In this episode of MarketFoolery, Chris Hill and Motley Fool analyst Jason Moser go through the latest headlines from Wall Street. They've got a couple of car stocks to talk about and a Chapter 11 bankruptcy filing. They cover some surprising developments happening in the footwear space and much more.

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This video was recorded on May 26, 2020.

Chris Hill: It's Tuesday, May 26th. Welcome to MarketFoolery. I'm Chris Hill, joining me from a safe social distance, Mr. Jason Moser. Good to see you, my friend.

Jason Moser: Good to see you.

Hill: We've got footwear news; we've got a lot of automotive news and we're going to start there with Hertz (NYSE:HTZ). Because, just like we saw with JCPenney in retail, what had been rumored for a while is now official, Hertz Global has filed for Chapter 11 bankruptcy protection.

The New York Stock Exchange is going to delist the stock. And this is, I don't want to set this up as, wow! This was an unbelievably stable company from a financial standpoint to begin with, but just when you look at the speed with which [laughs] this stock went from the low-$20s to its current price of $2-and-change. This is a swift end for Hertz Global.

Moser: Yeah, I mean, it is. I would say that this was, kind of, just the icing on the cake, really. I mean, this was a very challenged business before the COVID-19 pandemic hit, and that certainly accelerated its demise; I mean, it has obviously accelerated the demise of many businesses, but Hertz, it was in a challenged position before this. Sales were essentially flat. They were taking losses left and right, and they've also been plagued by management upheaval. I mean, they've named its fourth CEO in six years just this year.

And so, you know, the one thing I always think about when you see a revolving door like that with leadership, if you don't have a leader in place that's been there for a while, you don't really have the opportunity to try to see around corners and perhaps take the business in a new or additional direction. I mean, that really is one of the great virtues of tenured leadership there, is they have a good grasp of the business but also the market that they're pursuing and how the company can respond to competitive threats.

Like I said, before the pandemic hit, Hertz was still a business in trouble. This just hastened really, I think, what was inevitable. As we've seen the whole travel industry change with companies like Uber and Lyft. And just this need for rental cars is maybe not the same that it was before. So, it's a shame, you certainly never root for this kind of stuff, it's a brand, I think, we all grew up with. And you remember those commercials of O. J. Simpson running through the airport, leaps and bounds. I can still remember that just as if it were yesterday. But then clearly this is a business that was not able to think about the challenges that were approaching and they were not able to figure out a way to pivot or evolve and ultimately, you know, this bankruptcy was just inevitable.

Hill: Shares of Avis Budget (NASDAQ:CAR) up 15% on this news. I was a little surprised at that. I realized that, look, if one of your competitors, no matter how challenged they are -- Hertz was a competitor, if they go under, yeah, that's good for your business. I was still a little surprised to see that pop in Avis Budget's stock. Because I thought, look, that's [laughs] -- this is not a great environment for any of your businesses.

Moser: It's not. And I mean, this isn't really a great business even in the best of times. I mean, the cost of doing business for companies like these, it's expensive. I mean, you're talking about gross margins in the 15% range even in good times. So, you can see that gross margin, we're talking about earnings which trickles all the way down to the bottom-line. It's always just going to be a tough margin business. The cost of doing business is really high. There's no real loyalty.

I kind of liken these car rental companies to airlines, there's no real loyalty. People just want something cheap that works. And it, kind of, takes me back. Now, this is a family friendly show, Chris, so I'm not going to completely go off the deep end here, but you remember back in the day that Planes, Trains and Automobiles, the movie with Steve Martin and John Candy. You remember what transpired when Steve Martin was trying to get that rental car, right? You can give me a Datsun, a Toyota, a Mustang just for "blanking" wheels and a seat, right? That's kind of what we're seeing with these car rental companies. There's not really any loyalty there. I liken them to airlines in that regard.

And, you know, before I moved up here to start working at The Fool 10 years ago, I was working with Travelers Insurance and I was in the auto claims department there for a year. And I was astounded by, No. 1, the amount of car accidents that happen on a daily basis, but then No. 2, the business that these insurance companies give these rental companies is just amazing. I mean, if your car gets hit, you need another way to get around, I mean, it was kind of automatic business from that point. So, it, kind of, showed you the opportunities there, at least, with these car rental companies to take advantage of partnering up with big insurers like that.

But all-in-all that's just one avenue of revenue. And it's not really growth, right? I mean, you're not rooting for an environment where we have more automobile accidents. And it probably could be argued that in time, as technology gets better, we should be able to bring that number down.

But you know, this is a business where -- the thing that really stood out to me on their income statement, it was not revenue growth, it was not how well they managed their earnings, it was the net interest expense. And expenses are bad. And we're talking about from 6.5% in 2015 to 8% of total revenue today. And that's a lot. And they were free cash flow positive.

The last time they were free cash flow positive it was 2016, it's not even close after that. They've got a debt-to-equity close to 14. So, I mean, when you combine all of this together, it's just a really, really difficult business to run. I would certainly not make the leap that, because Hertz is going to be going through this, that Avis is going to be some massive beneficiary. Because remember too this is Chapter 11. Hertz is still going to be able to try to figure out a way to do business going forward. And granted, it may not be one that you want to invest in, but it's still going to be a force out there in that market, which you know, I think continues to make this just a difficult space for investors. It's great if you need a rental car, but as an investor, there are better places to look in my opinion.

Hill: The last thing before we move on, Hertz owns more than half a million vehicles. Isn't it reasonable to assume that part of this process is them going to be selling some of those off, reducing their fleet just a little bit?

And where I'm going with this is, I filled up my car 15 days ago. And I took a very short drive yesterday and I looked and I've got three quarters of a tank left. So, if that keeps up, one tank of gas is going to get me through two months. And this will lead into our next topic in a second here, but I don't know, it really seems like for consumers, who are either looking for a new car, looking for a lightly used car -- I mean, I think the last car I purchased, the one that I just filled up, I'm pretty sure it was a rental vehicle beforehand. And it is in good shape; I don't know. It just seems like if you're looking to get a used vehicle, you're going to have even more options as a result of this.

Moser: I would imagine so. I mean, I would certainly think to right-size their capital structure, they're going to be releasing some of those leases and some of those vehicles, and that certainly does flood the market with more used vehicles. And as we always say, economics at the end of the day rule. And so, when you flood the market with supply like that, oftentimes you're going to see a lot of competition just on the pricing side. And that's great for folks looking for lightly used cars. I mean, the nice thing, usually, at least with rental companies, they do maintain those fleets pretty well, just because those cars have to always work. You're renting on the premise that my car is going to work. So, they typically take care of the vehicles and service them well.

It's really interesting to think about, going forward, how we use our cars, because I'm with you. My wife and I, both, have our own cars. And I have not been taking my kids to school over the past few months. I've obviously not been driving to the headquarters for the last few months. I'm taking two weeks to go through a tank of gasoline. Now, I don't think it'll always stay that way, but I think we're seeing a lot of signs. Certainly, out West we're seeing more companies embracing the work-from-home or work from other places. So, it's reasonable to assume that maybe people will be driving less, and if that's the case, then that probably means that people aren't out there demanding to buy cars as much. And then that will have profound impacts on this market. The ripple effects are plain to see.

Hill: Let's move on to AutoZone (NYSE:AZO), because third quarter profits and revenue came in higher than expected for AutoZone. Their same-store sales weren't positive, but they were still solidly better than Wall Street was expecting.

Moser: To be an essential business, [laughs] Chris. This is an essential business. They didn't have to close up shop for one day. And to remember here, I mean, just as a reminder, this is the quarter that ended May 9th. So, make no mistake, this is a quarter that really did report in the midst of this pain. These numbers do come from a lot of the toughest times here.

Sales were relatively flat; same-store sales, as you mentioned, down only a smidge, I mean, that's got to feel like a major win for this company, particularly when you look at the carnage writ large in our national economy. I always have looked at AutoZone and O'Reilly as they're the two big players in the space. AutoZone and O'Reilly and Advance, kind of, brings up the rear there.

But it does feel like you could call AutoZone the Lowe's to O'Reilly's Home Depot, except maybe the disparity between O'Reilly and AutoZone is a little bit closer. They're two very similar businesses, they perform very similarly on the margin side. And they provide, ultimately, an essential service, you know, your car has to work. And they have the consumer and the commercial side of the business, the omnichannel side of the business where there is ordering online or order online pickup at store still represents a very small percentage of their business, it's less than 5%. So, they do count on people coming into those stores.

And they didn't really have to close many stores for any extended period of time, they didn't have to whittle down their hours terribly substantially. They did note the chronology as the quarter went along, the first four weeks, things were going well, they were up mid-single-digit same-store sales. The next four weeks, that was the greatest or the first impact, at least, and probably the greatest. And they said, that's when their same-store sales really took a hit. But they did note, over the last four weeks of the quarter, they saw these stimulus checks actually had an impact on their market, consumers are willing to get back out and shop at a socially safe distance. And again, they're providing things that ultimately, we as consumers with cars need, and consequently, you've got a business that is still performing pretty well in a very difficult time.

Hill: Yeah. And again, to go back to, sort of, the larger automotive environment. It really seems like we're going to be in this situation where people are -- let me put it this way, I wouldn't want to be in the business of selling brand new cars. I think [laughs] that's going to be a particularly tough business over the next couple of years. When you consider the tens of millions of people who are recently unemployed more and more people are going to be looking to get the most out of the existing car that they have. If they're looking to buy a new vehicle, there's probably going to be even more consideration for used cars, whether that's from Hertz Global or [laughs] somewhere else.

And I think that businesses like AutoZone and O'Reilly and Advance are probably set up for a better next 24 months then they might have been otherwise.

Moser: I think that's a safe assumption; I would agree with that. For auto dealerships to sell new cars -- I don't think that low rates are going to necessarily stoke enough demand. You know, that's one of the levers they can pull. They can say, "Hey, when you get this car, you can finance it over six years for 0%." Well, that's a no-brainer, because you're not paying any interest. And you can pay it off whenever you want, so.

But not everybody is in that boat, not everybody can do that. And so, then you couple that with a market where there is likely a flood of used vehicles out there, and you're still going to be able to get them at very low rates. Folks who are in the market for a car are probably going to look at that used market first. And folks who have cars, like myself, yeah, I'm definitely in that boat, I'm going to get as much life out of my car as I possibly can. I mean, I really want to drive it until it just doesn't drive anymore. And if you take care of a car these days, much like technology, these cars, they could last a long time if you take care of them.

Hill: Let's wrap up with Crocs (NASDAQ:CROX), because shares of Crocs are up nearly 10% this morning. Sales in March rose 14% compared to a year ago. And according to a report in The Wall Street Journal, Crocs is the only footwear brand among the top 30 brands that saw an increase in sales. That is astonishing to me that only one saw an increase in sales, and that the one that saw the increase was Crocs.

Moser: Well, and then, I think, I read further that the only other one that even performed remotely close was Ugg. Which, I mean, you know Uggs? That seems, I don't know --

Hill: -- I don't think you and I are the target market for Uggs.

Moser: Maybe not, maybe not. But, I mean, Tom Brady certainly seems to like his Uggs, Chris. I don't know. Maybe he's trying to get that out there a little bit more mainstream. Yeah, listen, hey, Crocs, I said out on Twitter yesterday that I'm working on putting together a basket of stay-at-home stocks, a presentation and a basket of stay-at-home stocks for FoolFest this year in a couple of weeks, which is going to be a virtual event, of course, and it'll be something where we get to deliver a lot of different ideas and presentations.

Maybe Crocs, who knew? it's the ultimate stay-at-home stock, right? Like, you are at home, you're working at home, who cares what shoes you -- most people aren't even wearing shoes. You know what I'm wearing right now, Chris? Now that we have the video component, look, I'm wearing my Under Armour flops. Nobody cares about wearing nice shoes anymore. So, yeah, I guess it kind of makes sense from that perspective.

And, you know, the interesting thing, if you look back to this, you know, this company, has always had potential and really seem to live up to it. But if you look back at their earnings call in April, it was really kind of fascinating to see e-commerce sales growth of 15.8% on top of 16.5% growth the previous year. That was their 12th consecutive quarter of double-digit e-commerce growth.

And so, my point is, ultimately, this is a business really set up to perform well when it comes to e-commerce. You kind of know your size, you know, if you have Crocs, you're not expecting too much out of them, right? It's not like you're looking for, you're not Cinderella, right? You're not looking for the perfect fit, it's just you're looking for something kind of like four wheels and a seat, Chris. You're just looking for something to shuffle around the house in. And Crocs does a really good job of that.

And then they do an even better job of partnering up with all of these different sorts of content partners or, sort of, niche fan bases, whether it's Kiss or Kentucky Fried Chicken or Harry Potter, charms to attach to your shoes, they've really added this identity that you don't affiliate, I think, with any other footwear product. And so, while I myself don't own any Crocs, I'm not terribly surprised to see them performing well in this environment.

I guess the big question is, will they be able to sustain it when we get back out? You know, are we going to be, it is the new normal where we're always working from home or do we eventually have to go back to the office? And then furthermore, if we do go back to the office, do they really care what you wear at the office? We're very lucky at Fool HQ, we wear Crocs at Fool HQ and get away with it. Not every place you can do that, but I don't know, maybe we see that changing here.

Hill: Well, and I think, to broaden it. Yeah, this is going to be a lean couple of years for anyone in clothing, footwear, any sort of aspirational high-end brands, I think it's just going to be a rough road. Like, you know, we were talking about this the other day. You really don't want to be in the business of selling men's suits [laughs] or at least dress pants because to the extent that you need to look good on a Zoom call, maybe you've got a jacket and tie, maybe.

It's probably a time to look at businesses that are focused on the waist up. And this is something we talked about recently with Target, with Target's latest quarter where you look at the investments they've made in apparel, they didn't really pay off in the most recent quarter, but that is an opportunity for a business like Target.

Moser: It is. You know, speaking of opportunities, I feel like this is really the opportunity for me to go ahead and trademark the wardrobe mullet, right? We had talked about that, I think, a number of years back that wardrobe mullet, where it's all-business up-top and all-party down-below, because, you know, on Zoom, nobody cares what you look like from the waist down because they're not seeing it. I mean, I think there is something to that and I think we're even seeing companies marketing to that. There are even items of clothing that are being sold that are geared toward, [laughs] you know, making you look better for that video conferencing workday.

And so, yeah, it does strike me as some companies are going to be able to really, they're going to be able to really embrace this time and make absolutely the best of it, Crocs seems to be doing just that, and it's a relatively simple concept, simple product, it doesn't sound like it's too terribly difficult to make. And obviously very, very lightweight shipping, so, I mean, their fulfillment costs are going to be fairly minimal it seems and the numbers reflect, I think, what is a pretty robust e-commerce business. So, I suspect we'll see them continue to do well.

Hill: Jason Moser, 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.