How COVID-19 Is Impacting Traditional and Digital Businesses

In this episode of Market Foolery, Mac Greer and Motley Fool analyst Jason Moser discuss how the COVID-19 pandemic is impacting various businesses and the markets in general. They look at some companies which are doing really well in the digital economy. The S&P 500 is shedding one of the most iconic retailers from its index. They talk about the housing market and much more.

Also, The Motley Fool is donating $1 million to New York state's COVID-19 response fund. You can go to Donate.Fool.com to contribute directly.

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 April 1, 2020.

Mac Greer: It's Wednesday, April 1^st, welcome to MarketFoolery. I'm Mac Greer, and joining me is Motley Fool analyst Jason Moser. Jason, welcome! How are you holding up?

Jason Moser: Hey, man. You know, everything's fine here. I don't usually have a problem being more alone. I guess, I'm maybe a little bit more introverted, so it doesn't bother me so much. I do find, I'm usually a bit more productive on the research side when I'm in the office; maybe that's just the workflow there, the double monitor setup that I've got. But given the state of affairs today, listen, our household is all happy and healthy and we've got not one complaint. So, how about you all?

Greer: We're good. Same, you know, you're working from home, I'm working from home, these are strange times, surreal times, April 1^st, April Fool's, normally that would be time for The Motley Fool to launch one of its annual April Fool's Day jokes, but these are not normal times, so this year we're doing something a bit different. We're focusing on the state of New York, where nearly half of the country's coronavirus cases are. The Motley Fool is donating $1 million to New York state's COVID-19 Response Fund which is being managed by the nonprofit group Health Research Incorporated. Now, those funds will be used to purchase medical supplies, set up field hospitals and provide housing, food and transportation to support medical staff.

And, Jason, we just want to encourage all of our listeners to join us and contribute to the COVID-19 Response Fund in New York. They can go to Donate.Fool.com to contribute directly or support an organization in your community, obviously, that's great too.

So, I love New York, Jason, I know you love New York, we love New York, The Motley Fool loves New York.

Moser: Yeah, no doubt. You made the point there about New York having such an outsized exposure to this right now, that doesn't mean it's always going to be the case, I think you got to recognize we're a one country. You know, Mac, like they sing in High School Musical, "We're all in this together," right.

Greer: Amen! Jason, let's talk stock market. Now, I have CNBC on in the background, the market down around 3% at the time of our taping; so, we call that a calm day. [laughs]

Moser: [laughs] 1,000 is the new 100.

Greer: Coming off a historically bad first quarter for the Dow and the S&P. Jason, the Dow down 23% for the quarter, the S&P down 20%. Now, Chris talked about this on yesterday's show, but I wanted to get your thoughts, how are you thinking about the stock market?

Moser: Yeah, you know, it really was, obviously, a rough quarter, and I haven't really witnessed anything like this in probably about a decade. And probably that's how most of us feel right now. And so, I look back a decade ago and going through the Great Recession and the financial crisis that came from that time, it was tough at the time; after it was done, you come out on the other end, you know, the other side of things and you're like, "You know what, man, that actually was one of the best things that could have ever happened to me as an investor, I learned so much about myself as an investor in that time," and being able to bring that feeling, those lessons into this point in time right now. I know, it's a bit of a different cause and a bit of a different effect, it's not going to be necessarily the same type of recession that we witnessed over a decade ago, but there are a lot of similarities there. And certainly, emotionally speaking, a lot of similarities.

And I do want to say, first-and-foremost, for the investors out there, for all of our listeners, all of our subscribers, everyone out there, if you made it through this first quarter un-waivered, if you stayed invested, and furthermore, if you were fortunate enough to be able to continue investing, if you are able to keep working and you're able to keep contributing to a retirement plan and you kept that ball rolling, I mean, give yourself a pat on the back, that's something to really be proud of. Because these are not normal times, this is the exception, not the rule. And making it through a quarter like this, keeping your wits about you, it's not easy to do. We talk about it all the time, and that's part of the reason why we do what we do, Mac, is to help people, you know, remind them you can hang in there, you can do this. And these are some ways that you can get through these times.

If you made it through this point in time as an investor, I mean, give yourself a little pat on the back, because that really is something to be proud of. And this time-period is going to go down in the record books for a lot of reasons, you know, certainly market conditions no exception there.

Greer: Totally agree, Jason. I do this exercise where I check my portfolio -- I try to just check it once a day. And before I check it, I imagine the number, I try to predict what the number, what my portfolio is going to look like? And it turns out that the number for the last quarter has actually been lower than what I predicted technically. So, if you can just keep those emotions in check then, yes, at some point we're going to come out of this, there is light at the end of the tunnel, the question is, how long is this tunnel?

Moser: That, I think, is the key observation. That's the question, right, because we're seeing a lot of speculation, lots of forecasts out there in regard to how bad the economy could get, how high unemployment is going to get, how big of a hit is GDP going to take? And, we've seen all sorts of ranges there. The St. Louis Fed recently estimated that this economic freeze, as they called it, could ultimately cost 47 million jobs and the unemployment rate could soar past even 30%, you're talking 30%, 31%, 32% even, which is phenomenal to think about, of course.

And then you look at some recent numbers out from Goldman Sachs, their projections, in that, we could see the GDP sink 9% during the first quarter and then even further, with 30% in the second quarter. Unemployment potentially reaching 15%. So, there's a tremendous range there. One thing we know, it's going to be bad. The question really is how long is this going to take? Because there are some external factors that are really going to determine that. And a lot of that depends on the measures that we're taking today socially, are they having an impact, it sounds like they are. If so, when is a reasonable expectation for people to get back to some sort of normal life. And then furthermore, and I think this is really the biggest near-term risk is, if any type of second wave comes along here? I mean, just because we're mitigating some of the impacts today doesn't mean that we've nipped this thing in the bud, there's a lot we still don't know. And so, I mean, there is the potential in the near-term to see either a second wave or that there our measures aren't necessarily having the same impact that we hoped that they would.

If that's the case, you have to look at the potential impacts there. And maybe those numbers that the St. Louis Fed is projecting aren't all that outlandish. Which is kind of scary, but again, it's not going to be something that I think would last for terribly long either. So, there's that.

Greer: And, Jason, let's talk about that impact. The story in The Wall Street Journal today hits on something we really saw playout in the first quarter, and that's the divide between online and traditional businesses. The Wall Street Journal lead, "The new coronavirus pandemic is amplifying gains for businesses that cater to customers online, while businesses reliant on more traditional models fight for survival."

Moser: Yeah, well, I mean that's not news, I mean that's something we've all kind of just been watching play out here. To some degree, I think, over the last several years, we've been talking about the move to this digital economy and that trend is continuing. This point-in-time, the coronavirus situation is, I think, just accelerating that, I think it's really just bringing that to the forefront. And honestly, it is starting to become much more obvious now, the companies that have been making big investments in online for a long time now versus those who haven't. If you're a company that's been spending the last five to ten years focusing on a digital and online strategy, this is where we're starting to really see, that's becoming more obvious versus the companies that are starting to be more reactive to this situation.

And so, I do also think, and it's very easy to go kneejerk in a time like this and think, "Oh, well, it's now just about all the digital economy and physical retail is in trouble, and restaurants are in trouble and the situation probably won't get better." Let's not make the mistake in thinking that traditional business is actually going away. I mean, there is something to say for that traditional model. The person-to-person interactions, it's easy to get carried away in a time like this and think that maybe they're going away.

But ask yourself the question, one or two years from now, let's assume, and I think it's a safe assumption, that we have a vaccine, maybe we have a treatment, you know, maybe this isn't as serious two years down the road as it is now. I would like to believe that that's going to be the case. So, you know, it's not to say that we're not taking this threat too seriously today. We're taking it very seriously, but I think as the conditions change, doesn't that put people's minds more at ease? I think it potentially does and I think, for the most part, you know we are social creatures and we do forget things pretty quickly these days. So, I don't want to make the mistake of thinking that traditional business will go away, I just think this is more about the businesses that have been proactive in developing an online presence, even businesses that have been more reactive, it doesn't mean they can't succeed, but you're starting to see that disparity there between the ones that came into this prepared and the ones that didn't.

Greer: And let's talk some more about that, because when you look at that first quarter, some stocks were actually up, which is just really hard to believe, but Netflix up around 16%, Amazon up 5%. And then here's a fun fact, Microsoft was the only member of the Dow, the Dow 30 that was up. It was up $0.01 for the quarter. So, Jason, you can win a bar bet there. Microsoft up $0.01.

But you have that, and then you also have the news that Macy's (NYSE: M) is being removed from the S&P. Macy's market cap is now around $1.5 billion and falling. So, you mentioned that some of these traditional businesses will survive this. What are some names that come to mind when we come out of this on the other end?

Moser: Names that potentially can survive this? Well, yeah, let's look at some of the businesses that should do OK and perhaps some of the businesses that might be in a little bit of a challenging spot there. Because I do agree that you look at companies like Macy's, Kohl's is another one that stands out, and I've just seen, because the stores are closed and the parking lots are empty. You do look at those traditional retailers and really feel like it's hard to see that pathway forward for them so much. But certainly, plenty of businesses out there that are I think set up for success in different market opportunities.

One that we went over with on last week's Motley Fool Money, we were looking at Nike's (NYSE: NKE) most recent quarter. And their quarter, which was reflective of results that ended at the end of the month of February, so it didn't really encapsulated everything that's going on right now, but it did to the extent that that they talked a lot about China and being on the other side of this recovery in China and how they're seeing things play out there.

I think that Nike is a company that is very much poised to continue to succeed in an environment like this. And that is interesting to think about, because -- think about when we were growing, Mac -- I mean, our relationship with Nike was really, seeing their products in our local shoe store, right. That was it. And fast-forward to today now, Nike is saying, "Well, if we can't have our physical stores open then we're just going to take these new releases online," and they're actually having these release events online through their family of digital apps and whatnot.

And they're seeing strong engagement from the consumer. And look at China, for example, and while Nike's performance in China over the last several years has been really, really impressive, I mean, it was 22 consecutive quarters of double-digit growth there in China alone. This was the first quarter in those that they actually broke that streak and it was down, I think, 4%. But the flipside to that was that they saw their digital business in China grow more than 30% and they've maintained that momentum going through into this quarter and beyond. So, I think it's something that they really see as a skillset, a philosophy, a strategy that they can carry over into other parts of the world, particularly, Europe and the United States, Canada, whatnot.

So, I do think that Nike, that's a great example of a company that's been investing in an online and digital presence for a long time and definitely benefiting from that, based on the results that we've seen.

In a couple of others, I mean, Domino's Pizza (NYSE: DPZ), you know, we talk a little bit about that one from time-to-time with earnings and what not. Domino's is a really fascinating business. And one of the things I learned about it that I just thought was -- I just didn't realize this, the diversified customer base in delivery versus carryout. And so, I'm going to ask you to take a guess, if I had to break it down percentage wise, out of their 100% of their customers, what do you think the breakdown is of delivery versus carryout? What percentage of their business do you think is delivery, sales-wise?

Greer: Okay, I'm going to say 90%.

Moser: Yeah, and see that's probably what I would have said too, somewhere in that general area. Delivery accounts for 67% of their sales, carryout accounts for 33% of their sales. And when you break it down on a transaction basis, delivery accounts for 55% of their transactions, carryout accounts for 45% of their transactions. So, Domino's has very much been not only an online business but a physical business, people go in there to get stuff.

Now, that's going to change a little bit, I think, here in time as consumer behaviors change. But I think that Domino's is a great example of a business that clearly has made a lot of investments in digital and mobile here leading into this, but they've remained very well-diversified in their customer base all along the way and they're leveraging that digital and mobile presence, kind of like those great omnichannel retailers out there. Whether you order online and pick up in store or you just order online and have it delivered, Domino's is really knocking out of the park on both sides there.

And when you look at the growth opportunity there, around 17,000 stores today, they're looking to get to 25,000 by the year 2025. So, big aspirations there with Domino's.

And then one more, Ulta Beauty company is really making a lot of investments in their digital and mobile presence. And the near-term that business is not so levered to the physical stores that it's going to be fatal, put you understand the fact that they have 5% of their revenue comes from the services side, which is the salon side, but if you tack-on the haircare products and styling tools, which is about another 20%, then you could see a good quarter of the business really depends on that physical presence. And those stores are closed for now.

The flipside there, they continue to invest in their app, bringing immersive technology in, introducing a new online booking and scheduling tool. So, they are making a lot of investments as well. And I think that as the dust settles, I think Ulta is going to be another good example of a company that will be poised to succeed in this new, sort of, let's call it a hybrid economy, I mean, it's going to be part digital and part physical.

Greer: And, Jason, I got to ask, because my wife has cut my hair for the last like three or four years, she does a great job. And once again, I got to give a shout-out to Costco, because that's where we bought all that gear and the clippers and stuff, but what are you doing as far as haircuts go, like, what's your MO right now?

Moser: Well, lucky for me I got a haircut just maybe a couple of days before the hammer really came down on all this stuff. So, I haven't had to cross that bridge yet. But, you know, [laughs] I do have a beard trimmer. And so, it's crossed my mind more than once of just taking that beard trimmer and just going to town myself. I don't know, I'm still mulling that one over. But I haven't had to cross that bridge yet, so we'll just have to wait and see. But it's certainly possible I'd get back to the office in a month or two and I'm a bit shaggier than normal.

Greer: You know this is the time to experiment. So, if you're going to try something like that along those lines, we have these new kittens, and the other day one of our kittens kissed our dog. And I'm like, "You know what, I mean, would I do that?" Maybe not, but I mean if you're going to -- you know, it's a pandemic, so, you know, I mean use the beard trimmer, cats, dogs kissing each other, I just feel like it's a time to innovate.

Moser: Yeah, man, that's well said, I can't top that.

Greer: [laughs] Let's close with the housing market. We kind of have a tale of two markets here. We have more people refinancing with mortgage rates falling, falling, falling, but we also have potential homebuyers backing away. So, let's put some numbers on that. Refinance applications up 26% for the past week, that's 168% higher than a year ago. But mortgage applications, to purchase a home, fell 11% last week, that's 24% lower than last year.

Moser: Yeah, we saw some news recently, Zillow put their home buying program on hold. Remember, Zillow was, sort of, evolving their business to become a little bit more a participant in the actual housing market itself. And so, they've actually put their entire home buying business on hold during this period of time for obvious reasons.

And so, refinancing, for sure, is very understandable where interest rates are today. I think that anybody out there who owns a home, even if you have, like, a 4.5% interest rate, it's worth enquiring about the opportunity to refinance, because there really are a lot of different options out there. And if you're looking to save a little bit of cash this is going to be a tremendous opportunity to do that.

And I would recommend trying to get in line sooner than later, because what I'm seeing and what I'm hearing is that a lot of lenders are being flooded with those refinance requests and so it's going to take a little while before you can actually get that going. So, get your name in the hat sooner rather than later.

Not surprising to see purchase mortgages down. You know, this is a point in time where everybody has got a lot of questions, both, health-wise and finance-wise. And one thing I did notice -- so, I was talking about this last week at work -- and a question in regard to, how do conditions like these impact home prices? And you can go a number of different ways with it, but actually, what it boiled down to, there was some interesting research and there was an article that one of our colleagues, Maurie Backman, put out on our Millionacres site and it was quoting a study from Zillow, they actually did a study on the impact of previous pandemics, believe it or not, on housing markets. And one thing that they found was that home prices largely, for the most part, home prices remained fairly steady or only suffered modest declines. And the basic reasoning behind that is that, if you're going to sell a home and you're going to sell a home into a depressed market, unless you are a desperate seller than you're actually calling the shots and you can say, "You know what, I'm just going to holdoff, I'm not going to sell my house right now because I don't want to take a lower price than what I think it's really worth." And so, you're ultimately seeing fewer transactions, you're seeing fewer and fewer homeowners that are actually selling at a loss.

And so, it does make sense to see that home prices, more or less, don't feel too much of an impact, and that's because of fewer transactions and that's right in line with the mortgage application data.

But yeah, the ripple effects from a depressed housing market or an inactive housing market, I mean, you certainly see companies like Lowe's and Home Depot (HD 0.35%), they're going to feel the pinch there. I mean, the data that Home Depot continues to quote, and this was last year, but they were saying, by 2020, which is now, obviously. 54% of all U.S. homes are greater than 40 years old and that's versus 51% in 2016. And so that just leads you to believe that there's a lot of renovation and home improvement projects that need to be done.

But you're going to see, I think, certainly those retail sites take a pinch, we've talked a lot about the REITs and rents. Taubman and Simon saying, "Hey, the rent check is due." And Cheesecake Factory saying, [laughs] "Hey, we're not going to pay it." Well, that's a fascinating one, because you got to remember, those REITs have obligations to satisfy as well.

And insurance companies, let's not forget them, insurance companies are being asked to cover things now that they're actually not even liable for in the policies that they've written. And that is an unusual situation. But we are seeing everybody feeling that cash crunch and it just goes to show you how this really all is connected.

So, when I say, "We're all in this together, Mac," I mean it. Sing it with me, "We are all in this together."

Greer: Amen! Okay, desert island question. Over the next five years, you're on a desert island and you've got five years ahead of you and you can only own one of these stocks, let's go with, Macy's, Nike, Domino's, Lowe's or Home Depot?

Moser: Wow! I was going to go Domino's, no question, but then you had to throw the Home Depot in there, so now I got to think about this one for a second, because I love pizza, but you know I love a good home renovation project too, Mac.

Greer: But I'm talking about the stock, I'm not talking about what you love.

Moser: Yeah. They both get a good amount of my money. I think Home Depot gets a little bit more of my money at the end of the day, though, and they pay a really sweet dividend. I'm going Home Depot, Mac.

Greer: Okay. Excellent. Well, [email protected] is our email for your questions, your comments [email protected].

And before we go, Jason and our MarketFoolery listeners, a correction regarding Monday's show, which, yes, I hosted, I want to say mistakes were made, but I don't think you're allowed to say that if it was your mistake. I said that United Technologies owns Sikorsky Helicopters, that is incorrect, that is wrong, that is not right. Now, Lockheed Martin bought Sikorsky from United Technologies back in 2015. So, Lockheed Martin owns Sikorsky. So, apologies for that. Lockheed, I am sorry. Lockheed owns Sikorsky. Sorry, United Technologies, but a deal is a deal.

Jason Moser, thanks for joining me.

Moser: Thanks for having me.

Greer: As always, people on the show 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 it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Mac Greer, thanks for listening and we will see you tomorrow.