In this episode of Market Foolery, Chris Hill and Motley Fool contributor Dan Kline look at some headlines from Wall Street, including a closer examination of unemployment numbers and why Luckin Coffee (NASDAQ:LK) stock dropped. A prominent cruise liner took on new debt and a major theater chain could be heading for restructuring.
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This video was recorded on April 2, 2020.
This video was recorded on April 2, 2020.
Chris Hill: It's Thursday, April 2nd. Welcome to MarketFoolery. I'm Chris Hill, joining me today from Florida, Mr. Dan Kline. Dan, how are you holding up?
Dan Kline: Hey, there, Chris. I'm getting a little cabin fever, but glad to be getting to work so much, which is obviously something not everyone can say.
Hill: Absolutely, and we're going to start there. We're also going to talk about what is happening with Luckin Coffee, as well as the latest from various forms of entertainment. But let's start with the unemployment numbers. And for anyone who is blown away by the increase we saw last week, you get to be blown away again, because 6.6 million people filed and so we're at 10 million in just two weeks, Dan. Look, I didn't expect it to go down from the 3.3 million. I got to be honest though, I didn't expect it to double from last week.
Kline: So, I did expect it, because with the $2 trillion bailout being passed, there are provisions for expanded unemployment for up to four months. So, a lot of companies that want to come out the other side of this that are closed, you know, Ross Stores, TJX, much more threatened company, JCPenney, have furloughed their workers rather than using their cash reserves to pay them off and keep them employed for a week or two, because they want to be in a position, whether it's two months or three months or whatever, to go back to work. And I think higher-end retailers, like, Macy's might struggle in the first days, because obviously, you're not spending a lot of money if you haven't been working, even if you were collecting, but I do think, sort of, your lower-end retailers, your discount retailers, they're going to bounce back pretty quickly.
So, these are unemployment claims, but they're not necessarily people who are losing their job. These are people who are furloughed and being sent home that will probably have a job to go back to.
Hill: I hope everything you just said is right. I mean, it all seems to make sense, and I think the reaction we saw from the market this morning, in part, was fueled by this report and it was not a horrifically negative reaction.
Kline: Here's the thing. This is going to be lumpy. Are some retailers going to go out of business? I mean, yeah, you heard me mention JCPenney. I thought they were going to go out of business before this, [laughs] nothing has changed my mind on that.
On the other hand, some of these companies that have had a boom, that are hiring, some of them are going to keep these workers. It would not surprise me, if Amazon held on to the workers it's adding, 100,000. Home Depot, Lowe's, places that are adding employees, they'll be heading into their season, where they're busy anyway, where they already would have needed workers. So, as much as there are 10 million new unemployed, there's also -- I don't know the exact number, but around a million over a million -- new jobs being added.
And you know this is a wait-and-see, if we come out of this in a couple of months, that's very different than if this takes an extended time-period.
Hill: Let's move on to the stock of the day, and Luckin Coffee is the stock of the day, because shares are down more than 70% -- not 17%, 1-7, no; 70, 7-0 -- because Luckin disclosed that an internal investigation discovered that the Chief Operating Officer was making up sales numbers. There's no other way to put it. Fabricating sales to the tune of hundreds of millions of dollars last year.
And this backs up the report that Muddy Waters Research, which came out with a short report on Luckin Coffee, they came out in late-January and said, we've got some information sent to us, we don't know who it's from, but it appears to be credible, and if this information is correct then Luckin Coffee is inflating by 70%, 80% the amount of sales that they're doing. And now Luckin has come out and basically said, yeah, turns out the Chief Operating Officer was doing it.
Kline: Yeah, and the problem is, in February when Luckin responded to that report, they came out and said, it's a short-seller, it's someone who's completely making it up, they were really vehement in their denial. And what they probably should have said is, "We believe this isn't true, we are doing an investigation." Obviously, their share would've fallen, but it would have been a better handling of this. And ideally, they would have found nothing is wrong and then they could report that and the share would go back up. But if you own shares in Luckin, one of the things I suggest you do -- and this is not a Motley Fool recommendation, people who own the stock, if it's recommended by us, they will be getting email from the various services -- but you need to wait until the whole picture comes out, because if you believed in the fundamentals of this company and what you're finding out is they're farther down the road than you originally thought they were, you might still see a path for them to get there. I'm not saying that's the answer, I'm saying, right now this is the company saying, this is what we think the issue is. They've appointed a special committee to look into it, they're using independent auditors to go back and check this out.
And this could be worse, it could be better, it could just show that there's more work to do here. And this was always a long-term stock. This right now is a company selling $20 bills for $19 -- I've used that analogy a lot -- to build market share, to build volume, they're giving away coffee to compete with Starbucks. That was always going to be a difficult play, so wait until you have all the info, especially, when you've already lost so much of your value.
And certainly, don't buy, this is, you know, reaching your hand in blindly into the cabin and eating whatever you pull out. Do not do that.
Hill: Yes. This is absolutely a stock that's been recommended in, I think, a couple of services that The Motley Fool has. And I don't own shares of it, because as I've said before, investing in coffee is already represented in my portfolio, I own --
Kline: [laughs] Mine too. I'm a Starbucks shareholder.
Hill: Yeah, I own a lot of Starbucks, so. I think, however, if I did own shares of Luckin Coffee, I would want to see, as you said, I would want to see what other information comes out. This is one of those situations. And just to reiterate, you're absolutely right that the thesis of Luckin Coffee could still hold, but I would absolutely want to see the leader of this company come out and I would want to see some anger. Like, if the CEO had no idea that the Chief Operating Officer was cooking the books here, then I would want to see someone come out and vehemently defend the thesis for this business in the same way that -- and this is not an apples-to-apples comparison -- but in the same way that when Chipotle first had their health problems, when people were getting sick and it happened in a couple of different places, including one in Boston.
In hindsight, it should have been a sell sign, for me as a shareholder, that when Steve Ells [sic] then the CEO of the company came out and did the round of television interviews, not just on CNBC but on The Today Show, you know, sort of the bigger more general market television, that his attitude was not what I want to see. He was not pounding the table saying, "This is what we're going to do to make this better." He was almost -- he wasn't blasé about it, but he was so much more controlled than I wanted to see. I'm not saying that I want to see my CEOs, of the companies that I own, unhinged all the time, but every once in a while, I feel like it's warranted.
Kline: He was arrogant, and that's part of why Chipotle got punished. If you hold yourself up as better than other people, and it turns out you're not, you're going to fall farther. And the reality is, what Chipotle actually did in response to that crisis was the right thing, they closed all their stores for training, they hired advisors that were some of the top people in the world, they changed procedures on how they do certain things, but their public-facing response punished them for over a year in terms of people sort of associating them with, sort of, food poisoning. Even though, if you serve fresh food, there will be food poisoning, no matter what you do. Things can go wrong, workers can come to work sick and not know the extent that they're sick, things will happen. But this is a company that got punished, because they told us they were better than other food companies and then they were proven, in some ways, not to be.
Hill: Obviously, when to sell a stock is an individual decision, but I think you and I are in agreement that there's probably more to come from this story.
Kline: Yeah, look, they have to tell us who else was involved. Was it just one guy, how did he get away with it, were there bonuses paid based on this information that have to get clawed back? I mean, ultimately, the CEO maybe has to lose his job over this. I actually don't know who the CEO is, so I assume it's a his, but maybe I'm wrong there.
This is not a company I particularly believed in, not so much because it's not a good business model, but do you really want to be a brand-new brand going up against Starbucks?! That's a pretty big hill to climb. Dunkin' has struggled a bit in the U.S. where they were the established brand for a long time; at least in the parts of the world we're from. So, this to me, I was not a huge fan. I know a lot of Fools were.
But if you own it, you probably believed in their thesis. So, sit down and look at that once we get the full information. You don't really have that much more money to lose, not to be blasé or humorous about it, but when a stock falls 80% and there might be upside, you should probably wait for all the information.
Hill: Last thing before we move on. I was thinking about, do you remember the Volkswagen emissions scandal, when that whole thing came out when Volkswagen was basically fixing their test so that they would pass emission standards?
Kline: I do and it hurt them pretty badly for a while.
Hill: It did. So, a friend of mine at the time was an executive for another automotive company and I was talking with her and I said, "Hey, is this one of those situations where even though it wasn't your company that did this, every automaker gets dinged? Because I feel like, every time there's a big recall or a big scandal involving safety with the automotive industry that every automaker gets tagged with it."
And she said, yeah, basically, we hate it. Like, obviously, it's worse if it's us, but we hate to see it, because it just causes more problems for us. And I feel like what's happened with Luckin Coffee, the analogy is that with Luckin Coffee, this is a Chinese company. And a question we get all the time about Chinese companies, regardless of what business they're in is, "Can I really trust the numbers? They don't have the same regulatory requirements that we have in the United States." I'm interested in this business, but can I really trust the numbers? And in the case of Luckin, turns out, no, we couldn't trust the numbers.
And I feel like every other Chinese company is going to get slightly dinged or anytime, anyone pitches a stock where the company is based in China, the natural question is going to be, "Well, is this another Luckin Coffee situation?"
Kline: And there's only one way to counteract that, because I saw this question 100 times today during the Fool live stream is, they need to tighten standards or it's going to be harder to get investments from Americans. There's going to be skepticism, and it doesn't really matter. Companies can use independent auditors to check their reports, they can use U.S. firms that are trusted. These kinds of things can happen, especially when you tie compensation to two sales figures.
The fact that it was happening at the COO level suggests that there's more to it. And you know, this could be like the Wells Fargo scandal where it turns out that it goes much, much deeper. And I will point out that I actually opened a bank account at Wells Fargo after that scandal on the assumption that, well, they can't do anything worse, like, they are going to be under a lot of scrutiny right now. So, not an argument to buy stock in Luckin Coffee, but if you happen to be in China, maybe an argument to buy a cup of coffee from them.
Hill: Let's move on to Carnival Cruise Lines (NYSE:CUK) which has raised more than $6 billion in new debt. Do you like this move?
Kline: Well, they needed to do it. So, Carnival did not have as deep a credit facility as Royal Caribbean, which will also need to raise money. And they have about $1 billion a month in costs to keep their fleet ready to go. So, they basically have a bunch of cruise ships that can't cruise anywhere, they don't know when they're going to be able to cruise anywhere. They've actually canceled all the sailings from San Francisco for the rest of the year. That was going to be a new port for them. So, they're just not even putting that investment in. They have a couple of ships that they had to push back dates till well into the Fall because those ships are being retrofitted in drydock.
So, this is a company that if they want to come back, what they had to do was, they issued a bond with a 12.5% yield, which earlier this year they'd raised money at a 1% yield. So, they are paying dearly for this, but this is a very profitable company when it's running under normal operations. Hopefully, they don't need to use all this money, they can use some of this money to pay back this money. And when they get back to normal, this ensures their survival.
And I was saying, "Well, three to five years, this is a great investment," now, maybe it's 10 years. But I do still believe in Carnival, Royal Caribbean. I don't own shares in either. I will say I am an avid user of their products and believe that it's going to appeal to, sort of, my generation, mid-40s, as they get a little bit older, and that there's an awful lot of us, so this will be a growth industry.
Hill: But do you think, the profitability of the cruise industry, do you think the profit margins come down? Because they have to hire more people, they have to assure everyone, even avid fans like yourself, that it's going to be safer than ever to get on a cruise ship.
Kline: So, I'll argue that they've taken those steps already. When you go on a cruise ship, it is very obvious how much it's been cleaned. Every time you walk into the buffet, there's a man with a guitar singing a song telling you to wash your hands. There's a lot of peer pressure. And I've told this story on air before, but if you're in the bathroom and you're in the handicap stall that has a sink and you wash your hands and you come out, people will glare at you because they think you didn't wash your hands. So, there is a huge amount of pressure.
I don't think they're going to have a big added expense. I do think they're going to have much lower pricing. I know that I've booked some cruises through the Fall. And I generally get casino comps, and I'm getting balconies and free play and basically whatever I want as opposed to normally only getting inside rooms on short sailings. And when I've looked at prices to bring some people along, those prices are very, very depressed. So, the first goal of the cruise industry is to get people on cruise ships and show them that it's safe.
And if you look at the numbers pre-coronavirus of time something has happened, they are a very safe industry and it's just very visible when something goes wrong. You know, we don't not fly because there have been a plane crash or two. There have really only been a handful of mass outbreaks on cruise ships. It's something that they're very hyperconscious of.
Hill: But keeping in mind that, at the beginning of the year, shares of Carnival Cruise were at $50, then they got cut down to $20, and we got a lot of questions from people saying, "Gosh! $50 to $20, is this a buying opportunity?" It's now at $8 a share. So, just to reiterate, you think, they bounce back, but from an investor standpoint, you're pushing out the timeline from three to five years to more like five to ten?
Kline: Yeah, if you want to see those heights again. If you're buying at $8, and think it might get to $10 in the next three years, I don't think that's crazy, but obviously, there's a lot of debt to service, even when they go back into business, they will be taking in less money.
There are expenses they can put off. I don't think you're going to see ship construction at the level you have. I don't think you're going to see new ports. You can slow down spending on redeveloping your private island, things like that. Some of that is going to step back. But I do think once they report a profitable quarter or two, which might be a year out, I think you'll see some bounce.
This is going to take a long time, this isn't Walt Disney World, where I think people are going to come back pretty quickly. There is some fear with this, there is also a loyal customer base, but that customer base tends to pay the least. It's the person in New York who cruises once a year who pays the highest price, not the guy in Florida who lives an hour from the port.
Hill: Shares of AMC Entertainment (NYSE:AMC) are down more than 12% today. AMC Entertainment is the largest movie theater chain in the world and the stock is down on the news that AMC has hired lawyers to look into restructuring. And I'm wondering, Dan, how bad do you think this is going to get, because one of the things we've seen over the past month is more and more movie studios push summer blockbusters or what they hope will be summer blockbusters, action movies, further into the calendar in 2020, and in some cases they're pushing movies into 2021. How bad is this going to get for AMC?
Kline: It's bad. Because, in my opinion, we have too many theaters anyway. It makes sense to go, and I'm a big "go to the movies" guy, but it makes sense to go see Star Wars or the Avengers or Fast & Furious 23 or whatever it is in a theater, it doesn't necessarily makes sense, with all of us having 55-inch televisions in our house and streaming services, to go see the latest thoughtful drama.
So, I do think you're going to see a pretty massive change in theaters to more the sit down and eat model, having three or four screens rather than a multiplex. But I do think there is a huge play here from people who own the space where theaters are housed to work with them, because if a movie theater goes out of business at your mall, that is an awful lot of space to repurpose and do something else with and there's not much you can do with it.
So, I think this is a company, much like Cheesecake Factory, because it has those ridiculous-looking restaurants that are hard to repurpose. I think they're going to be able to negotiate for rents a lot of concessions. And the one thing you could say is, whenever we move past this and movies can safely be scheduled, it's going to be a Murderers' Row of releases. That's obviously going to hurt some films, but you are going to see an awful lot of stuff come out, and that might bridge the gap for the few months of production we're losing on movies for next year that aren't getting shot right now.
Hill: Before we wrap up, I'm assuming you, like me, like most people, you've been watching a lot of stuff in your home, what's one recommendation, it could be a movie, it could be a TV series, anything?
Kline: So, my wife and I were talking about this last night. And we've sort of run out of things we like together. We both have a lot of things we like on our own. And we decided we're probably going to rewatch Six Feet Under, which was one of our favorite shows on HBO. The only negative is, I've watched the finale many, many times, because it's in my laptop. So, sometimes if I'm traveling, it's just something I'll watch if I'm out of things to do, but I don't remember the road of how they got there, and it was one of our favorite shows at the time. So, it's a very deep quirky show, but a lot of fun and a lot to get into.
Hill: So, one movie we're going to watch, my whole family's going to watch this coming weekend is, my college student has been going back-and-forth to Richmond, which is about a 100 miles South. So, one of the things we've been doing every night, just to be in touch is, we'll facetime and we'll do the crossword puzzle together. And there is a wildly entertaining documentary from 2006 called Wordplay, and Wordplay is about The New York Times crossword puzzle, sort of, its origins. And then the culture of people who obsess over The New York Times crossword puzzle, leading to a competition that is held. There's an annual competition. And it's very entertaining. I've seen it before, but the kids haven't. It's 90 minutes, it's highly recommended if you're looking for just, sort of, like, a fun documentary.
Kline: Chris, what's the title?
Hill: Wordplay. Dan Kline, always good talking to you. Thanks for being here.
Kline: Thanks for having me.
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.