How Lockdowns Are Impacting Automobile Makers

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest earnings releases. There is a surprising new player in the e-commerce space. They discuss some April CPI figures and talk about some automobile, consumer apparel, live entertainment stocks and much more.

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This video was recorded on May 12, 2020.

Chris Hill: It's Tuesday, May 12^th. Welcome to MarketFoolery. I'm Chris Hill, joining me, Jason Moser. Good to see you, my friend.

Jason Moser: Howdy!

Hill: We've got some earnings. We have a surprising new player in the e-commerce space. We're going to start with the automotive industry, though, because a few data points [laughs] coming out for the automakers, and I don't think any of them are good, Jason. We've got the latest earnings results from Honda and Toyota; and both those stocks are down as a result. And we also got the Consumer Price Index for April, and you go through it on a granular level and one of the biggest moves that we saw in the CPI for April was car and truck rentals down 16.5%. And all of these combined are making me wonder where we're going as a country with the automotive industry? Where do you think we're going?

Moser: That's a really good question. We were talking about this before taping, and it does seem like, as we get back to some sense of normal, whatever that is and whenever it does happen, how attractive is it going to be for people to take public transportation? I mean, in areas where public transportation is a great solution, and eventually, it becomes such a great [laughs] solution that everybody uses it and it becomes a less user-friendly experience.

And so, you have to wonder about the willingness of consumers to put themselves in those types of crowded environments again, and how long that trepidation may last. And if that does last, does that play out where people decide, well, they want to drive more? Or is it something where we feel like, hey, maybe I don't need to worry about driving to work or taking public transportation to work because I can just telecommute or whatever? So, there are a few different ways that you could see it playing out.

I think when you look at the bigger picture, I feel like cars are not going to just be disrupted. I mean, cars are an integral part of our transportation system here; not only domestically, but globally. If you look at the results that Toyota put out today, I think, they said they expected profits to plunge by around 80% this year as essentially no one's out there buying cars right now, for understandable reasons. And that they're going to sell fewer cars. And I think that's a pretty safe assumption all the way around the board, whether you're a Toyota or Honda or Ford.

And what we're going to see then, at some point when we get back to normal, they're going to be dangling every incentive out there to get people to come shop. And normally, those incentives come in the form of either cashback on the car or perhaps 0% financing. And I think back to 2015, I guess it was, I bought a Ford Explorer, and even then, it was 0% financing. And so, it does feel like these automakers are going to have to rely more and more on selling cars and maybe they're not going to necessarily have as much exercise on the financing side of things, but there's no question it's going to be very interesting to see how this all plays out longer-term.

The car rental numbers, that I think is probably a bit more tethered to travel; and of course, you know, not a lot of people are traveling either. But yeah, I mean, any which way you cut it, it's obviously not a good time. And when we get back to brass tacks here, they're going to have to dangle a lot of incentives to get customers to come back through the door.

Hill: Although, on the flipside, you look at the price of gasoline. I filled up my minivan the other day for $35. [laughs]

Moser: I know. I mean, I did the same thing with my Explorer. I walk away spending, like, $35, and I'm thinking, "Hey, this is the greatest thing ever," but you know what, I might put 10 miles a day on that thing now at most.

Hill: But do you think, at some point, whether it's six months down the line, 12 months down the line, do you think people who are looking to buy a new or slightly used car are just going to be in heaven? Because it seems like they're going to have a lot of options. And one of the things I'm thinking about is the struggles that we're hearing from companies like Hertz, and I don't know, it's easy for me to imagine a scenario where anyone who wants to buy a new or used car in, call it, a year, they're going to have just a potpourri of options.

Moser: Yeah, I think that's a safe assumption. And I think there's probably going to be some of that pent-up demand that we always talk about when we go through times of fiscal tightening, when we're pinching the purse strings, so to speak. At some point or another, when you kind of get out of that stage, you want to get back out and spend a little bit, and it's kind of an exciting time. And so, I could certainly see a dynamic of pent-up demand coming back out on that market.

And, yeah, to your point, there's going to be a slew of options, no question about it. But we got to get there first. And unfortunately, it's impossible to really figure the timeframe at this point. But yeah, I think eventually we do get back to that. I don't think this is something that impairs these automakers permanently. I mean, making cars is hard work. And as much great stuff that Elon Musk and Tesla are doing, I mean, you see the trials-and-tribulations of what he's going through, you just recognize the fact that making cars is really hard work.

And so, these companies have got it down to a science, they do a really good job with it. And yeah, I don't think we're going to see a world where we're pivoting away from automobiles in the near future. And so, yeah, I could see a point where a year or two down the road things bounce back, people are feeling a little bit better about their jobs, a little bit better about their bank accounts and they're going to have some really attractive options as far as automobiles.

Hill: People are going to have some options on vehicles. And the other thing out of the CPI report is, men who are looking for a new suit. Good news, because one of the biggest price moves [laughs] we saw in the April CPI was men's suits. The price of suits are falling; for all of the obvious reasons. And I don't remember the last time I bought a suit, but I don't know, I might go get one, because I have to believe they are going to be on great sales this summer.

Moser: Well, and the good news is, Chris, if you go to JoS. A. Bank, if you get one, you'll probably get about 10 more free. And I think that's never going to change. We talked about this earlier before, and we saw Men's Wearhouse and JoS. A. Bank merged together to form Tailored Brands. And one look at their financials and their market cap, you can see clearly there is a problem. I mean, this is a $50 million company. The stock price is now trading around $1, they've got just a load of debt on the balance sheet. I'm not sure how they're going to ever be able to really service it. And that's the combination of a lot of things, right?

And I think, our current day situation, with everybody telecommuting, working over Zoom and Microsoft Teams and whatnot, you don't need to wear suits for that. And I think the workplace of this generation and going forward, you know, there's not the same priority placed on having those sartorial sensibilities, so to speak. Whereas cars, I can certainly see a world where they're still very, very relevant; I don't necessarily see the same thing playing out for suits, so to speak.

I mean, there's a time and a place, but that time and place, remember, used to be at work every day, it's just not that way anymore. And I don't know that that really changes, I think, we just keep on going in the other direction there. And so, to see that industry lagging is not surprising at all, and I don't know there's a catalyst on the horizon that really kicks it back in the other direction anytime soon.

Hill: Shares of Eventbrite (EB 1.70%) down nearly 20% this morning. First quarter results for the event management company were about what you would expect in a world where live events have basically come to a screeching halt. You know this company a lot better than I do, how bad was this for Eventbrite?

Moser: I mean, it was bad, but it wasn't surprising. Having followed this company and actually I own some shares of this company as well. You knew going into the quarter it was going to be bad, I mean, the market for this company, the market it serves has been completely shut down; there are no live events anywhere.

And let's just put this in a context; restaurants have it better than Eventbrite at this point, because at least they can figure out other ways to serve customers, whether its drive-thru or curbside pick-up or delivery. I mean, Eventbrite's business just essentially ground to a halt.

And when you look at some of the numbers there, yeah, they obviously lost a ton of money in the quarter. Now, part of that loss is reserves set aside for future refunds that they anticipate are coming. But regardless, I mean, the questions I had going into this quarter really focused on two things. And seeing if we could get any context from them as to when they think things will start improving in their market, when they see that live events market, kind of, coming back online.

And then the other question, which is the financial state of the business and how they plan to weather the storm. Now, the first question, there's really no clarity there, and that's not their fault, I mean, we really just don't know. I mean, states are just starting to dip a toe back in the water to see if they can open up their economies and get back to business, but that's going to take some time even still.

And we've talked about this two-sided recovery. I mean, there's one thing to get the supply out there and open up your stores, but it's an entirely different proposition to get the consumers out there, to get the demand out there. And so, I think that's going to be something that they're going to have to deal with as well.

But on the financial side, they do have a balance sheet that has a healthy amount of cash on it to keep them in business, they're really cutting back any unnecessary expenses. And they also got a nice little infusion from Francisco Partners for up to $225 million in term loans to help get them through the next couple of years, if they need it, right? That loan comes in a couple of tranches and they can get one and then if they have to exercise the other one, they can exercise the other one.

But, you know, Eventbrite is a very interesting business. I mean, if you look at 2019, they served 1 million creators who sold 300 million free and paid tickets for approximately 4.7 million live events across 180 countries. I mean, this is a real business; it's a big business. And it's kind of like Live Nation, just smaller and serving that, sort of, small- to medium size business demo. But they are going to have to really batten down the hatches and ride this thing out, because there's just no other option.

They can make a little bit of that money back with virtual events, but that's not really their bread-and-butter. I mean, you know, people can just go to Instagram Live or Periscope or Zoom or whatever and do the same thing. So, it's going to be a tricky time for them. But I think, at least the question regarding the liquidity for the business, the resources to be able to weather the storm, that question is answered. So, I think that's certainly a reason to at least be cautiously optimistic that things will eventually get better for them, but who knows when.

Hill: Let's move to Pepsi (PEP -2.97%), because Pepsi; I love this, Pepsi announced the launch of two new e-commerce sites so that Pepsi can sell their stuff directly to you. They announced the launch of Snacks.com, which is just what you think it would be, the Frito Lays snacks that they have, Doritos, Lays Potato Chips, and my personal favorite, Cheetos. And they also announced the launch of PantryShop.com where you can bundle in some of the other products that Pepsi makes: oatmeal, Gatorade, that sort of thing. This is a brilliant move; I love this.

Moser: It is. And I'm totally on board with Cheetos; I love them. Just, you know, I'm curious, do you like the regular Cheetos or do you like the Cheetos Puffs?

Hill: I like the regular.

Moser: You like the regular. I like the regular too; I like that crunch. Every once in a while, I'll spice it up and get those Flamin' Hot Cheetos, not too bad, pretty good.

I'm with you here, man. I think this is a great example of just some forward-thinking, a consumer-centric move from what is a pretty basic and kind of boring traditional business, right? They're just selling drinks and food to people. But they're ultimately figuring out ways to meet their customers where they are.

And think about it when we talk about Pepsi and when we talk about Coca-Cola, what's the one thing we always shine a light on with those two companies? Beyond just their brand recognition, it's really, it's the distribution, right? These are distribution companies. It's this massive supply chain and they have this ability to get products from point A. to point B. in really quick amounts of time. And for the longest time, I mean, there's always been a focus on physical stores. Incorporating a direct-to-consumer angle into this business seems like it would be relatively complementary to what they're doing already.

And if you look at Pepsi as a business, I mean, they generated around $68 billion in sales over the last 12 months. And e-commerce, it's just a smidge of that, maybe $2 billion of that is e-commerce related. So, I don't know that this is something that necessarily takes over and becomes a material part of the business, but I'll tell you what it does do, it keeps their products on the top of consumers' minds. And it also gives them some data to work with. I wouldn't be surprised at all to see them take some of this data, work with it and cater more to the individual as time goes on. I think that's the beauty of direct-to-consumer, is getting that data regarding that specific consumer.

So, I mean, these products scratch-and-itch for everyone out there, they've got a great assortment of products, they have something for everyone. And I really like this move. If anything, it's kind of like restaurants. They're figuring a way to innovate and to do things a little bit differently, making the best of a bad situation.

Hill: And we've talked for a while now about retail, put aside consumer products, we've talked for a long time about retail and how e-commerce is officially table stakes. Like, if you don't have an e-commerce strategy then what are you even doing as a retailer?

And I look at this move by Pepsi, I have to believe that other nonretailers are looking at this and saying, "Okay, what's our version of this?" "Why wouldn't we do this?"

I was talking recently about Under Armour, and the money that Under Armour invested all those years ago, the hundreds of millions of dollars that Under Armour invested in the Connected Fitness, imagine you can go back in time and instead they invest that $700 million in e-commerce and building out an UnderArmour.com robust e-commerce platform. I don't think they're in as bad a shape today as they are as a result of that. I mean, you know, that's athletic wear, this is consumer products, but look, when we're done with this episode, I'm going to PantryShop.com and I'm placing an order. I'm signing up and I'm placing an order.

Moser: I mean, it's really cool where they've got these kits you can order. I mean, they've actually set it up so that you can actually go in and buy kits that cater to the specific tastes of the individual. It's just, they've done such a good job in giving the consumer so many choices, and in some cases just saying, hey, if it's information overload, here, just get this basket here, it's got a little bit of this and a little bit of that.

And I'm glad that you brought up that Under Armour example, because that's a great point there. When we talk about management teams that they're able to reinvest capital in effective ways, when they're able to invest their capital in effective ways, you know, at the time when Under Armour made those purchases, I think we tried to paint a smile on our faces and say, oh, yeah, that's just a smart move, because data and tech, and it's going to be a data-driven world, but in the back of our minds, we're kind of sitting there and thinking, is that something they really needed to pay that much for? And fast forward to today and we can look at that and say, just absolutely not, that was a bad investment. And I don't think Kevin Plank ever really fully admitted that it was a bad investment, so that's strike two.

But you look at what Pepsi is doing here. This is just a simple addition, a simple complement to their business model already, and I think it ultimately goes back to that advantage that businesses like this have in distribution. For them to fulfill these orders and get them out to the individuals, you know, we have a tremendous infrastructure around this country that can help make that happen, but, you know, they already have these massive supply chains and distribution networks in place, and this is just going to be one more way to leverage it. And I think it's a wonderful move.

Hill: Thanks for being here.

Moser: 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 tomorrow.