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Low-Price Retailers Post High Growth

By Chris Hill – Jun 1, 2020 at 9:57AM

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There is encouraging news coming out of the retail sector, but is it sustainable?

In this episode of MarketFoolery, Chris Hill chats with contributor Dan Kline about the latest news from the markets. They look at the retail space and how retail businesses are serving underserved communities. They've got some updates on the employment front, entertainment announcements, 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 28, 2020.

Chris Hill: It's Thursday, May 28th. Welcome to MarketFoolery. I'm Chris Hill, joining me from Florida, the one and only, Dan Kline. Good to see you, my friend.

Dan Kline: Hey there, Chris. It is a rainy week here in Florida.

Hill: It is a rainy day here in the ALX, so I feel for you, at least for today only. We've got some retail news, we've got some employment news. We've got entertainment news, but we're going to start with Dollar General (DG 0.59%).

First quarter profit and revenue came in higher than expected for Dollar General. Same-store sales were up nearly 22%; that is not a typo. [laughs] That is not me misspeaking. Same-store sales for Dollar General up nearly 22%; just a monster quarter.

Kline: Yeah, these numbers are incredible; and there's a reason for it. Dollar General is a business that serves people that are underserved. They're generally neighborhood stores. So, a lot of their customer base can walk to them or it's a very short drive. So, at a time where we're under stay-at-home order, shelter-in-place, whatever you want to call it, this is the only option for some people who are otherwise taking the bus to go to a grocery store. So, you could have predicted this beforehand.

This is a company that sells everything: groceries, toilet paper, you know, your iPhone charger breaks, they'll have an iPhone charger; cleaning supplies. I'm sure they adjusted merchandise. They're probably selling a lot less pool noodles right now; but that type of stuff. So, these are stores that had a really strong supply chain, they're clustered tightly together, they can often be a mile apart; that's how narrow the area they serve is. And EPS is up 73%, and there's no reason to believe this won't continue as long as we're in this current situation.

Hill: You know, it's an interesting thing to think about, because, you know, Gary Philbin is the CEO of Dollar Tree. Dollar Tree is the parent company of, both, the Dollar Tree and Family Dollar. I watched an interview he gave on CNBC this morning, and that was one of the questions that was put to him, was [laughs] essentially, "Okay. A year from now what kind of comps should we be expecting from you?" Because Dollar Tree also came out with their first quarter report. Not exactly the same type of comps that they were putting up, but Family Dollar stores, I think, the same-store sales growth was about 15.5%.

So, I think it's going to be a really interesting thing to watch with both of these businesses. Can they keep this going? Because one of the things Philbin said was, "Look, in the wake of the Great Recession, there were a lot of customers who were just, sort of, trying us out for the first time and we kept a lot of them." So, I think it'll be interesting to see.

The other thing he said that I feel like I took this as an encouraging sign for all U.S. consumers, so whether you own Dollar Tree or Dollar General, one of the things Philbin talked about was the supply chain and how in April household essentials were selling out in two hours. And that's getting better; that's better now. He didn't say they were at full capacity, normal capacity, but he did say he thinks they will get there in several weeks.

And I just thought, I don't know, it's encouraging news to think that whether it's Dollar General, Dollar Tree, Family Dollar, Target, Walmart, whatever your neighborhood grocery store is, if they can start getting back up to capacity for just those basic household essentials, [laughs] I think we're all just going to breathe a little easier.

Kline: Yeah, Chris, I'll speak a little bit anecdotally. First thing, it's also important to point out that Dollar General is not a dollar-store, they're a low-price retailer. So, that gives them a lot of optionality by not having a sort of artificial price cap limit. I will say that, I've been in Wawa recently, that is a privately held chain of gas stations and convenience stores. And they've had toilet paper and paper towels. And there doesn't seem to be a major run on them. My wife has been in Target and Publix and while she couldn't get the brand she wanted, we were able to get that. We've been able to order hand sanitizer on Amazon (AMZN -3.01%). it's hand sanitizer of a brand I've never heard of, that I hope is made of what they say it's made of, but that said, it smells like it's hand sanitizer. So, I do think the supply chain is largely returning to normal.

The other thing we all heard about was, "Oh, my God! We're going to run out of meat," "There's a huge shortage of meat." And I can say that you don't have every cut of meat. You might go to the grocery store wanting 93/7 ground beef and have to settle for 90/10, but that's pretty much the choice you're making. So, these are not -- you know, if you're up in arms over a 3% extra fat, you're doing something wrong, like it's not like they're saying, "Hey, there's no ground beef, there's only cans of salmon." You know, there's a reasonable selection.

I think all of the retailers that I've been to, and Amazon especially, have done an amazing job of settling out the supply chain, adjusting. You know, the companies that make toilet paper had to shift from making commercial toilet paper; you know, the toilet paper at the office isn't the stuff you use at home, it's bigger rolls, it's meant to not clog up the system, it's rougher. So, they had to change, and they changed really quickly, and in my opinion, really impressively.

Hill: I'm still seeing this in Alexandria, I'm wondering if you're seeing this where you live. Restaurants, as a way to encourage people to do takeout, they're still doing the, "Oh, by the way, one of the things you can order off of our to-go menu is rolls of toilet paper."

Kline: So, we order regularly from Sonny's BBQ, and they have -- which is, I think, a national chain or at least a Southeastern chain -- they have been including [laughs] a roll of toilet paper when you order, which we've just, sort of, put on the pile. Some restaurants here, Panera Bread everywhere, have converted to doing some grocery, some local places -- my mother orders from a place called Ledger in Salem, Mass. which is a really upscale steakhouse-type place. And they're selling raw food. Morton's Steakhouse, we've ordered a couple of times dinner, and along with dinner we've gotten raw burgers that come individually packaged, they send you the bun really well done. So, a lot of restaurants have pivoted.

The other thing I've seen is, we went out to dinner last night, for the first time in 11 weeks I want to say. And we ate outside at our favorite, sort of, Mexican place, a regional chain, and the menu was limited. They weren't offering everything they normally offer. Now, they had all the ingredients they normally had, but they weren't packaging them in all the different ways they normally do. Some of that was probably to get people in-and-out faster, some of that is also based around takeout. Some of their dishes served in steaming, you know, stone cauldrons don't really take-out all that well. But aside from the general disregard of people wearing masks on the walk to the restaurant, it was a pretty pleasant experience.

Hill: Sonny's BBQ, I just looked up, a Southeastern chain, so.

Kline: [laughs] Okay, sorry. A reasonably priced pretty decent barbecue chain; if anyone wants to visit.

Hill: The past 24 hours have been pretty eventful for Boeing (BA -5.37%). Boeing announced they're laying off nearly 7,000 workers, they also announced they are resuming production of the 737 MAX. Now, for the sake of context, nearly 7,000 workers, that's about 4.5% of the total workforce at Boeing. I know Dave Calhoun has been on the Board of Directors for over a decade, but he's been the CEO of Boeing for about five months, and I really hope he knows what he's doing.

Kline: I'm not so sure. And the job cuts go deeper than that. It's 4.5% have been notified, there's another 5,000 jobs they're eliminating that are unfilled. And overall, they're going to cut about 10%. Restarting the Boeing 737 MAX before there's permission to fly it, before there's any demand for it, kind of feels like my plan to build, you know, Titanic 2 and launch a cruise line. This is a terrible idea.

Chris, I've flown on the Boeing 737 MAX many times, I'm a Southwest customer, I am not a skittish guy, but until independent people tell me that these software glitches have been fixed, I'm not getting on it. And symbolically, this has to be like skipping Windows 9 and going right to Windows 10, because Windows 8 was such a debacle, though, I personally liked Windows 8. This is one of those scenarios where this needs to be renamed and they need to try to make us forget that these problems ever happened instead of them just, sort of, blindly ploughing along. Isn't there something else Boeing could be building that people actually want?

Hill: Yeah, it's just -- I'm assuming these are decisions that a lot of thought went into, but the timing of it seems really odd, the pairing of the announcement seems odd. And like I said, I hope Calhoun knows what he's doing because we're outside the company, we don't know all of the factors involved here, but from the outside, it just doesn't look good.

Kline: The optics are bad. They're in financial good shape. We get asked this question all the time, "Are they going to go bankrupt?" They're probably not going to go bankrupt, even strategically, just because of the cash cushion they've built up, but they're going to lose customers, they're going to lose sales. And commercial air travel is going to slow down for probably a long time. There's obviously less flights. Like, I, usually once or twice a month, fly from West Palm Beach or Fort Lauderdale to Alexandria or to Baltimore or to Washington sometimes. And usually there's 30 flights to pick from. Going forward, once it's normal, say in the Fall when maybe the office is a little bit open or there's a reason to visit, it's going to be a few flights to choose from in order to meet the demand. Not a lot of people are flying for no reason, so I can't imagine there's that much wear-and-tear on airplanes or that companies are going to be looking to bolster their fleets, especially with high capacity planes; that doesn't make a ton of sense right now.

Hill: Let's move on to Amazon, which recently has hired 175,000 workers. Amazon came out and said they're going to be offering permanent jobs to at least 70% of those people and the remaining 50,000 or so are going to be on seasonal contracts that last up to 11 months. And, you know, this answers a question I've had for a while now, when we've seen these numbers coming out of Amazon, coming out of Walmart as well, in terms of the number of workers they've hired. Obviously, there's increased demand at both. I mean, these are the two biggest retailers out there, but it is interesting to see this commitment from Amazon.

Kline: Yeah, it surprises me that they say this publicly, because this means they're not going to automate some of these positions away. Ultimately, picking groceries isn't going to be done by people. I've gone to multiple trade shows and seen how easily this can be done by robots in a relatively small amount of space. But that means, Amazon is so confident that their business is going to keep growing that they're going to need these workers. You can't automate everything. So, this is a scenario where they could have just said nothing and said, thank you for your service, and let a lot of these people go. But if they're publicly coming out and taking a bow and saying 70% of these workers are going to stay, I take them at face value.

And they are difficult jobs, from everything I've heard, they push people very hard, but these are reasonable paying jobs in many markets. There's an Amazon warehouse down the road from me. I live in West Palm Beach, but I have a modest home in Davenport, which is a very middle-class, lower middle-class community. And you can live reasonably well on $15 at Amazon. You could certainly rent a one-bedroom apartment if your spouse is doing something similar, or your partner, you can have a pretty OK life on combined $30/hour. So, it depends where you live, but these are pretty good jobs in many markets.

Hill: And not that this is why Amazon did it, although it certainly might go on the list of reasons why they would put out this announcement. Do you think, in some ways, this puts a little bit of pressure on Walmart to say what they're going to be doing in terms of the 200,000 people they just hired?

Kline: So, I'd be shocked if Walmart came out and said they're going to do this, because Walmart has been pretty clear that they intend to automate a lot of stuff they're doing by hand. It makes zero sense to have a massive grocery delivery business, which is literally people walking around in a backroom picking groceries. Walmart will absolutely finish this with more workers than it started, probably a significant amount, and they will make an announcement when they know the numbers, but the numbers are probably going to be lower.

What Walmart probably wants to see is, what's the attrition? As the economy comes back, who's going back to their job as a waiter, who's going back to their job in the hospitality industry? You know, a lot of hotel clerks and people who clean your room and hotel managers, frankly, are probably working at Walmart and Amazon right now. I don't think Walmart is going to be as bold, because they've talked a fair amount, quietly, about automation. I've definitely seen them talk at trade shows and other spaces. So, I'm not sure their demand for people is going to be as high as Amazon's is.

Hill: Cineworld is the second biggest movie theater chain in the world. Cineworld is the parent company of Regal Cinemas, which is the second largest theater chain here in the U.S.

And Cineworld came out and said, we expect to open Regal Cinemas in the U.S. in July. I'm a fan of movies and I am surprised to see that kind of a sweeping announcement.

Kline: Chris, one of the main factors in where I live in downtown West Palm Beach was that I wanted to be walking distance to a movie theater. It's actually an AMC theater, not a Regal. I am an avid movie goer; I like the experience of going to the movies. I would go to a socially distanced movie or event at a movie theater as long as I was really convinced they've taken steps, you know, nobody next to me, nobody in rows; who knows what those steps are. You can't make money doing that.

And there's two big movies coming out; Chris Nolan's Tenet and Disney's Mulan. So, those two films, I will be shocked if they are fully theatrical releases. So, the demand for movies is going to be very limited. People don't want to be crowded in. Even as bad as the behavior I saw last night in public where people, like, with old people and kids and not wearing masks, I'm pretty sure, we don't want to be all crammed together in a movie theater and we won't be allowed to, even here in Florida. So, this seems to me like, I'm glad you're opening the doors, I'm glad some people will get some work, but having showings of Mulan that are 25% full or even 50% full probably doesn't work unless you figure out -- you know, maybe they're going to show Mulan on 11 screens in the cinema and that's going to work because some of the lesser movies wouldn't play. But this is going to be a very slow path to recovery.

Hill: Yeah, the theater that's closest to me is an AMC theater, and one of the things I've noticed over the past few years is, increasingly, they've moved to a system where you can select your seat, if you're ordering tickets online ahead of time. And so, I think it would not be difficult for AMC or any chain, I don't know if Regal does that as well, but any chain that has that capability, it's easy to imagine, oh, OK. Well, we're just going to block off every other seat, so there is no option for people in terms of crowding together. We are going to set up a system so that the theater can be 40% filled because we're going to block off the rest of the seats.

But yeah, I think it's -- but you really got to want to see a movie to say, yes, I'm going to go to the theater. But like a lot of things, I think it's one of those experiences that if they get it right, they do it right. You know, you go the first time and it works. Then you think, OK, they've done this the right way, I'm going to come back in the weeks to come for a different movie.

Kline: Yes. So, Chris, there are big challenges to this. So, they all have that technology, because even in the theaters that aren't using it in regular screenings, they are using it in their IMAX theaters or their other special theaters, so they all have access to it. The problem is, my household is three people, your household is, I want to say, four people.

Hill: At the moment it's four, but sometimes it's five. [laughs]

Kline: So, you could go with the five people who live in your house. They already live with you, you've already, you know, breathed in each other's faces. How do they handle it? There are six people in my household and four people in his and we all can't sit together, like, it becomes very tricky, and then it becomes, like, how do you police it? Because, look, I saw groups of people in their 20s out last night as if it was pandemic over and they were all just meeting up and having a good night. And that's fine for them if they choose to sit together, but how do you manage all that? It's a very tricky thing and I'm not sure they know the answer.

It's probably going to be very raw, you can't book every other row, there has to be a seat or two between your group and it will fill in, as it fills in, it won't be optimal.

Look, I'd love to go to the movies, but so far, I can wait to see a movie or I'll pay $30 to watch it at home or whatever it is. I think there's a big fight coming between movie theaters and movie distributors and that may impact these July releases as well.

Hill: Last thing and then I'll let you go. A lot of Summer blockbuster movies got pushed off in the schedule later in the year. Some got pushed to 2021. What's the one you're the most looking forward to seeing? Because when I was, you know, months ago, January, February, you know, I say months ago, really it felt like three years ago.

But earlier this year, when I was looking at the slate of Summer movies, I was thinking, "Boy! There's a bunch of good things coming, but I'm particularly looking forward to Black Widow."

Kline: Chris, you stole my answer. So, the best movie I saw last year was the Avengers: Endgame, the end of the line movie. An amazing film, I've watched it multiple times, layered and deep, and I know that sounds ridiculous for a superhero movie, but I cried more than once during that movie. I'm an emotional movie guy, I'll give me that. But this was one of those scenarios where I'm curious as to what they do with a prequel, because Marvel and Disney never do anything on its own, there's going to be stuff launched in that movie that shows you who the next Black Widow is, or what other characters come out of that world, or maybe there's some parallel universe where [laughs] it's still the same character and she's not dead, I don't know what the answer is. But they're playing the long game, they're telling complex stories that weave together. So, I'm really excited to see that. And frankly, I've forgotten what I was excited to see, for the most part, because who knows when these movies are coming out? Mostly, I'm excited that the NHL is coming back in July, you know, so let's go Rangers, it's an emotional and exciting time here.

Hill: Dan Kline, thanks for being here.

Kline: Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you on Monday.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and Walt Disney. Daniel B. Kline owns shares of Walt Disney. The Motley Fool owns shares of and recommends Amazon and Walt Disney. The Motley Fool recommends Southwest Airlines and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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IMAX Corporation Stock Quote
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Dollar Tree, Inc. Stock Quote
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Dollar General Corporation Stock Quote
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$241.62 (0.59%) $1.42

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