Why This Spices Stock Hit an All-Time High

In this episode of MarketFoolery, Chris Hill chats with Bill Barker about the latest headlines and earnings reports from Wall Street. A restaurant conglomerate's shares are up despite sales declining. They advise some caution on the housing side, and talk about the spice business. Finally, they share a new study on the health benefits of coffee 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 25, 2020.

Chris Hill: It's Thursday, June 25^th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Bill Barker, good to see you.

Bill Barker: Good to be here.

Hill: We got a full plate. We've got housing, we've got consumer goods. We're going to dip into The Fool mailbag, but we're going to start with what was, at one point today, the No. 1 gainer on the S&P 500, and that's Darden Restaurants (DRI 0.46%).

Darden is the parent company of Capital Grille, LongHorn Steakhouse and, of course, Olive Garden. Shares of Darden Restaurants are up around 5% because the fourth quarter loss wasn't as bad as analysts were expecting, which is saying something, because same-store sales were basically cut in half.

Barker: Yeah. Total sales decreased 43%, same-store sales down 47%, a few more restaurants opened as compared to last year. Just across the board, all the brands saw 40% to 70% declines in sales, Olive Garden the biggest, and declined the least, because I guess it's got the most likely takeaway menu, so that helped a little bit. Of course, this was the three months, being March, April, May, the report that ended May 31^st. Probably three worst months for restaurant sales. So, I think that to the degree that the stock is moving up a little bit today, it's a relief that some of the guidance for the year ahead is not as bad as one could fear, I guess.

Hill: Yeah. And Darden has a portfolio of restaurants, I mentioned a couple of them, but I think they have somewhere in the neighborhood of maybe like eight to 10 restaurant brands under their umbrella. Fortunately for Darden and its shareholders, most of them are not what you would consider to be in the fine dining category. Eddie V's Prime Seafood, Capital Grille, those are in the fine dining category, but the bulk of this business is just in terms of restaurants, it's Olive Garden and LongHorn Steakhouse.

Barker: Yeah. They've got a few other brands, some of which I'm a little bit familiar with, others not, Bahama Breeze, Yard House, Cheddar's Scratch Kitchen and Seasons 52, so like a lot of companies that you think you know, they've got a lot of other elements as part of the recipe here. But as I said before, these were pretty much all closer to down 60% or 70% for most of them, Olive Garden only down 39%. You know, guidance is probably more important today. They are seeing sales at 70% of last year. So, for the first quarter of the fiscal year -- they're starting their fiscal year right now, that's always helpful to try to figure out what's going on. And so, they've got, you know, if restaurant sales are down 30% for this quarter, that's the kind of guidance that will allow them, they think, to breakeven and market finds that to be good enough.

Hill: Yeah. And just to put an even finer point on it. Look, anyone who has been to a Capital Grille Steakhouse, I mean, that's a nice experience, that's a nice night out, that's a place you go to celebrate something. Capital Grille [laughs] is not a place where you do takeout. I mean, sorry, you just don't, whereas Olive Garden, LongHorn, Bahama Breeze, like, these are more conducive to sort of the takeout, the delivery, that sort of thing. So, you know, this was, as you said at the top, this is sort of the worst of the year so far that they've been through. So, I understand the reasons for optimism behind the stock.

Barker: Yeah, an additional reason that might be optimistic, might turn out to be too optimistic, is the guidance that the company expects to open 35 to 40 new restaurants during the year. And so, that's the year that started June 1. They're looking at enough of a return to normalcy. And granted, construction is a type of activity that has been going on and is less, at least in my area, that that seems to be going on fine and has not really stopped, that maybe more of a necessary enterprise. But I'm a little concerned that that guidance may not be met. That if the pandemic comes back the way this week, things are turning, perhaps that may be a hard number to meet or to want to meet.

Hill: Let's move on to housing. KB Home (KBH -1.25%) second quarter profits came in higher than expected, that's sort of the bright spots, I mean, [laughs] if you're just looking at that headline, because overall revenue was down. Net orders fell 57% and shares of KB Home down about 11%, 12% today.

Barker: Yeah, the backlog really dried up here. They were able to sell what they thought they could sell for the quarter, but as it went along, things went really, really badly for new orders and cancellations. I think the cancellation rates, breaking them down by month for the quarter, their cancellation rates were 20% in March, 114% in April, and 34% in May. How do you cancel 114% of something, you know, you can get there, but it's a pretty bad number, [laughs] that's the problem. I want to cancel that one twice.

Hill: Yeah, I mean, it is one of those. You never really want to do a whole lot of extrapolation out of a single business, you know, within that industry. But one of my thoughts in looking at the numbers for KB Home was, sort of like, OK, what kind of numbers are we going to see out of D.R. Horton, you know, that sort of thing. So, it is going to be interesting to see, sort of, the extent to which there are ripple effects across the housing industry just because of what we're seeing out of KB Home.

Barker: Yeah. And all housing is local, so I think there are going to be some parts of the country that are doing much better than others in terms of continued home orders. And we'll just see which of these companies is better geographically placed than others, but for comparison, at the end of the quarter, the backlog was the ordered homes that were and some not cancelled, 5,080 compared to 5,927 the year before. So, basically 5,000 down from 6,000 year-over-year, that sort of gives you an idea of where things stand.

So, the quarter just completed, not too bad, but that's because that work had been undertaken quite a while ago, people were in position, they had made the payments, they were ready to take their houses, people are now pulling back on that kind of planning. And you know, the housing market is still moving, interest rates are great, so that's supporting this, but there are a lot of people that have got to be more cautious today than they were, both, 3 months and 12 months ago.

Hill: Second quarter profits for McCormick (MKC) came in much higher than expected and shares of McCormick up 3% to 4% today, hitting a new all-time high. Somewhere, Jason Moser is smiling.

Barker: Probably in his house. [laughs] Somewhere, you know. If we had to guess where he is. Could be on the golf course, could be. He's probably in his house. Yeah, people are not eating at Capital Grille, but they're eating at home. And so, McCormick has sold a lot of spices to people who were eating at home in a way that they hadn't planned on doing and have to revisit what spices they need and toss out some of the ones that have been sitting around for a couple of years, they haven't picked up for a while and have noticed have expired.

On the other side, McCormick does a flavor solutions business for industrial makers and for the restaurant business, so that got hit quite a bit but not nearly as much as the retail sales improved. So, they're hitting an all-time high. And I think they've got another couple of quarters of probably pretty good sales ahead of them.

Hill: I would think so. And you know, you mentioned the flavor solutions part of the -- you know, sort of, the B2B part of McCormick's business. And that may be one more reason for optimism for this company. If you assume that at some point, and maybe it's 12 months from now, but at some point that returns to where it was before, then imagine how much better, presumably, the numbers look then.

The other thing I was thinking about McCormick, and this is something we've talked about in the past relative to, sort of, the big beverage companies like Coca-Cola and Pepsi, [PepsiCo] and that is, the extent to which those -- you know, part of the cost of Pepsi and Coca-Cola's business is paying for the shelf space in grocery stores. They're paying for, sort of, the premium real estate so their products get featured. And you know, that's an investment that pays off for them. McCormick does the same thing, and I think it is money well spent on McCormick's part, because anytime I've been in a grocery store, if I'm looking for spices of any kind, McCormick makes it really easy to find their stuff, you know, they've got, sort of, that premium endcap, you know, not quite the endcap but near the end of the aisle, they've got the displays, they make it really easy to find what you're looking for. So, you know, again, it's money they're paying out, but it's money well spent.

Barker: Yeah. And they don't take up that much shelf space, because you're not buying, sort of, Costco-sized purchases of spices; or at least I'm not. And it comes in that easy alphabetical system, usually able to find your spices pretty quickly there.

Hill: Big fan of the alphabetical system. I think we all are.

Barker: I say stick with it. If you're McCormick, you know, the new guy comes in, the consultants, they're like, we got a new idea, let's just go with the really popular ones up at the top and then, you know, the ones, like, the celery salt or whatever nobody is really buying, like, let's just ... I say to McCormick, don't listen to that guy, stick with the alphabet.

Hill: Yeah. Our email address is [email protected]. Email from Mark Stenson, who writes, "I thought you might like to know that Panera Bread is now doing a promotion where you get free coffee for the rest of the Summer through their unlimited coffee subscription service. I've taken advantage of it so far and love it. I think it's a great strategy of bringing people into a routine of going to Panera. Hope you, your family and everyone at The Motley Fool is staying safe."

Likewise, Mark, thank you for that. And, you know, we had talked about, earlier in the year, Panera rolling out this monthly subscription service. To Mark's point, this is a way to [laughs] essentially get people back into that service, to say, look, sign up for this service, it's $9/month, but from now until the end of August, we're not going to charge you. And you know, I think it's a smart move by Panera.

We were talking the other day about Unilever looking to sell off their tea brands and maybe get somewhere in the neighborhood of $6 billion for that, I'm interested to see if JAB Holding goes through with spinning back out into the public market some of the coffee brands they have. I don't know that Panera is necessarily going to want to go back to the public market, at least as long as Ron Shaich is running that company, because he seems thrilled to just be [laughs] running a private company once again. But I think it's a smart move by Panera.

Barker: I mean, it's a smart move for you, because you're going to avail yourself of some of this free coffee. It seems to me probably a good move, without knowing the numbers, I imagine if enough people used it to just grab some coffee and not buy a bagel along with it, something like that, and then canceled, then, you know, it's a huge cost. But I think you're probably right, that given, getting people in and giving them a daily reason to show up, that's probably, this is probably worth the effort. Are you going to go back to it?

Hill: I think I might. In part, because this will just get me out of the house and there's a Panera within walking distance, that's right across from Fool HQ. So, yeah, I could see myself, sort of, talking myself into this. I think I'm starting to talk myself into it right now, so. By the way, I also have to give a shout-out to Henry Höganäs. I'm sorry, I'm almost certainly mispronouncing Henry's last name. so, I'm sorry, Henry.

But he pinged me on Twitter with the latest scientific study on the health benefits of coffee. This is a joint effort of the University of Dusseldorf in Germany and the West German Center of Diabetes and Health. And the money quote in the abstract of this study is, "We argue here that coffee as a plant food has similar beneficial properties to many vegetables and fruits." And, look, they're the scientists, you and I are not scientists, but I feel like we've made similar arguments even if we haven't compared coffee directly to fruits and vegetables. But, look, they're the scientists, they're the ones coming out and say, look, this is -- you know, say what you want about V8 juice and all the vitamins you're going to get from V8 juice, why not just have a hot cup of coffee, it's basically the same thing.

Barker: Yeah. And we always do want to emphasize, because there is a lot of confusion out there: are we scientists? No, we are not scientists. So, taking health advice from us is, you know, at your own risk. However, we do like to compile the work of all the great scientists out there and especially the ones that promote the health benefits of coffee, because if they're all wrong, we're in trouble, you and me, if, coffee, in any way is bad for you. In fact, even if it's just neutral for you, I'm probably in trouble. But if it's actually -- coffee is a fruit. I mean, if that's what they discovered in this survey than I, you know, could -- but you know, it's not really -- it's a fruit extract, that's what coffee is, right?

Hill: I don't know, I'm not a scientist, man.

Barker: No, again, [laughs] we're not scientists. All we know is what we read on the internet. We don't have labs.

Hill: We don't have labs, but you know, they've got labs at the University of Dusseldorf, they've got them at Harvard, they've got them at Stanford. I mean, just add to this study to the pile of studies that have come out over the past decade on the various health benefits of coffee. So, thank you to Henry for that.

Barker: Yeah, keep them coming, because we like to promote them all. And any place it's giving away free coffee, we also -- because the work at Panera -- as we were talking about earlier, Panera giving everybody free coffee, are they on the same level with, say, Jonas Salk?

Hill: Maybe not the same level, probably like a notch or two below that, but who's to know --

Barker: It depends how much free coffee they move. The benefits for society are almost incalculable.

Hill: That seems as good a place as any to wrap up. Bill Barker, thanks for being here.

Barker: 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.