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Retail Tournament: Motley Fool-Style

By Daniel B. Kline - May 22, 2020 at 11:53AM

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Eight retail companies across four different matches, who will be the winner?

In this episode of Industry Focus: Consumer Goods, Emily Flippen and contributor Dan Kline play a fun game that looks at how some retailers are doing. Get to know eight great retail companies, their strengths and much more.

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 May 19, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, May 19th, and I'm your host Emily Flippen. Today will be a fun episode not just because I am joined by Dan Kline, but also because we're going to be playing a fun game, and more so, [laughs] because we're going to be playing this fun game in front of a live audience, and I would say a live studio audience, but we're actually still remote. So, we're recording it over Zoom. Either way we will be trying to bring in a little bit of audience participation in today's episode and you can play with yourselves out there in podcast-land.

Dan, thanks so much for joining today.

Dan Kline: Oh, thanks for having me, Emily. I am excited about this, just so many new things all at once, it is a lot, and you know, I bring the fun, so this will absolutely be fun and exciting.

Flippen: [laughs] You definitely do bring the fun, and that's even more so today because doing this task of game challenge we're doing today was actually your idea. So, how about you introduce our listeners to what it is we'll be doing for this podcast?

Kline: So, folks, if you've seen March Madness, it is a bracket challenge. We have eight retail companies lined up and there's four different matches. So, we're going to do the opening round, then we're going to take those winners, we're going to do a semifinal round or a quarterfinal round, it is a semifinal, then a final, then we'll have a winner.

Assuming this goes well, we might match that winner next time we do this with another eight companies. We didn't pick the eight biggest retailers, we picked, sort of, companies to give a bit of diversity to make it, sort of, interesting. So, for example, Amazon is not on this list. So, there's the possibility we do this again.

Emily, do you want me to share the matchups or do you want to do that as we go along?

Flippen: Yeah, go ahead and share the matchups, give our listeners an idea about the companies we'll be talking about.

Kline: The No. 1 seed, the behemoth, the Duke, the Kansas, all rolled into one, that would be Walmart (WMT -1.47%). Taking on, kind of, an upstart, a company that has really gotten back on track, Target (TGT -3.47%).

The No. 2 seed at the bottom-half of the bracket, the Home Depot (HD -1.20%), taking on another company left for dead for a long time that would be Best Buy (BBY -3.51%).

The No. 3 seed, a retailer struggling right now, but that's likely to bounce back when this is all over, [TJX's](TJX -2.37%) TJ Maxx, taking on a retailer that's doing really well now in the sixth seed Dollar General (DG -1.48%).

That brings us to our four-five matchup. It's the steady company versus the disruptor. Costco (COST -1.15%) in the four seed, taking on Wayfair (W -20.09%) with the five seed.

Those were the matchups, folks. Start thinking in your head who's going to win. We did not plan out what we were going to say, so this is going to be an open rumble as we do it.

Flippen: Yes. And so, the way that this will work is that each of us will discuss our thoughts on the matchup, and it's worth noting, I was the one who seeded these. I just assigned them a seed that I put them up against somebody I thought was an interesting conversation. We'll see how the seeds go, [laughs] don't read too much into it. But we'll discuss our thoughts on the matchups and then one-by-one we'll cast our votes for who we think should advance.

And in the event that we are in disagreement, Dan, we do have a poll pulled up for our live audience that should allow them to cast the tie breaking vote. So, hopefully, we won't end up in too much of a stalemate for a lot of these matchups.

Kline: Emily, let's get started. Why don't you make the case for Walmart and then we'll move on to Target?

Flippen: Yes. So, the first matchup we have here, Walmart versus Target. Honestly, these two retailers, I'm big fans of. In fact, all of the companies that we have in our bracket today, I think are, fair to say, very strong retailers. You'll notice [laughs] there's no JCPenney in here.

And Walmart and Target have taken very separate approaches to how they've grown their business. And Walmart, to me, I think has done an amazing job in that omnichannel experience, really thriving in a world where people are trying to get groceries delivered, trying to get groceries picked up. I can only see this global pandemic, that's a horrible thing for most people, but as a good thing for Walmart.

Target, in my opinion, a great company, strong performer, always has a niche audience, but they've just been slower when rolling out their grocery business, which to me, feels a little lackluster.

Kline: A little slower in grocery, but they bought Shipt, so their ability to get you stuff on same-day delivery has been very high. So, grocery can follow. Target has, in general, been slow to invest in their grocery, where they have invested, and why I like Target better, is Target has invested heavily in owned and operated brands and has shown them off and they're selling. So, that might be its partnership with Magnolia, where it's lifestyle stuff and aspirational. Some of it's short-term deals, where it's bringing in brands like Vineyard Vines and they sell out in seconds and people are collecting them. But some of it is replacing Champion, a brand it doesn't own, with whatever it calls its athleticwear line, it's just a smart idea, because the sales appear to be strong and they own that, they don't have to negotiate on it every year. They're building equity in something that people will then follow online.

I think Walmart sells pretty generic inventory, I don't find shopping at a Walmart usually all that pleasant, though I will say there's a Walmart near me in the Orlando area that is in an especially clean and well-run Walmart.

I just think Target has a very loyal customer, they're back to that, and hate people who say this, but they're back to being Tarjay, they mean something. You can wear clothes from Target and tell people you bought them at Target. If you wear clothes from Walmart, unless you're painting or a kid at summer camp, there's not a lot of prestige to wearing clothes from Walmart. These are both omnichannel, heavily invested businesses, but I actually think Target has differentiated in a way Walmart has not.

Flippen: [laughs] Well, I can't believe this, the first match up, the one I thought for sure was going in the way of Walmart, it seems like we're probably going to be in disagreement here.

Kline: [laughs] This is a 1A and a 1B for me, but what puts me over the top is, I will go to Target just to walk around, just to see what inspires me, maybe I'll buy a few things, maybe I'll see something on clearance, maybe I'll buy a shirt, maybe I won't. I will not go to Walmart unless I need to go to Walmart. And to me, I don't think I'm alone in that.

And obviously, I'm talking about not in coronavirus times. Right now, my wife has gone to Target, it's not a particularly pleasant place to go. So, Dan's pick in this case would be Target. Emily's pick would be Walmart.

And, Emily, I don't see the votes tabulate, which I'm hoping you do, because normally ...

Flippen: ... I do, in fact. And Austin has done a great job in throwing up this tiebreaker here for our live audience. And, Dan, I'll tell you what, you're coming out on top here, your audience agrees with you. I am disappointed, because I think Walmart has really proven out their value, especially during this pandemic in a way that Target simply hasn't lived up to. But yep, our live audience agrees with you there, Dan. So, we're going to have to roll this one in favor of Target.

Kline: That, folks, is a big upset. You know, you don't see that happening, you don't see like Hofstra, where I went, beat Duke very often. In fact, I think it's happened never or maybe once that a 16 has beat a 1. In this case, this is like a tournament of champions. Every company, except the next one we're going to talk about is, in my opinion, a real winner.

Yeah, I'm not even sure how this one made the list, Emily. So, No. 4, Costco, I like Costco, is against No. 5, Wayfair. I will make the case against Wayfair, if you like?

Flippen: Please do, because I'm going to come in here with a totally different opinion. [laughs]

Kline: So, I understand that they're doing well in the pandemic, because it's not that pleasant to go to any furniture store even if the furniture stores are open. And the type of furniture you're buying, a desk chair, a desk, maybe an extra bookcase, that is areas where I think Wayfair will excel.

I am a Wayfair customer; I bought a pantry from Wayfair. It was the right price, it was a little cheaper in terms of material than I would have wanted, I would not have purchased it if I had seen it first. But my contractor put it together, reinforced it a little bit, it's fine. I'm not upset because it's a pantry, it is where my food lives.

If I had bought a mattress or a couch, something that I'm going to sit on, I very rarely sit in the pantry, I would not do that from Wayfair. I think the market for this company is very constrained by the fact that they're in tactile business. A lot of furniture you really want to get a look at and maybe online catches up with some of the visual, but I don't think it can catch up with, "Is this couch comfortable?"

My wife and I just bought the nicest couches we have ever purchased. The first time in our life we've spent like a couple of thousand dollars redoing our couches which is way more than I've ever spent previously. And I probably sat and reclined in, like, 82 different couches before we picked it out. And I was willing to spend twice as much, it just turned out that the ones we liked happened to be at a pretty good price point.

Now, previously, I had gone to IKEA or Bob's or places that sell $400 coaches. So, this was a big jump up. But, Emily, I just don't see, you know, Wayfair, it's a niche player that is benefiting from the current situation.

Flippen: Okay. I'm not going to lie, Wayfair is definitely benefiting from the current situation, and it's fair to say that the run up we've seen in Wayfair's price this year is pretty unsubstantiated, in my opinion. I mean, the company was hit before this crisis even started, because their margins on the products they were selling were so thin. They were spending so much money. And management had taken this entirely new approach, and I won't go too much into it, because I know we've talked about Wayfair on our Consumer Goods Industry Focus podcast in the past, but it's fair to say that Wayfair has done $10 billion in revenue over the past year. They see the opportunity to turn this into a 10% net income margin business, which should mean that if they were able to scale up and just keep sales the same they are this year, as they were last year, that's $1 billion in net income that they're not realizing, because they're wasting money.

And so, management is committed to this turnaround to turn Wayfair from an unprofitable business into a profitable business. And even if that niche is a $10 billion niche that they just happen to, you know, truck along, they're growing at the rate of inflation or whatnot, it still ends up being a really strong business. And it's nothing against Costco, but I think Wayfair could be a really compelling turnaround story.

It's fair to say, I think, Dan, that your vote is for Costco and my vote is for Wayfair.

Kline: Yeah, but let me bring up why I like Costco. Costco is slow-and-steady wins the race. Costco has an incredibly loyal membership base, about 91% renewal rate. Costco knows the economics of opening a new store, how long it will take to scale and, sort of, where it's going to go.

So, Costco is safe-and-steady; Wayfair, they might make a profit, they might do the same amount of business that, I don't know, 5 Costco warehouses [laughs] do out of 700; I literally think that's the number. So, I don't know, Emily, I am guessing I am winning, which I promise you on the rundown tonight you're going to drub me. [laughs] So, in this case I have taken sort of the more popular tact, I think. Costco is just safer.

Look, I hope Wayfair does well. But a management saying, "Hey, we've been wasting money and now we're not going to," that doesn't seem like a great strategy for me. So, Emily, where did the numbers come in?

Flippen: I'm going to say, I like the idea of bringing in a live audience, having voting on this, I thought it would be fun. But I have done something to wrong the people listening right now, because I'll tell you what, 89% of the votes went to you, Dan. So, it's clear that Costco is going to be our winner again this round.

Man, Walmart and Wayfair losing, feel like complete upsets to me.

Kline: Yeah, look, I think Wayfair could be a compelling business story. Costco is a compelling business story, they're already there. You know, if you're going to make a safe investment right now, there are few places that look as good as Costco as a place to put your money. And know that this is not a rocket ship company, this is an elephant that's just slowly walking forward, but can do that for a really long time.

Flippen: Okay. Our next match up. This was fun, Dan, I think, we talked a lot about these businesses in the past, I feel like they're pretty straightforward. It's TJ Maxx versus Dollar General, both of them really strong retailers, totally different in their approaches, but actually are totally different in their businesses. Dollar General, obviously, operates more of a necessity chain versus TJ Maxx looking at clothing/retailing, but they target the same audience, which is why I thought that this was a particularly interesting matchup, because it does target middle-America a lot more than something like a Wayfair does, for instance.

Kline: Yeah. Why I like TJ Maxx isn't so much that -- yes, they both target people looking for value but TJX also owns Marshalls, and Marshalls can service that middle-America middle-income audience, but they can also service a wealthier audience looking for a bargain. My mom likes to go to Marshalls, you know, not the wealthiest woman the world, but you know, doing reasonably well.

And there's fun in going there. And I don't think she'd step foot in a TJ Maxx and she's probably indifferent on home goods. But that said, that company can serve everybody. It has that bargain-hunt aspect, it has the treasure hunt, you never know what you're going to find; another plus for Costco, by the way. And it's really exciting.

I really like the Dollar General business model, they know their customers, they're expanding really quickly. Stores get up to about 1.5 million in sales, which is kind of where they top out, very quickly, they're adding about 1,000 stores a year, but I do think they're selling to just one audience. And it's not that you can't go in there if you're well-off, but they tend to be in underserved markets where there's not enough grocery stores, vacation markets, you know, that. So, I like Dollar General a lot, but I think we're going to agree and lean toward TJ Maxx on this one.

Flippen: Yeah. And I should clarify, when I talk about TJX, which is the ticker for the TJ company family, I always say TJ Maxx, but it's actually inclusive, as you mentioned, of Marshalls and HomeGoods. So, they have a really compelling few segments there that they're targeting, and all of their business lines have been steady performers.

Dollar General, yeah, I'm not a huge fan of the way that they sometimes take advantage of the markets in which they serve. They tend to be underserved markets where you can't get a Walmart or a Target, which is fine, they fill a need, but it's not always the best experience for the people who shop there. So, just on premise alone, I tend to like TJ Maxx.

Kline: Yeah, they're well-priced but they're not well-run, we've talked about this before. Stores are a little chaotic, some shelves are empty, some are packed, it's an inconsistent merchandise, sometimes it's deceptive packaging, you think you're buying an 8-pack of toilet paper and then you realize each roll is only like a quarter what you would expect a roll of toilet paper to be. There is a Dollar General walking distance from our other house. And to go to the Publix, I have to cross a big street. So, I go to Dollar General pretty often to buy things like ice coffee and whatever.

And it's fine, it serves a need, but they could tighten up their ship and be a better-run retail operation and maybe they would beat TJ Maxx here.

Flippen: Completely agree. And now we have our last, first round; does that make sense? You know all the terminology here, Dan. I'm not a sportsperson.

Kline: Our last opening round matchup, that could be where you go.

Flippen: [laughs] There you go. Our last opening round matchup, we have Best Buy versus Home Depot. I'll let you start here, Dan.

Kline: So, I'm going to go with the upset again. I really like Best Buy. Best Buy is a company that was left for dead, I forget how many years ago it is now, but let's say eight or nine years ago. They brought in a CEO, Hubert Joly, he's since moved up and, I think, is Executive Chairman. And he basically said, here's what we're doing wrong. Our prices are too high, our salesmen are commission-based. We are forcing people to do all the work and then Amazon gets the sale. How do we change that, how do we eliminate employee theft, how do we make money from services?

Best Buy has an incredibly overpriced service division in Geek Squad that people love. If you want to spend $249 to have your $349 television mounted, Geek Squad will do that for you, and people seem to buy it. They bought a company that makes health devices, monitoring for people, sort of like the I fall and I can't get up type monitoring, but that's going to be a hugely growing industry that produces recurring service revenue.

Best Buy is another store that I enjoy going to. You might walk around and just like, "Hey, I want a smartwatch at some point, let's look at all of them." They have stores within a store, so they're getting rent from Microsoft and Samsung and cable companies and whoever else it might be. They are a physical player in appliances at a time where JCPenney dropped appliances. Sears is down to, like, I don't know, a handful of stores and other local appliance chains are slowly dying out.

And I know, I'm in the market for a refrigerator freezer, my wife found the one she likes, but it is not a stock item at Home Depot or Lowe's, so we can't go see it. Home Depot does a fine job, it serves a niche, obviously, it's a huge niche. They do an OK job for small-level contractors, not really for big-time contractors. But I know as someone who is not particularly handy, I dread going to Home Depot. They are not well-staffed, the stores are not well-explained, they assume you know what you're doing if you're going to be there. And someone who doesn't know what he's doing can't paint a wall. I've hung drywall, I've figured these things out and I find the experience of going to a Home Depot when you're not a handy person is very, very unpleasant, unless you get lucky and you get a staff member, if you could ever possibly find a staff member, who helps you. So, yeah, little personal bias here probably.

Flippen: [laughs] I'm just so shocked again, this is definitely one we're going to disagree on. And I'm going to fight hard here for Home Depot. So, Home Depot reported today, they had a lackluster quarter in terms of their bottom-line. However, Home Depot itself is such a well-run business, if anything, they're known for providing that great employee treatment. When you come in and you don't know what you want. I mean, that was the value that Home Depot has traditionally provided over a competitor like Lowe's. I also think that calling the home developing market a niche is maybe missing the point of the home development market. It's always an industry that is going to need to be done physically and personally.

Having those big warehouses is a part of the industry that's never going to disappear versus a company like Best Buy. While they've done a great job in expanding their omnichannel presence, ultimately, there's only a small number of people that are [laughs] going to need to visit in-person to be making their Best Buy purchases and --

Kline: ... oh, I'm not sure about that, do you want to buy a television you didn't see?

Flippen: If I knew that I could return it for free if I didn't like it, yeah, probably.

Kline: Have you ever tried to return a television? I had to do that once.

Flippen: Admittedly I have not.

Kline: Yeah. Well, Walmart shipped me a 55" television that was broken, getting it back into the package is basically six Rubik's cubes. That is not a fun experience in any way. Look, obviously some people don't care that much, they're going to buy their laptop there, whatever. But Best Buy is the default in that brand. If you're thinking electronics, you're going to think Best Buy, but I'm guessing I didn't win this argument.

Flippen: No, we just polled our live audience and with 82% of the vote we're going to be moving Home Depot forward up in this bracket. And I'm selfishly happy with that decision, I really like Home Depot. And this next matchup is going to be interesting, Dan, because I think we're probably going to be disagreeing [laughs] from here on out.

Heading into -- is this the quarter finals or the semifinals?

Kline: This is the semifinals of this half of the bracket, assuming we're going to do another eight at some point. So, that is a tiny bit confusing.

Flippen: But we have a matchup between Target, which upset Walmart last round, and Costco, which in my opinion, upset Wayfair, although our live audience would disagree with both of those statements. Since they're both companies that you champion for, Dan, how do you feel about the Target versus Costco matchup?

Kline: So, I'm torn, but I'm going to go with Costco. I'm going to go with the argument that the foundation of membership allows Costco to see a problem coming very, very far out. Costco is also in the enviable position that, because you pay for that membership, they operate on very thin margins. Most of their profit is made from those memberships, so all they focus on is driving down costs for members. That is going to make you really popular with your members, especially now during a pandemic where we're seeing prices go up on a wholesale level.

If Costco is saying, hey, the price of eggs went up 16%, we were only making 3% on eggs previously, but let's just sell eggs breakeven right now. We won't pass all the increase along. And you notice a noticeable difference on some of these prices, that's a very good position.

So, I love the Target business, I love how they've reinvented it, but I just think Costco under any circumstances is going to do well. Costco is also entertainment. It is fun to take your kid or a friend to Costco. You get a cheap meal, you have some samples; I know you can't do this now. You wonder why they're selling kayaks in a landlocked area. You have your picture taken with the giant teddy bear, like, whatever. Like, Costco is a fun store to walk around. I like to walk around Target too, but I don't view it as, like, an outing, it's just like, "Oh, hey, we need some stuff, let's go to Target and also walk around and see what's there." So, it's a squeaker to me, but I would say Costco. Your thoughts, Emily?

Flippen: I tend to agree with you, Dan. I can't add much, that's a wonderful explanation for why I think Costco has the edge over Target. The membership model does just make them more compelling.

What I will say, I think is hilarious. As you commented, that you see Costco as an entertainment venue, [laughs] going to Costco is an entertainment experience. And I'm chuckling because you threw me back to growing up in relatively rural Texas in high school, we would go to Costco for entertainment, [laughs] to eat those free samples. And it's nice to know, you know, even as we get older, we still get enjoyment from the little things.

Kline: Emily, if you someday have a kid, instead of a cat, you will find that things you never considered entertaining become entertaining. My son liked to walk around Target or Costco and asked me who was real. And sometimes I didn't know, like, I wasn't sure if Betty Crocker was real or not, like, I know Captain Crunch is real, you know, some of these didn't know; and that was years. Because when you have a kid anything that entertains that kid is really important and valuable to you.

Emily, why don't you take the lead on our second semifinal matchup?

Flippen: Which is TJ Maxx versus Home Depot. And I'm going to make the argument, because I know you're going to vote with TJ Maxx here, Dan. I'm going to make the argument for Home Depot.

Home Depot, to me, just has better growth opportunities. Honestly, when I think about the business long-term, it's been a steady performer in the market in which it operates, but it's really just begun to take advantage of the contractor market. They set up their shops to really serve contractors, not just local people who need to improve their homes, but the people who are doing it professionally, which tend to have higher margins.

And I've spent a lot of my time looking at the cannabis space, as anybody who is familiar with me knows. And they've set up some really interesting and pretty lucrative agreements with some of the biggest suppliers for hydroponics equipment in the nation. So, Home Depot to me, is just more forward looking with the opportunity to expand greater, especially as the home market and home development market expands. And I don't see any future in which home development stops completely, which gives it the edge over TJ Maxx, in my opinion.

Kline: You know, it's funny, I want to disagree, because I like TJ Maxx, but you're right. Like, optionality, HomeGoods is unnecessary. So, as much as I bought two ceramic chickens for my vacation house, which is sort of a nod to my grandmother, my family home for some reason had ceramic chickens in New Hampshire. And it's fun to walk around and they might have, like, about-to-expire chili mix or candy or who knows what or like a painting for $30 that's nice. Like, it's a really weird store, but it's unnecessary.

And then clothing is something you can put off purchasing. So, if things are not going well, you might go to Marshalls or TJ Maxx looking for the incredible bargain, the 90% off suit, because you still need to wear clothes, but you might not shop. If your refrigerator breaks, you need a refrigerator. If you have to repair your wall because you hypothetically, accidentally kicked a hole in your wall stubbing your toe in and being in incredible pain, you have to do that. So, it's just one of those situations where -- and I don't love the company, I certainly don't like how they treat me, but I do think from an investable point-of-view, Home Depot is a better choice.

Flippen: Oh, this is wonderful, I'm happy with that matchup. To be clear, I like all of these companies, but there's something especially fun to me about having Home Depot move to our final matchup here on a day when the stock is down a bit and the market is up, simply because their earnings, the bottom-line didn't quite meet expectations, not for any real business reason, but because they're paying their employees more during a global pandemic. So, I like this final matchup, and I'll now let you kick it off because I genuinely do not know which way you're going to go, and that's Costco versus Home Depot for the win.

Kline: So, Costco famously pays its employees well. They've also been paying bonuses during this. And, look, I don't think any investor should be looking at EPS right now, that is not the important thing, it is, did you retain your customers and not bleed money?

Even a Best Buy, which lost a couple of rounds ago, Best Buy doing 70%-something of its business during a pandemic when its stores were closed is astounding, that suggests that like, in your brain, "Hey, I need a new laptop," your head goes to Best Buy. It is sort of the opposite of, say, like an Office Depot. Oh, maybe we should do a losers' bracket at some point, that would be a ton of fun. Sorry, Office Depot; my cousin works there in management, well, not management, but he's a marketing executive. So, I wish you nothing but the best. But it took me three days to remember that you sold toilet paper. And by the time I thought of it, other people had figured it out, that should not be the case when everybody is racking their brains for places to get stuff.

So, this is a case where, you know, these companies are both really strong, but I do think Costco is a little bit stronger. Costco can sell anything, if they see a demand for paint, they can add a paint section at a good price and compete with Home Depot. Costco probably does occasionally have lighting fixtures and other things. And, obviously, you're not going to Costco if, like, your first stop is repairing your home, you're going to go to Home Depot. But there's just so many markets, like you forget Costco sells beds, Costco sells seasonal furniture, they sell pool supplies, when it's appropriate, in a market for pools; they sell grocery, you can buy your tubs of mayonnaise, you could buy a 9,000 pill Tylenol jug, whatever it is. So, it's very close, but I'm going to say Costco here.

Flippen: I'm going to take the Home Depot here. And maybe part of me is just wanting to do this because I like being contrarian sometimes. I like both of these companies, but Costco is a very low margin business. A company like Home Depot I do not see getting disrupted by any sort of technology at any point in the future. Costco is actually competing against a lot of technology giants. And before this pandemic, I probably wouldn't have said this is a risk that they were competing against food delivery markets, like, AmazonFresh, for instance, but as people have attempted to move away from shopping at stores to online, the fact that Costco hasn't invested as much into their own delivery systems, their own online presence, the fact that a majority of their purchases are still made in stores, could potentially threaten the people who've been paying for that Costco membership to move to e-commerce platforms to get their food delivered instead.

And I realize that's out there, but I think about the long-term impacts of this pandemic and I think that there are businesses that will be impacted more than people are realizing. And it's possible, in my opinion, that Costco could be one of those businesses. I do not see a future in which Home Depot is as strongly impacted as a company like Costco is, but I say that with a lot of hesitation because I recognize that both of these companies are outstanding performers.

Kline: Yeah, I mean, there's potential disruption for Home Depot, because, you know, if you're buying a truck full of drywall, either they have to deliver it or you have to pick it up. There is the ability to buy cheaper real estate and not have a store and stock some of this stuff and serve contractors. I mean, my family has a ladder and scaffolding business and basically, we don't compete with Home Depot, because ladders are free at Home Depot compared to buying, but in terms of being a high-quality option, no real contractor is buying his 36-foot ladder at Home Depot.

And it's a testament to the companies they do business with. The ladder they sell you is tested to exactly the legal weight. So, if it's a 300-pound weight, it's tested to 1,200-pounds. My family was never able to do that, so our ladder -- and we don't make ladders anymore, so I feel comfortable talking about this -- our ladder would test to, like, 2,000-pounds because we couldn't shave off those tolerances, contractors, real ones at least, they're buying that heavy-duty ladder, they're going someplace else. Home Depot is the small-time guys.

But, Emily, we have a winner, oh, and it was close, but why don't you tell the people who won.

Flippen: Yes, drumroll, you are the winner, Dan, or should I say Costco is the winner. It's not personal. Costco has beaten out Home Depot with 56% of the votes. And the fact that that was closer makes me feel like I didn't completely ruin [laughs] the seeding when setting up this bracket challenge, but I'm happy with that. As much as I do like Home Depot, there's really no denying that Costco is in a really strong competitive position.

And when we think about retailers, Costco isn't the one that comes to mind first for a lot of people. And we forget that there are strong retailers that have been performing consistently for a long period of time, and Home Depot and Costco, our winner, are both examples of that.

Kline: Yeah, and a lot of people are asking us in the Q&A, why we're talking about shopping experience, you know, because that's not the investment argument? I would say, absolutely it is, like, if you have a good shopping experience that is going to lead to customer satisfaction and more sales. So, one of the challenges facing a Home Depot or any retailer isn't how you handle the person that's comfortable shopping there, it's how you handle the person that isn't. When I used to run the toy store, you'd see, like, the mom walks in and is overwhelmed, it was a gigantic place, you know, 50,000 square feet packed with toys. And that's someone you walk up to and you say, "Hey, are you new here? Can I show you around? Are you looking for a gift? What would the choices be?" And you really do your absolute best to bring them in. And I think that's something that, say, Walmart does reasonably well. They've gotten rid of their greeters. Everyone at Walmart is trained to be helpful, same thing at Target. Though, it can be harder to find someone at Target.

That is something where Costco intentionally doesn't do, because everything they have is put into pricing, so there's very few people on the floor. And really at Costco your question is, "Where could I find it?" because, you know, I don't think I need to explain to you what eight tubes of toothpaste are? Like, most things that Costco sell are pretty self-explanatory, whereas at the Home Depot, if my contractor says, "I need to get a flange for this kind of toilet" while he's replacing it, I'm going to just have that written down, and I don't know if it's a big box or a little box or what it would possibly look like. And there's a level there that I just think they're missing on.

So, Costco is the winner here. Emily, this was a ton of fun. Do you have any final thoughts?

Flippen: Yeah, this is a ton of fun, I really enjoyed this, and thank you for bearing with me [laughs] as we experimented this time around. I do have a final thought, and it was about what you just talked about in terms of looking at retail experiences through the lens of the shopping experience. And it's important for every investor not to put too much emphasis on their own anecdotal experiences, because one person's experience isn't necessarily indicative of another's, but that's what makes looking at consumer goods and retail chains, in particular, so interesting, is that it does depend on the member experience. And while it's not an individual experience, it's the aggregate experience that people have when they go into a store. And so, Dan, when you talk about your experiences shopping at Home Depot or Dollar General, I don't think you're the only person who has experienced those trends.

So, while it doesn't so much matter what one individual thinks when you look at a SaaS company, for instance, it matters a lot more when you're trying to target huge numbers of just individual shoppers, like these stores are, and it makes it challenging for investors, but also really enjoyable, especially when you get to have conversations like we did today.

So, Dan thank you so much for joining me for this episode of Industry Focus, it was extremely enjoyable.

Kline: Thanks for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out and say "Hi!" you can feel free to shoot us an email at or tweet us @MFIndustryFocus.

As always, people on the program might own 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.

Thanks to Austin Morgan for his work behind the screen today, and for dealing with us as we [laughs] put up those live polls to our audience. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Microsoft. Emily Flippen owns shares of Home Depot. The Motley Fool owns shares of and recommends Amazon, Home Depot, Microsoft, Wayfair, and Zoom Video Communications. The Motley Fool recommends Costco Wholesale, Lowe's, and The TJX Companies and recommends the following options: long January 2021 $120 calls on Home Depot, long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2021 $210 calls on Home Depot, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$321.32 (-1.20%) $-3.89
Microsoft Corporation Stock Quote
Microsoft Corporation
$286.15 (-1.39%) $-4.02
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q, Inc. Stock Quote, Inc.
$138.23 (-2.86%) $-4.07
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$137.02 (-1.47%) $-2.05
Target Corporation Stock Quote
Target Corporation
$167.04 (-3.47%) $-6.01
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
$79.53 (-3.51%) $-2.89
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$554.53 (-1.15%) $-6.43
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$211.36 (-2.36%) $-5.11
The ODP Corporation Stock Quote
The ODP Corporation
$37.48 (0.75%) $0.28
Dollar General Corporation Stock Quote
Dollar General Corporation
$253.86 (-1.48%) $-3.80
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
$66.40 (-2.37%) $-1.61
Wayfair Inc. Stock Quote
Wayfair Inc.
$57.01 (-20.09%) $-14.33
Zoom Video Communications Stock Quote
Zoom Video Communications
$99.50 (-3.57%) $-3.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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