coronavirus?

Kline: Yeah. So, there's a few things you can do. I mean, I mentioned the one I've been doing is I've been ordering takeout. Now, obviously there are people who have health considerations that might not even want something handled, dropped at their door without interaction, but if you're healthy -- in my case, I live in a building, it could be left at the desk, you know, and you're not worried about that, you should support your local restaurants that way.

If you can order things from local businesses, you know, you need pet supplies or whatever it is and they have a method of getting them to you, think about maybe paying a little more and getting them. If you have businesses you love, buy a gift card online, if they sell them, or call them up and ask them to charge you and set one aside for you. Do what you can to be a good neighbor.

I think the other thing that's important to be, is actually a good neighbor. Make sure the people around you have what they need, some people cannot afford to go out and stock up. So, you probably know who those people are, they're in your family or just people in your community. Go on Amazon and send them some basic supplies, ask them what they need, buy them from local businesses if you can. This is a time where we should really be helping each other. And, yeah, investment is important, there's lots of opportunities. I believe that the good companies, you can buy them at a discount, and that's great, but it's equally important to support your community.

Flippen: Well, I think that's a good note to leave this episode off on. And I apologize to listeners out there for not getting this coverage out sooner, but I'm sure we'll have more updates as the coronavirus continues to evolve, and hopefully, we'll start to see a lot of these retail companies get back into business, although it seems like it may be a few months.

Dan, thank you again for joining me. Sorry, it was supposed to be in studio and we missed you, but even just having you over the phone is great.

Kline: I'll be there as soon as they let me.

Flippen: [laughs] Me too. Listeners, that does it for this episode of Industry Focus. if you have any questions or just want to reach out shoot us an email at [email protected] or tweet us @MFIndustryFocus.

As always, people on the program may own any companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

I would say thanks to Austin Morgan for his work behind the glass today, but I know he is working from behind the computer screen, but thanks, Austin, for your work there. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!