In this episode of MarketFoolery, host Chris Hill chats with Motley Fool advisor Jim Gillies about the latest headlines and earnings reports from Wall Street. They discuss the most recent results of a ride-hailing service, as well as a retailer flirting with small-cap status. And finally, the pair talk about the future of movies and much more.
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This video was recorded on Aug. 13, 2020.
Chris Hill: It's Thursday, Aug. 13th. Welcome to MarketFoolery. I'm Chris Hill, with me from the great white North, it's Jim Gillies. Good to see you my friend.
Jim Gillies: Good to be seen, Chris. It's the great humid North today, so, but it'll be the great white North in a month or so probably again.
Hill: We've got entertainment industry news, we've got retail earnings, but we're going to start today with ridesharing.
Second quarter-revenue for Lyft (LYFT 2.84%) fell 61%, and somehow that was still better than expected. Lyft says that ridership is on the upswing, but shares are down about 5%. Today they're down 35% for the year. I'm sure there are some people who look at the drop and they're thinking, maybe this is a time to get in, are you one of those people?
Gillies: Absolutely not. And, you know, I fear I'm going to be a very negative Nelly on the show today, and I'm going to apologize in advance. But I have been down on these types of companies for a while, Lyft, Uber, because look, let's just deal with the earnings first. As you said, earnings are better than expected. And I mean, I have probably seen, for companies reporting in the wackiest quarter we've ever seen, you know, the market down 35%; GDP down, I think, at this peak was over 30% as well, there's a nascent V-shaped recovery, sort of, kind of, coming back, but there's still a lot of unemployment, there's still a lot of concern, what have you.
Today it was announced, in my province here in Ontario, they've officially called this a recession, to which I said, really? Gee, thanks for catching up with what we knew in February; or maybe March. But yet 95% ballpark, as I spitball the number here, 95% of earnings reports I've seen out there have been both beat expectations -- [laughs] just how bad were expectations -- and to a person, the companies have said, well, we are proud of our response and our recovery and look how robust our business is. And I'm like, you know, I think this was -- it's OK to call something bad guys, like it was a bad environment for you. And for Lyft, it was not only a bad environment, I think it's going to get worse. And we can talk about that in a minute.
But the problem for Lyft, the problem for ridesharing, the problem for Lyft for Uber, there's a tiny Canadian company as well in the same space, the problem is, in a pandemic world why do I want to get in your car, how clean is your car? That's the prevailing thinking. But the bigger problem is, these businesses are almost established and engineered to lose money, and they're not going to make it up on volume. [laughs] And so, I don't know how much cash these companies are going to be allowed to burn over the years before a new model comes along. And I don't know...
Hill: You raise a great point about the cash burn, because go back one year, two years, the story for, both, Lyft and Uber -- or I should say, part of the story for both of these companies was, hey, look, they're going to be burning cash for a couple of years, but you know, at the end of the rainbow there's going to be a pot of gold. And anyone who thought that and bought shares and thought, you know what, I'm going to be patient, I'm not expecting this to turnaround, I'm in this for the long haul. The haul just got a lot longer, didn't it?
Gillies: Yes. And also, I don't believe that there's a pot of gold at the end of the rainbow frankly. Because again, as I mentioned, there's no scalability for these businesses, you're not going to make it up on volume, you've now got Uber going off in strange directions buying delivery companies. So, that's more cash out the door. The delivery company at least makes a little bit of cash, and those have been somewhat successful, but folded into the greater Uber empire, it's just going to be more cash burn.
And look, let's say I'm wrong, because I'm wrong all the time, but let's say I'm wrong and there is a point at which these companies turn to, not just temporary one or two quarters of cash production, but turn to the ability to self-finance, OK. There will be plenty of time to buy the stock then, when it's actually proven itself out. And there are so many other possibilities that you can purchase as an investor that are currently self-financing, self-sustaining.
My fear -- we've seen this at various macro themes in the past, 2008-2009 would be the obvious one. We've seen it in industries in the past, the oil and gas industry in 2015 would be an obvious one. Where, when companies cannot exist without the continued and ongoing financing of external -- so, being able to issue new shares of new debt -- and they can't self-finance those things themselves, there's one end and that end is the stocks get destroyed.
And so, Lyft and Uber today, Chris, you said Lyft is down 35% in the last year, I believe?
Hill: Year to date.
Gillies: Year to date. 35% year to date. Maybe I'm being optimistic. I imagine Uber is probably the same, I haven't looked at their chart and don't have their chart pulled up beside me here, but I don't think it matters because I'm willing to bet that a year, two, three years from now, the stocks will still be down even further. And so, there's pessimism round one, I suppose. But I don't understand why anyone is interested in these spaces.
Hill: Well, let's move on to pessimism round two. Tapestry's (TPR +0.19%) fourth quarter, also not as horrible [laughs] as Wall Street was expecting, this is the parent company of Coach and Kate Spade and Stuart Weitzman. They were helped, and we've seen this from a lot of retailers and restaurant companies, they were helped by strong online sales. The stock was up premarket, now it's down 2% to 3%. I don't know, you know, Tapestry has an interim CEO, and it really seems like for the brand equity that they have, and I believe they do have brand equity with their properties, it just seems like there are too many question marks facing the business right now.
Gillies: Yes. And I hinted in our pre-show discussion -- where we were going back and forth, Fools -- I hinted that I kind of look at Tapestry -- which is the name now, the previous Coach, but then they bought Stuart Weitzman, then they bought Kate Spade, so they've kind of had this tapestry of brands, luxury brands. I hinted that I kind of have a longer-term look on this company, and that longer-term look is, again, spoiler, one of pessimism, because this was a company previously -- and I have a relationship with this company and a recommendation I made in a Foolish service early part of last decade, where the company, Coach at the time, was just shy of $50, I think, and the company was off about 40% from its high. And yet it was debt-free, it was run by a long-term, good, Foolish-style management with a significant stake in the game, and then the wheels came off.
And so, it's eight years later, ballpark, and the stock is around $15. So, we've lost 70% ballpark?
Hill: Oh, yeah. I mean, this used to be, 2012 this was, in terms of market cap, north of a $20 billion company, and today it's just north of $4 billion.
Gillies: Yeah. It's flirting with small-cap status, but the problem is it's coming from the wrong direction of small-cap status; if you think small cap is $3 billion and under. What happened? Well what happened is, the good, long-term, Foolish-style management that we know and love in so many companies, retired, left, took the fruits of their 20-year career and went home. And you can do that. It was made fairly clear that the bench strength that we perhaps thought was there, was not there. There have been a number of CEOs since, including, as you say, the gentleman who exited about a month ago due to some, I don't even know what the story is, it's insinuations of impropriety from before he worked for Tapestry. So, we'll leave that alone.
But you know, what happened? There's the old cliche about always being scared when a company that you know and love starts building a giant new headquarters building. Well, they did that, I think, about 2015-2016. I think it was like a $1 billion headquarters, which they leased some of it out, but still, they started building a monument to themselves. They made these acquisitions, Stuart Weitzman and Kate Spade, that have not worked out and that have cost them money. They've levered up to do so. So, now they've got about $2.5 billion in debt, ballpark; I'm not counting leases. And they've got about $1.5 billion cash on the balance sheet, but a lot of that is because they pulled down their credit lines to get through this period.
But they have a lot of expensive store leases, people aren't going to stores, people are, you know, there are certain protocols you have to go through to get into stores now, no more than five people, etc. But this has been a case of a company that has been -- you know, has destroyed shareholder value over going on a decade now. And you know, it's sad to see, because it was, under the former CEO, Lew Frankfort; under the former CEO this was a multibagger recommendation for Foolish services like Stock Advisor, where I think Tom Gardner rec'd it two or three times. And it's just been sad to see what's happened.
I realize I didn't talk about the earnings there, right? [laughs]
Hill: Well, no, no. I mean, I'm actually thinking back to something you said about Lyft. Because again, if you forced me somehow to buy one of these two stocks, I would actually buy [laughs] Tapestry, just because I do think there is the brand equity there. But to the point you made about Lyft, I looked at Tapestry and thought, boy! They can turn this around. Like, we've seen turnaround stories in this industry before. It's not inconceivable that they turn it around. It's going to take a while if they actually can pull it off. And to your point, there's going to be plenty of time to buy this stock.
Gillies: Yeah. I mean, in the false dichotomy you've thrown out there, you know: You must buy one of these two stocks. Yes, I'm buying Tapestry. But is there a door No. 3? Like, Tapestry is not going away. There's absolutely brand equity there. I have a number of friends who have spent [laughs] far more money than I will ever spend on one single gift. I have a friend who likes her bags; we'll put it that way. And she's got a number of them. And God bless her, but, you know, the problems here have been a long time coming and COVID just accelerated it. And what this looks like in a post-COVID retail world? I'm not sure.
Hill: A quick programming note before our final story. This weekend on Motley Fool Money, our guest from Down Under, Uncle Joe Magyer, is returning. So, I had a really good conversation with Joe. And he weighed in on a number of topics, including his current thinking on Berkshire Hathaway, which I'll just tease out, it has changed. [laughs] Long-time fan of Berkshire Hathaway, Joe's thinking has changed a little bit, but that'll be on Motley Fool Money this weekend.
Shares of AMC Entertainment (AMC 2.34%) are up more than 13% after the company announced a special promotion. This is the largest movie theater chain in the world. Next Thursday, Aug. 20th, AMC is going to be reopening some theaters in the U.S.; about 15% or so of their theaters. And tickets are going to be just $0.15. They're calling it "Movies in 2020 at 1920 Prices." This caught my attention. I don't know, I'm going to see if the AMC theater closest to me is partaking in this. Because again, it's only a minority of theaters that are doing this. And I will just add parenthetically, I got an email from them this morning about this promotion, but the bulk of the email -- and I think this is a smart move on their part -- was about all of the safety measures they are taking. Everything you would want to see if you are a fan of movies, if you like going to the theater from time to time. I think they did a really great job of messaging the way they are trying to get people back in the theater. And you know what, $0.15, this could work.
Gillies: They need to do something, right? I mean, this is a company that's desperate; let's just say COVID does not help them. And it's also a company with a massive amount of debt on their balance sheet, because they assumed that they could continue building their empire over time. So, they got, like, $5 billion in debt, not including leases, again, eliminating those. Are they paying rent on those leases? That's another story. But they've got this debt that they need to handle.
There's no new movies coming out. So, you know, for $0.15, like, I'm not sure which movie will be available in your area, Chris, there's no AMC near me. But I'm going to guess maybe you'll have your choice of Back to the Future or Raiders of the Lost Ark.
I took my family, we went and saw The Dark Knight recently; it's our first time in a movie in almost six months. We went and saw The Dark Knight for $5 at a local IMAX theater. It was great. But the problem was, even though, as you say, they had all these measures, here's what we're going to do to keep you safe, we're sanitizing everything between every showing, only certain seats are open. There were eight people in my IMAX theater. Now, IMAX theaters aren't small. [laughs] There were eight people in my theater, and I have a family of four. [laughs] So, you know, I mean there was nobody there, right? But that building is expensive, and it was $5/ticket, and that was fine, no $0.15.
You know, you have to convince the viewing public that was already bleeding away because they have numerous streaming services at homes and they have their 60-, 70-, 80-inch televisions at home, where they don't have to pay for a $7 Diet Coke. You have to convince those people to come back to the theater. And you were already losing that battle beforehand. But, you know, AMC is, by far, not the only theater chain that is struggling with that industry dynamic. Then COVID hits, guts their business model.
If you like movies, and I know you do, but if you like movies, you're probably going to go to one of these, right? I get to go see Back to the Future on the big screen for $0.15. Sure, that's a great night out for me and the family. But are you going to go back in September for Christopher Nolan's Tenet? Are you going to go back whenever Disney does release Black Widow or Mulan?
Hill: Well, Mulan, they've already said they're moving that to Disney+. And as a Disney shareholder, I find that to be a very interesting test; [laughs] I'm curious to see how that goes, because they're releasing it for $30.
Gillies: Yeah. And you have to be a Disney+ subscriber to get that $30. And I'm less enthused than others are, just because, you know, well, it's a streaming service. Like, if it's going to be $30 in September with a big event, why am I not waiting until, say, March when it's part of just the free content that I get with my $7/month subscription, right? And I really like the look of the new live-action Mulan, and I mean, I have a young daughter. So, I think it's good for her to see a female role models, you know, kind of, kicking butt and taking names on the screen, as Mulan does, but I'm not sure we're going to pay $30 incremental to sit around for two hours and watch it, so, yeah.
But it's going to be tough for AMC. This is The Downer show, man, I'm sorry. [laughs]
Hill: [laughs] Part of me hopes -- because I haven't checked, I don't know what movies are going to be available -- part of me hopes -- and again, I know that their whole theme is like, "Movies in 2020 at 1920 Prices." I'm kind of hoping they've got one movie from the 1920s in there. It's just like, yeah, we've got Back to the Future, Raiders of the Lost Ark and Nosferatu. We've got The Kid with Charlie Chaplin, [laughs] you can see that. It's like, actually, I would go see that on the big screen.
Gillies: Yes. [laughs] That would be fantastic.
Hill: Jim Gillies, always good talking to you, thanks for being here.
Gillies: Thank you, 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 MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you on Monday.
