In this episode of MarketFoolery, Chris Hill chats with the Fool's Maria Gallagher about the latest headlines from Wall Street. They've got some news from social media and talk about two partnerships in the athletic and fashion apparel industry and much more.
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This video was recorded on June 29, 2020.
Chris Hill: It's Monday, June 29th. Welcome to MarketFoolery. I'm Chris Hill. With me today, from our nation's capital, it's Maria Gallagher. Good to see you.
Maria Gallagher: Thanks for having me.
Hill: We've got a lot of apparel news to get to; athletic apparel, fashion apparel. We're going to start though, with the social network, because shares of Facebook (FB +0.16%) are down 10% over the past week as more companies have announced they are pulling their ad spend from Facebook. On the list: Starbucks, Coca-Cola, Verizon, Unilever, Diageo, Honda, Lululemon Athletica. Those are just some of the companies that are taking a break from social media advertising.
And there are a couple of things going on here, Maria. One is this movement within social media with the hashtag #StopHateForProfit that some groups have come together to form to encourage advertisers to pull their ad spend from social media platforms that they feel aren't doing a good enough job with hate speech online. So, that's part of what we're seeing with some of these advertisers. Others are just not formally joining this group, they are hitting the pause button.
And I should mention that Twitter's shares are down a little bit more than 10% over the past week as well. So, it's not just Facebook, it's social media in general. But Facebook is one of the biggest companies out there, so they are the biggest target. Therefore, a lot of the focus from this group, and others, is focused at Facebook.
Let me start with just the business question; how big a threat do you think this is right now, because it's certainly a bigger threat than it was a week ago?
Gallagher: I think that's a good question. I think thinking in context, Cambridge Analytica happened, everyone was like, is this going to be the end of Facebook? It wasn't. Now, there's this coming out. Is this going to be the end of Facebook? I think, realistically, probably not. If you're a Facebook shareholder, if you're a long-term Facebook shareholder, this is kind of something that keeps happening. Facebook and Mark Zuckerberg, I don't think have been leaders in the space of moderating hate speech the way they could have been, so I think that it's a really important thing that these advertisers are trying to use their power to have some sort of change within the platform. I mean, Facebook last year brought in almost $70 billion in ad revenue globally. They have over 8 million advertisers. So, even though they have 100 people boycotting right now, they have 799,000 waiting in the wings to take that in. And so, I think that it's an important step and the public, kind of, shame or that hashtag #StopHateForProfit, is forcing Facebook to, kind of, think through their moderating tactics a little bit more, but I don't think this is by any means the end of Facebook.
Hill: It's going to be interesting to see where this goes over the next couple of weeks because, again, a week ago, that list of names that I ticked off, I mean, Starbucks, Coca-Cola, Verizon, that's just in the last couple of days they have jumped on board to pull their ad spend. I do think, and this is something we've talked about in the past, that if you are a large business, if you're looking at where your marketing spend is going to go, you have more options than ever before. And certainly, the rise of Facebook is due in large part to their ability to deliver for advertisers. You know, more than 2 billion people are on Facebook, but all of us who are on Facebook, we're not the customers, we're the consumers and, by the way, the creators of the content on Facebook. The customer is someone who pays you, so it's those advertisers who are really the customers. So, Facebook has delivered for those advertisers.
But like I said, they have options. It also makes me think that -- you know, I was saying to you earlier today -- even if none of this was going on, even if this #StopHateForProfit group hadn't come together, it really wouldn't shock me if a couple of advertisers just said, you know what, it's a presidential election year and we just don't [laughs] want to be on social media, we're just going to be somewhere else. We have a lot of other places we can spend our money, and we're just going to take a break every four years because we just don't want to be drowned out in all of the political discussion on social media.
Gallagher: Yeah. I think it's interesting also because it's, kind of, this crazy intersection right now where a lot of companies, as stores are reopening and they're trying to revitalize their profit that they've maybe lost in the past couple of months, it's not necessarily the best time for some smaller companies to be taking a moralistic stance if they need that revenue. And as you said, Facebook has such a massive reach, it is the best way for advertisers to reach such a massive market.
And I think it's important to note that the initial group, the Anti-Defamation League, the NAACP, Sleeping Giants, Color of Change, all of those groups, they weren't saying pause forever, they were saying for the month of July. And so, I think that's an important thing to note is, they're not saying none of these advertisers will ever come back to Facebook, but I guess it's maybe the inherent threat is they're saying, well, maybe we won't ever come back, but we are taking our money out right now. So, I think there's going to be some sort of compromise, some sort of meeting in the middle, because it's really a hard-to-beat platform. Even though I follow Pinterest, and I think Pinterest is a great place for these advertisers to go, I think that they will reach some sort of conclusion that, hopefully, will be beneficial to us as the consumers and will help moderate that hate speech.
Hill: Yeah, I'm glad you mentioned Pinterest, because one of my thoughts through all of this was, boy! If you're Pinterest, you know, you got to be calling some of [laughs] these companies up and saying, hey, we're not Facebook; we're not Twitter. You know, Starbucks, Coca-Cola, come on over here, let's have a conversation.
Gallagher: Exactly. And as a Pinterest shareholder, I would love for those conversations to happen. [laughs]
Hill: Back in 2016, Under Armour (UA 0.17%) (UAA 0.34%) agreed to an apparel partnership with UCLA that, at the time, was the richest apparel deal in all of college sports. 15 years, $280 million. That was then, this is now. Under Armour says it is terminating its agreement with UCLA because it is not getting the marketing benefits it expected. UCLA responded by saying they're going to fight to keep the partnership. Where do you think this is going? Because I can see this being a negotiating tactic on Under Armour's part, I could also see this being Patrik Frisk, who's been CEO for about six months now, looking through all of the deals that Kevin Plank made and saying, you know what, some of these have got to go.
Gallagher: Yeah, I think it's probably a combo of the two. I think if it's the richest deal in history, that it's kind of an indication you've overpaid for something. And so, I think it's important to note, also this isn't the first time Under Armour has done something like this. In 2016, they signed on to become Major League Baseball's on field jersey supplier, but then that fell apart in 2018 due to money concerns; and Nike swooped in.
So, I don't think that Under Armour has a history of great capital allocation. They spend so much money trying to pivot to become a tech company by buying MyFitnessPal. So, I think a good part of it is maybe management trying to prioritize capital allocation and saying, listen, we're in a time right now where we haven't benefited from athleisure or because we refuse to really get into athleisure; we haven't benefited from all of these trends that we could have; and we've paid money we shouldn't have and we need to really get it together.
Hill: Under Armour, like Nike, has apparel deals with dozens and dozens of colleges and universities, including some pretty small ones, like, division 2 and 3 schools. So, you know, not every deal is of this size. When I first -- and I say this as an [laughs] Under Armour shareholder -- when I first saw this story over the weekend, I thought, boy! That's a lot of money [laughs] for UCLA. And not to knock UCLA, but it's not -- over the past, I would say, decade or so, it really hasn't been at that level for, in particular, men's basketball and for football. In the past, UCLA has been that type of program for those two sports.
But, you know, you think about like a University of Michigan or Ohio State or something like that where they really are dominating at that level. And you know, you could see them shelling out that kind of money for, what is widely considered to be maybe, like, a top five brand in terms of the major sports. So, you know, they're not going to be getting out of this business altogether, that wouldn't make any sense at all, but, yeah, this is [laughs] just one ...
Gallagher: ... maybe they'll stop overpaying. [laughs]
Hill: Well, yeah. And you mentioned, you know -- and thank you for mentioning the MyFitness app deal, because I had gone at least a couple of weeks without thinking about it. But, yeah, the $700 million that they spent on MyFitness app, which was a head scratcher at the time. You know, maybe this is part of the turnaround plan that Frisk is trying to engineer; unfortunately, [laughs] it's happening during a pandemic. But you know, if he can show some progress over the next couple of years, maybe there's a light at the end of the tunnel for Under Armour and beleaguered shareholders like myself. But, holy cow! This was just so much money to shell out for UCLA.
Gallagher: Yeah, I definitely think UCLA got the better end of that deal.
Hill: Shares of Gap (GPS 2.45%) are up more than 20% in the past two days on the news that Gap is teaming up with Kanye West to develop a clothing line for men, women and children. Speaking of multi-year deals, this is a 10-year deal. There's the potential for some equity to change hands here, depending on how this deal goes, it's going to launch in 2021. Are you surprised that shares of Gap popped that much in just two days or, as someone who is much more connected with not only the Gap, but popular culture than I am, do you look at this and say, yeah, this makes sense to me?
Gallagher: I think that the deal makes sense, I don't necessarily think the pop makes sense, because I think the deal, it's actually really interesting to me. So, Kanye West actually worked at a Gap in Chicago when he lived on the South Side, so I think that it's kind of nice that he keeps saying, he's so excited to go back to the store he once worked at. So, I think that's kind of a nice little tie-in, but I think Gap is hoping that Kanye West can do for them what he did for adidas with his Yeezy sneakers. But the thing is, the model with adidas was so different, because it started on being so exclusive, and the Gap's model isn't one of exclusivity.
So, I think that they're trying to plan, because they're planning that this Kanye West clothing will sell about $1 billion in sales and five years from now, it will be $1 billion of sales, which he's just done with the Yeezy sneakers, which has taken about seven years. So, it's a very, very optimistic plan, in my opinion, of the Gap. But I think it makes sense, and I think that it'll be interesting to see what his clothing looks like. I don't know if you've ever seen Kanye West's clothing line, it's basically all tan ...
Hill: Let's just assume that I haven't.
Gallagher: It's all tan and monochrome and, kind of, just looks likes SPANX in full clothing, so I'm intrigued to see if he revamps or recolors it [laughs] for the Gap, because I don't know anyone who would be like, what a good deal, let me spend $400 on this tan jumpsuit.
Hill: $1 billion in revenue, I get that we're talking about five years from now, but when you consider that as a public company, with this 20% pop, Gap's market cap is about $4.5 billion, so, this is one of those deals that if it actually works out in their favor then whatever Kanye West end of the deal is, it's going to be worth it if they can actually get to that $1 billion in revenue off of this new clothing line, which isn't going to launch until 2021.
Gallagher: Yeah. And I mean, Yeezys, the sneaker side is valued at $3 billion right now, they are thinking $1.3 billion of sales last year through adidas. So, Gap is just really hoping he can do the same with clothing, but I think clothing is a lot harder to do, and like I said, it doesn't work within that exclusivity model that the sneakers have worked so well in with that resale model being pretty lucrative for, like, sneakerheads.
Hill: Do you think this is something that could extend to other lines of Gap's business? I mean, they've been very clear, look, this is going to be in stores, we're going to be selling this online. Obviously, Kanye West is going to be promoting this himself. I'm just curious, you know, to your point about the exclusivity, because you're right, Gap didn't make its bones by being [laughs] an exclusive brand. That said, I could see maybe some of this being just exclusive to Banana Republic.
Gallagher: Yeah, maybe he could do some sort of athleisure with Athleta, that could be kind of interesting. He seems really all in, like, Kanye West seems jazzed about it, so I think that it will be lucrative for the Gap, I just don't know if it'll be quite as lucrative as they're planning for it to be. Seems like they're really relying on it.
Hill: Maria Gallagher, thanks for being here.
Gallagher: 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 Austin Morgan, I'm Chris Hill, thanks for listening, and we'll see you tomorrow.
