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Why This Stock May Come Out Stronger

By Chris Hill – Jun 3, 2020 at 5:45PM

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Why this nonessential retailer is well positioned to capitalize on changing consumer trends.

In this episode of MarketFoolery, Chris Hill chats with Motley Fool contributor Dan Kline about the latest news from Wall Street. They've got a retailer with an impressive e-commerce sales number. They discuss an announcement regarding layoffs. There's some interesting news on the self-driving technology front, 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 June 2, 2020.

Chris Hill: It's Tuesday, June 2. Welcome to MarketFoolery. I'm Chris Hill, with me today, our man in Florida, it's Dan Kline. Good to see you, my friend.

Dan Kline: Hey, there, Chris. Now that we're taping these live on video, we need, like, backup dancers or, like, we need some more pizzazz, the MarketFoolery band. I think we could make this happen.

Hill: I don't have room in my basement for backup dancers set up. [laughs] Unless you're talking about -- what's that?

Kline: [laughs] They could be in another location.

Hill: That's true, that's true. We've got some retail news, we've got some layoff news, and we've got some pretty interesting news when it comes to self-driving cars; we'll get to all of that. Let's start with the retail, and that's Dick's Sporting Goods (DKS 8.15%). The first-quarter results for Dick's Sporting Goods was about as bad as you would expect, given all of their store closures, but their e-commerce was up [laughs] 110%. That's not nothing.

Kline: I actually thought their numbers were pretty good. Their same-store sales for the first quarter were down 29.5%, that doesn't seem that bad, given that they largely don't sell essential things. I'm sure there were some people who needed sleeping bags, there were probably some people who bought tents or other things, you know, to sleep in the backyard; you know, not a lot of vacations going on. Maybe some people bought a football to throw around, I know my son and I have done that, but I thought that this bodes well for their future. They needed to do more e-commerce, and they captured more email addresses, more credit cards; very important for Dick's Sporting Goods.

Hill: Very important. And, you know, this is another retailer, as nimbly as possible, adjusting not just with the e-commerce, but with curbside pickup, that sort of thing. You know, it's interesting you mentioned things like tents and that sort of thing because, obviously, their bread-and-butter is sporting equipment; for anyone who's ever been into a Dick's Sporting Goods, and there's one not too far from where I live that I go into from time-to-time. I mean, whatever your sport is, they've got you covered, but what's striking to me is right up front, and usually outside the location front door, is that sort of vacation equipment, whether it's folding chairs or it's tents or it's coolers. And that's the sort of thing that, when I was going through their quarter, was already thinking ahead to three months from now when they come out with Q2 results, what sort of damage they see on that?

Again, it's not their bread-and-butter, but it does help around the margins, sort of, those vacation-related or recreational-related sales. And they're absolutely going to take a hit on that.

Kline: See, I don't think they are. If you looked at Camping World and their results, people are buying RVs like crazy. We can't take the traditional vacations we take, I think people are going to be looking to go camping, to go kayaking, to do things that you can be socially distanced. And if you're not spending money on that plane vacation, assuming you're still working, assuming things are going well for your family, I know that my personal budget for local fun is way higher than it normally would be.

If my son said he wanted a stand-up paddleboard, I'd buy him a stand-up paddleboard, because we live near an ocean where you could do that. I think they're going to sell a lot of that stuff. And, yeah, they're not going to sell as many sneakers, the apparel they're not going to sell as much. That said, they do sell a lot of what you would consider athleisure, and people are going to need to replenish those wardrobes. You know, a lot of people have been sitting around in sweatpants and yoga pants for the past three months, they may be getting a little threadbare. So, I actually think Dick's is really well-positioned to capitalize on a nation that might be a lot more willing to go camping or at least needs coolers and other things for these new RVs they bought they're going to sell used at an 80% discount 18 months from now, but that's an entirely different story. [laughs]

Hill: Last thing and then we'll move on. It is going to be interesting to see what happens not just the next quarter, but really the next couple of years, because you go back and you look at how did Dick's Sporting Goods did coming out of the Great Recession. And this a stock that is basically flat over the past year; the past few years haven't been great in terms of performance. But coming out of the Great Recession, Dick's Sporting Goods had an amazing run as a stock from '09 to the end of 2013, and really into 2014; this stock was basically a five-bagger. So, it's going to be interesting to see where it goes from here.

Let's move on to Stitch Fix (SFIX 2.54%), which announced it is laying off 1,400 stylists, that's about 18% percent of their workforce, all of them in California.

Kline: Yeah. Chris, this is evil. And I hate to use that word, but basically, they're getting rid of 1,400 stylists to rehire them in cheaper states. They even said, hey, you can apply for those jobs and move. And I come from the newspaper industry, this is a classic newspaper industry tactic. I know your newspaper is in New England, but we're going to produce it in a cheap town in Texas and you can keep your job, but we're going to pay you a third as much and you have to apply for it and you have to move and we're not helping with any of that.

When I look at a company, and it's not a secret that I'm not a big fan of the Stitch Fix business model, but when I look at a company that doesn't take care of its workers, that is a negative sign. A lot of companies have had to deal with California being an expensive place to work. And it's fine to open up other hubs so you can add workers in cheaper locations, but to get rid of your workforce just to be a little bit cheaper, it seems to me shortsighted.

And if I was a stylist, please recognize that the plan for Stitch Fix is to get rid of you, they want to automate this, they see you as an unneeded expense. And as an investor, how a company treats its workers is a major red flag for me.

Hill: This is an environment where Stitch Fix really should be thriving as a business. [laughs] And as best I can tell, they are not. Now, this may be just like a cold, calculated, numbers-driven move that does pay off for Stitch Fix. But right now, this is a really bad look.

Kline: Goodwill matters. And did you really just lay people off in the middle of a pandemic to rehire people cheaper? That seems like a bad idea. If they had come out and said, due to the pandemic, here's where sales are, we're offering two choices to our stylists: You can take a 20% pay cut but move wherever you like, or you can take a 20% pay cut until such time as our revenue recovers. There was a way to do this that seems less villainous.

Chris, I don't know about you, but I don't want to work at a company where I'm a number, where they're just looking at me as a balance sheet negative and their goal is to replace me with a robot or, I don't know, with a picture of me and a tape recorder, who knows what it would be? But that said, I am not a fan of this business model, because very simply, they service the group of people who need to look a certain way and care about clothes that they don't like to shop, and that seems like a really small niche as far as I can tell.

Hill: Well, and, you know, one of the things we've talked about recently is a business, like, Target and the investments that Target and Brian Cornell and his team have made in apparel. And, you know, I'm sure that Stitch Fix is aiming at slightly more well-heeled shoppers than maybe, sort of, the average person who goes into Target, but I think Stitch Fix [laughs] also has to recognize the environment that we're in right now. That getting dressed up to go to the office, and that's obviously not all the clothing they're selling, you know, they're selling stuff, so people can go out at night, you know, that kind of thing. But this is not a great time for their business, it should be, it should be because of the way they've set it up. But I don't know, this is a really interesting needle that Katrina Lake is trying to thread.

And, you know, I don't own the stock, I'm not short of the stock, I'm just sort of sitting back and observing it all, it's going [laughs] to be interesting to see how it plays out. But there's a version of this where it goes south pretty quickly.

Kline: Yeah. I wonder if there's pushback, especially, I don't know, how the relationship between the stylist and the person getting the clothes are, but if you put this announcement out and then I get a box of clothes and I'm not a customer, I don't own the stock, I don't know how to short the stock, so I'm certainly not doing that. But if I was getting clothes and I liked them, and then all of a sudden, I got a box that I didn't like and I looked up that they've made this change, that might cause me to cancel. I think there's a lot of risk involved with this.

Hill: CVS has partnered with Nuro, which is a delivery robotics start-up company. CVS is partnering with Nuro to test prescription deliveries in Houston. Is this going to work because, I don't know, part of me thinks this could [laughs] actually work for them?

Kline: So, it's going to work, but let's not pretend we're going to get, like, a nation full of CVS autonomous vehicles delivering prescriptions. They're testing in a neighborhood because this is going to be one arrow in their quiver, just like they tested drones in the villages in Florida, and even that was sort of a muted test where the drone brought it from the store to the site for more traditional delivery. This is one thing.

Domino's and Amazon have used last-mile drones, none of it's widespread, this is a very viable model if, say, New York City were to decide to shut down some of its streets except for commercial traffic. This might make sense in Florida where there are a ton of gated enclosed communities full of older people. So, all a drone would have to do is get through the gate and then it could make its deliveries. There's use for this, but this is not going to be the widespread way CVS sends prescriptions out.

Hill: Although, one of the things I read in this story is that -- and I know that CVS has a big footprint, I didn't realize it was this big. One of the stats from Nuro is that 76% of people in the United States live within five miles of a CVS pharmacy.

Kline: I overstated the number a little bit earlier, but it's still stunning.

Hill: I mean, that's an astonishing number. And to your point, this is something that if this test goes well, does it get rolled out nationwide? Probably not. But this is the sort of thing that they can cherry pick locations across the country and say, yeah, if you live in this zip code here, there, all three time zones -- not to pick on Alaska and Hawaii -- yes, OK, what is it, six time zones, I guess, we have in the United States if we're going; I was thinking continental United States, you know what I meant, Dan.

I don't know, this is going to be a really interesting test to watch, because I do think, if this goes well for CVS, they have a lot of optionality in terms of where they can roll this out.

Kline: Chris, there's a lot of hurdles here, because these are prescription drugs. When Amazon delivers to my building; in theory, the drone could pull up and just leave everything, and the front desk person could put them in Amazon lockers. This is much like getting an Instacart liquor delivery, you actually have to go up to the drone and scan your license, and then it scans you to make sure you're actually you. So, with Instacart, my wife can pick it up, it doesn't have to be me.

In the case of this, there are some headaches. That person who is ill and older in Florida, might not be able to go to the door to get their prescription. So, there's a little bit of a gimmick here. But if you look at this as just one tool at CVS's disposal, they're at the forefront and it's an interesting case to watch. But again, it's not going to be a widespread thing.

Hill: But in terms of the economics, if this goes well, do you imagine this just becoming, sort of, an added cost that they tack-on and pass along to the consumer? Because I can't imagine -- you know, this isn't an Amazon Prime, this isn't, hey, pay us this annual fee and we'll just lob in all this other stuff. So, there would have to be some sort of fee attached to it, wouldn't it?

Kline: Yeah. I would assume a $4.99, you know, sort of like a Grubhub kind of model. But I also see, like -- so, I live in a building with about 350 units, maybe a third of the people are elderly. CVS could probably fill up one drone, there's a CVS about a mile [laughs] down the road, or one autonomous vehicle; tell people we're going to be at the building at 11 o'clock here's your window, you're 11:05, you're 11:10. And probably be very efficient, just like an Amazon Sprinter van shows up and every package in that van is for my building. So, you're going to have to scale this, you're going to have to use AI to figure out where it makes sense, predictive patterns on prescriptions.

Obviously, some prescriptions are recurring, so you start to know, OK, Mr. Jones on this block gets this every 30 days and he will likely for the foreseeable future. There's a lot of data available to CVS to make this work. And right now, I'm guessing the cost of a $15/hour driver to drive it is probably way cheaper than the cost of a robot to do it.

So, again, this is just getting to the future, because producing these sorts of vehicles is going to make more sense when there's more demand for it and that brings the price down.

CVS could also use this to deliver other things, it doesn't have to be prescription drugs. Though it's a relatively small vehicle, there's a lot of optionality here. CVS is located in Targets, they could partner with Shipt and do some other things there. Again, this is toe in the water, tiny test in three zip codes in Houston, likely because Houston is a physically gigantic area, so they've probably picked some places where this is safer and easier to do.

Hill: I'm glad you mentioned Target, because that was the last thing I was thinking in this story is, you know, a few years back where Target sold their pharmacies to CVS. And one more thing to watch with this test, because if this goes well, you have to believe Brian Cornell is watching.

Kline: Yeah. Look, Target, Walmart, Amazon are going to find every way imaginable to get stuff to you. I would not be shocked, Amazon has a patent on a truck that drives around that can 3D print broken parts for your electronics and your appliances at home, that makes so much sense. Because you know, Chris, like, you have a guy come out and he says, "Well, oh, I got to backorder the part, it's three weeks," what if Amazon could have that part to you, they print it somewhere and 45 minutes it shows up while the guy is still in your house. Like, that ability, all of this is going to happen on some level.

But you also have to figure out the first time an autonomous vehicle hit somebody. And it doesn't even kill them, just like scrapes them up, it's going to stop all autonomous vehicles for a while. So, there is a level of care here that has to be very, very meticulous. And CVS is a company that's dedicated itself to healthcare, so they will look worse if they mangle somebody or if their drone gets beaten in with a baseball bat -- which has happened in a couple of places -- or their driverless vehicle.

So, there's a long way to go before this becomes a thing. But I would expect every major retailer is exploring every possible option to get stuff to you.

Hill: Dan Kline, always good talking to you.

Kline: It was great being on here.

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.

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. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Stitch Fix. The Motley Fool recommends Camping World Holdings and Domino's Pizza and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$114.41 (-0.64%) $0.74
Walmart Stock Quote
$130.95 (-0.27%) $0.36
Target Corporation Stock Quote
Target Corporation
$148.47 (-0.16%) $0.24
Dick's Sporting Goods, Inc. Stock Quote
Dick's Sporting Goods, Inc.
$110.57 (8.15%) $8.33
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$314.19 (-3.25%) $-10.55
GrubHub Inc. Stock Quote
GrubHub Inc.
Camping World Holdings, Inc. Stock Quote
Camping World Holdings, Inc.
$23.81 (3.66%) $0.84
StitchFix Stock Quote
$4.04 (2.54%) $0.10

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

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