In this episode of Market Foolery, Chris Hill chats with The Motley Fool's chief investment officer, Andy Cross, about the latest headlines from Wall Street. Levi's (LEVI +1.96%) announced its second-quarter numbers. A 200-year-old U.S. retailer filed for Chapter 11 bankruptcy protection. The guys discuss how consumer spending and saving habits have changed due to COVID-19. They also talk about REIT and real estate investment and much more.
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This video was recorded on July 8, 2020.
Chris Hill: It's Wednesday, July 8. Welcome to Market Foolery. I'm Chris Hill. With me today is the chief investment officer, Andy Cross. Good to see you.
Andy Cross: Chris Hill, good to see you, as always. Thanks, man.
Hill: We're going to talk about real estate investing, we're going to see where consumer spending is going, but we're going to start with retail.
Shares of Levi's are down 8% this morning after second-quarter sales fell more than 60%. There's a lot going on with Levi's, Andy, including some layoffs; we'll get to those. But you know, this was one of those situations where the online sales just could not make up for the fact that Levi's stores were closed for roughly 10 weeks.
Cross: Yeah, Chris, online sales, their e-commerce business was up 25%, and actually in May, the run-rate, the May growth was up 80% year over year. So some really nice acceleration. This is a quarter, by the way, that captured March, April and May, for the most part, all of those months are really the heart of the COVID pandemic. But overall, revenues fell 60% year over year during that quarter. Most of their stores were closed, I think, for up to 10 weeks at a time there. So like you said, the e-commerce sales just really couldn't make up for the lack of the regular retail sales. Lots of just worries about what was happening at Levi's. They entered the year actually doing pretty well. They are pretty excited that their CEO, Chip Bergh, had talked about how the beginning of the year looked pretty positive, but then, obviously, the COVID pandemic really hit them, and then they rang up a net loss of $364 million, most of that was -- $242 million due to a restructuring and inventory costs and other costs tied directly to the pandemic.
So the good news is, now that most of their stores, I think, north of 90%, are now back open. However, one of the things that has many of us worried is just that the resurgence of some of the cases, the COVID-19 cases we're seeing around the country in the U.S. with cases spiking on a per-day level, has Levi's looking at up to 40 of their stores and wondering, hey, do we have to, kind of, re-shut those down for the time being, similar to what Apple did. So they suspended their share repurchase. They did pay a dividend but they are not going to pay that in the third quarter. And they suspended their guidance for the year. So tough times at Levi's and other retailers.
You know, this is a stock, Chris, that came public about a year ago, a little over a year ago. They raised their money at $17 stock price and it had a really nice day-one jump up to, I think, as high as $23, and now the stock is back down to $13. So a really tough ride for Levi's shareholders over the past year.
Hill: And laying off somewhere in the neighborhood of 15% of corporate positions, so that's one more cost-saving measure they're trying to pull in terms of levers. You know, the 25% e-commerce jump, that you know -- under normal circumstances, that would be seen as really good, but we've seen plenty of other retailers come out, Andy. And maybe their online sales don't make up for stores being closed, but they come a lot closer. We've seen any number of retailers, not just the big ones like Target and Walmart, but smaller niche players, where their e-commerce is, in some cases, doubling. So I mean, that's one thing that Levi's has to do an even better job of over the next 6 to 12 months.
Cross: Chris, you got that right. So it's 15% of their sales. That's up from 5% last year; but only 5%. So 5% was really e-commerce. So unlike, I think, so many of the other companies; you mentioned Walmart, for example, with what Doug McMillon has been doing, and Target and Home Depot and so many of these companies that are making these big investments in the omnichannel efforts to be able to sell directly to consumers through their channels, online as well as the retail, whatever strategy it may be. Levi's, obviously, has a lot of work to do. And they're talking all the right language now, but you know, I think there's some hesitations and some doubts out there. I mean, the Haas family is still the largest shareholder in Levi's shareholder base by far. Across their family, they own large amounts of stake. So they have a very stable shareholder base, maybe to weather the storm.
But, you know, on the margin, the cost reduction, Chris, you mentioned from the 700 positions or 15% of their workforce, that maybe is a savings of $100 million per year; that's about 2% of their annual cost structure. So it's meaningful on the margin, I think, but it's not like a game changer there. Really, they got to make sure they have a new strategy for how to sell their goods.
Hill: Brooks Brothers announced that it's filing for bankruptcy. It's a private company, but a storied brand. And this is just one more page in the book of what a brutal year it has been for retail. And for context, Andy, 2018, there were 5,700 store closings for the entire year. Already in 2020, more than 8,700 store closings; that doesn't even include whatever damage is going to fall out from the Brooks Brothers bankruptcy. And it's just a brutal, brutal time for retailers.
Cross: Yeah, I mean, this is a company that's been around for more than 200 years. I think they just celebrated their 200-year anniversary a couple of years ago. Levi Strauss has been around since the 1850s, so it's not like -- the Brooks Brothers have been around longer than they have; or at least versions of them.
Yes, they made an announcement that they're going to file for Chapter 11 bankruptcy protection. They have more than 500 stores; I think more than 200 in the U.S. So it's a large footprint. But I think that what we've been seeing over the last few months for them is just the continued struggle. The COVID-19 has just really elevated the continued struggle that Brooks Brothers has had, which is just the shifting tastes.
They've basically had, Chris, technology and anthropology and biology working against them for the past couple of years. And what I mean is, as we have become more and more technology savvy and we become more and more willing to explore the way that we buy our goods and use retail strategies, as we just mentioned with some of the great companies that are really pushing this, we're just, we're buying clothes so much differently than what we did, than when I first bought my first Brooks Brothers suit back in the 1990s, right. So it was like, you go to the store, you get it tailored at old Brooks Brothers, such a great brand, high-quality, U.S. made, it's just going to be, you can't go wrong with Brooks Brothers. Well, that's just shifted. That was 20 years ago, and technology has just basically pushed that to new ways of shopping, be it those companies or companies like Stitch Fix or even Trunk Club at one point.
And then from a biology/anthropology perspective, we're just changing the way that we are dressing ourselves, right? So we're at home now, with the COVID-19 pandemic, I have shorts on, T-shirt, and we're very casual at The Motley Fool; Chris, you always look relatively nice, I think you have a T-shirt on today.
Hill: I am also in shorts and a T-shirt today.
Cross: Shorts and a T-shirt. Usually, you're in a nice collared buttoned shirt, but if you're a lawyer or an investment professional, perhaps that you may have worn a suit before in the past 20 years ago like I did, you're not doing that anymore. And even if you are doing it, even if you are dressing somewhat, you have to dress up a little bit, maybe it's a little bit more of a professional environment, for example, you're meeting with the clients, you're certainly not buying the number of suits that you had before, the number of dress clothes that you had to do before. And so, instead of buying, like, two or three, maybe you're only buying one. And that one that you're not buying or that tie that you're not buying, that's all high-margin business for a company like Brooks Brothers. So it's just been a real struggle, I think, over the last few years.
I mean, it was bought out. Marks & Spencer had bought them, had acquired them, back in 1988. And then, an Italian financier named Claudio Del Vecchio had bought them. He's been a big fan of Brooks Brothers over the years. And it's just been a struggle, I think. And looking for buyers, now they're going to explore outside, someone who can buy the brand and can continue on with the Brooks Brothers brand. But the market certainly for retail and for the likes of those companies like Brooks Brothers has certainly shifted and this is just the outcome of that.
Hill: Yesterday morning, when I went out for my run, I saw a man in a suit and tie, carrying a briefcase, walking to the metro, and it was like seeing a unicorn. [laughs] It's just like, oh, my gosh! I haven't seen one of you in so long.
Cross: Yeah, you just don't really see it much these days.
Hill: So stepping back from Brooks Brothers and Levi's, where do you see consumer spending going? Because one other factor in all of this, for all of these businesses, is the fact that, somewhat quietly, [laughs] the savings rate around the world is going up. And as people, you know, look to their own personal finances and maybe they're out of a job, even if it's temporary, they're furloughed, whatever, more and more people around the world are saving money at a much higher rate. And that's good for them, personally; that's not the kind of spending environment that's going to restimulate the economy, though.
Cross: Yeah, Chris. And the U.S. spending rate, we just saw this massive jump in the past couple of months when the COVID-19, if you look at the U.S. savings rate and pandemic hit. So the savings rate topped out at about 32% two months ago. Now, I think, it's somewhere in the neighborhood of back down to 20%, 23% last month. If you look at the consumer spending patterns over the last few months, overall, they have really dropped, and that's jumped up the savings rate.
So while incomes and salaries are relatively, kind of, flat, and a lot of help from the federal government to support the economy, the consumer spending market, which is, as we know and we talked about, consumer spending is such a big part of the U.S. economy, 65%, 70% of the U.S. economy, the consumer spending patterns have really dropped. So you're seeing this drop, you're seeing these savings rates jump up, you're seeing interest rates really low. So the question is, how does this, kind of, play out over the next few months? Where do consumers spend their money? We are now shifting more and more of our spending patterns, and we're not maybe spending as much as we talked about, on clothing or more discretionary items like that and really saving for just what we need, which might be the technology, for example. And spending more money on things like our home office. We're spending money on what we may use at home as opposed to spending out at a restaurant, which we know restaurants are struggling.
So there's going to be the shift in pattern in consumer spending, overall the spending levels are now starting to come back a little bit from where they were and how much they dropped off in March. And we have seen this increase in, for example, retail foot traffic, although that, just in the past couple of weeks, that started to tail-off again too, with some concerns of some of the COVID-19 cases popping back up again. So it will be very interesting to watch the consumer spending habits, because it is such a big part of the U.S. economy.
Hill: Our email address is [email protected]. Question from James O'Leary who writes, "How much of my portfolio should be allocated toward REITs and other real estate investments? Since I'm 22 years old, most advice I've heard indicates I should allocate almost 100% toward stocks, since I have a very long investment horizon. However, several recent discussions on Motley Fool podcasts about REIT and real estate investing have me questioning this. Additional quick Google searches say that real estate, as an investment, has similar, if not greater, returns as stocks."
Thanks for the question, James. Always great to get questions from the audience, always makes me smile when someone much, much younger than me is already on their investing journey. So great that James is thinking about portfolio allocation and investment allocation to this degree.
Cross: Yeah, well done to you, James. It is interesting, if you look at it, I was looking at some of our retirement experts -- Robert Brokamp, who we've had on the shows and the podcasts and on Motley Fool Answers, as a co-host of Motley Fool Answers. And he, looking through some of the model portfolios, that's somewhere in the neighborhood of 4% to 5%, pretty much across the board, you can have in real estate investment trusts, those are REITs, and that's from the investment vehicle that investment vehicle versus owning commercial real estate or your home.
Real estate, in general, overall, over very, very long time periods -- whether you're looking at housing or whether you're looking at REITs -- tends to perform about the same, if not a little slightly better than stocks if you look at very, very long time periods. With the key is with lower volatility. I think for us, we look at real estate and using REITs as a way to add some diversification to anyone's portfolio, especially if you like dividends and especially if they're going to be in a tax-advantaged account and if you're going to reinvest the dividends for many years.
I certainly think I like the number that Robert had tossed out -- or has in his allocations, the 4% to 5% level, somewhere around that level, we continue to be, and I think the bread and butter and the success of The Motley Fool has been on finding those great growth companies that we can hold for many, many years. I think that's the way to continue to look, James, since you're just really -- you've so many years to invest, which is fantastic. So I wouldn't make it a large part of your portfolio, if at all, I would keep it in those low-single-digit numbers.
Hill: I'm going to just assume that at the age of 22, James does not own a house or an apartment, a condo, whatever; I'm just going to assume that. But for people who do own a home, should they consider that as essentially their real estate investment? Like, I don't have any investments in REITs, I don't have any other real estate investments. I do own my home. So should I just think about -- it's like, well, I've got my investment portfolio and I also have the value of my house, so therefore, technically, I'm invested in real estate.
Cross: Yeah, I think you can, Chris. I mean, I tend to keep that separate when I think about my portfolio and my investable assets, I think of those that are much more liquid, so I tend not to -- the housing market, the thing with the physical real estate, and owning your house and physical real estate, commercial real estate, if you own those properties, they tend to be much more less liquid, of course. So with stocks and even REITs, you can buy and sell those every day, which is why I think the volatility is a little bit higher in those over time.
So I consider that separate. I'm really focused, and I think for James' case, focused on the investable assets that a person can invest into the public markets and have that liquidity and the liquidity advantage. So I wouldn't necessarily equate my house as my investment. When I think about portfolio allocation, I'm really thinking about those more liquid investments.
Hill: Well, and once I get into the home-flipping business, then I'm really going to be liquid in a way that I'm not now.
Cross: Yeah, then you're like Zillow and Redfin.
Hill: Andy Cross, always good talking to you. Thanks for being here.
Cross: Thanks, Chris.
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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, and we'll see you tomorrow.
