Consumer Goods Stocks Steam Ahead

In this episode of MarketFoolery, host Chris Hill chats with analyst Emily Flippen about the latest headlines and earnings reports from Wall Street. Two leading retailers are hitting all-time highs after their quarterly results surpassed analysts' expectations. The duo discusses their numbers and how things look moving forward for these retailers. Plus, Apple (AAPL -0.57%) achieves a milestone.

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This video was recorded on Aug. 19, 2020.

Chris Hill: It's Wednesday, Aug. 19th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the incredible Emily Flippen. Thanks for being here.

Emily Flippen: Hey, thanks for that [laughs] nice compliment.

Hill: I think you're incredible, that's why I'm always glad to have you on MarketFoolery. Yesterday on the show, we talked about Walmart and Home Depot. Today we're going to talk about, you know, arguably their mirror images, Target (TGT 1.28%) and Lowe's (LOW -0.03%).

And we're going to start with some jaw-dropping numbers from Target. Second-quarter profits up 80%. Same-store sales up more than 24%, which is a company record. There are a lot more numbers we can get into, where do you want to start, what stood out to you -- in a sea of incredible numbers, what stood out to you?

Flippen: Well, what stood out to me was their earnings. And I don't normally say that, because I don't put a lot of emphasis on earnings expectations, but Target earned $3.39/share. So, $3.39/share versus $1.62 that was expected. And the reason why that stands out to me is because that's more than double the expectations. And those expectations were already pretty high. You know, we talked about Walmart yesterday on MarketFoolery, and we had some inkling that things were probably going to be pretty good for Target based off of what Walmart said. But doubling expectations, I can't say that I saw that one coming.

Hill: I was going to say, you and I were going back and forth late yesterday on Slack, and you made that point, you were like, well, based on what we saw from Walmart, it's probably going to be pretty good. Like you, I didn't expect this. And we've talked a lot over the past few months about retailers, including, and especially, Target and Walmart ramping up their e-commerce, and that showed up in Target's latest quarter. However, if you back that out and you just say, well, what do they do in the stores? In the stores, comps were still up 10%, like that's amazing to me.

One of the things Brian Cornell, the CEO of Target, talked about on CNBC this morning is something that, I think, obviously applies to Target, but it applies to any business in any industry that is succeeding in this pandemic. He talked about him, his executive team, and all of the employees at Target being flexible and adaptable. And that shows up in the people who are on the front lines in the stores, that shows up in the investments that the business is willing to make in safety for customers and employees in e-commerce.

You know, even something like apparel, which in their most recent quarter, let's just say it wasn't a bright spot, even that bounced back in this quarter. That was up double-digits in the second quarter. And it's hard not to be, even though the stock is up 12% today, even though [laughs] the stock is hitting an all-time high, it's hard to look at what Target is doing and not think that the future is still very bright for them.

Flippen: I'm happy that you mentioned their conventional-store sales, this is sales that happened just in stores, so somebody taking a walk around Target, the purchases that those people make. You said they were up more than 10%, and that's great, but what I thought was really interesting is that store growth alone, so that's just the in-store sales sales, that alone matched the total comp store sales growth in the last quarter. So, if you took away all the omnichannel, all the e-commerce business, if you just looked at the in-store sale purchases for Target, that alone matched their comp growth last quarter. So, to me, that is outstanding.

But to your point, a lot of the value of Target has been placed upon their e-commerce and omnichannel presence. And I listened to the earnings call this morning and I got a chuckle, because there's a little bit of sass from management, they essentially came on to the call and said, look, I know that a lot of you sat out there and you doubted us, you doubted our ability to implement e-commerce effectively, but look at our results now, we've delivered in, both, supporting capacity for e-commerce, as well as delivering on the capabilities to ensure that our members and our customers get what they need the way they want it. We rock at fulfillment. And I like the fact that management was so unabashedly sassy, [laughs] for lack of a better word, during this call, it really does, kind of, make you want to give a little clap to Target for this quarter.

Hill: Absolutely. Although, I will point out, and I don't begrudge them this, they're not offering guidance. So, you mentioned the comments they made on the conference call. In the interview on CNBC this morning, Brian Cornell, again, while on the one hand saying, we're not going to give guidance, Brian Cornell talked a lot about momentum, talked a lot about how they are picking up market share. It was one of the things they cited in the release that they feel like they've picked up $5 billion worth of market share. And those things may be true, but those are, sort of, at odds with one another. So, I like that they were having a little swagger on the call. [laughs] It's one of those things where you really don't want that to come back to bite you in three months' time.

Flippen: But I will give them credit for it, there was tepidness towards the end when they talked about guidance. They were very careful about the way they talked about what to expect moving forward, the same way they said the first quarter would not be a good predictor of the second quarter, they said this quarter is not going to be a good predictor of the third quarter, especially considering, and they did mention this directly, the back-to-school sales will likely hit them. There's a lot of uncertainty about where and if students are going to be going back to school, and a lot of their third-quarter sales does come from preparations for kids going back to school. That's clearly not happening this year.

Hill: Yes. And a great reminder that after the holiday season, for general retailers, back-to-school is the biggest season for them. And Target, and I assume other retailers are going to follow suit here, Target is doing what they can to essentially extend the supply chain in terms of back-to-school shopping, where they said look, we're going to have -- so, maybe late September, early October, when traditionally they're moving the back-to-school stuff out of the stores, that's probably going to still be available.

Flippen: Definitely. And so, it'll be interesting to see what happens next quarter, if this back-to-school actually is just experienced over a longer period of time or if the sales hits Target. Either way, it doesn't take away from what a strong quarter this was for Target. Again, beating earnings, doubling the expectation there. Nothing to complain about yet.

Hill: Lowe's second-quarter revenue up 30%, profits were up nearly 70%. Similar to what we saw yesterday from Home Depot, Lowe's is spending more money on safety and employee pay and employee bonuses. But when you look at the results, and the stock hitting a new all-time high today, it is clearly paying off for Lowe's.

Flippen: It's almost sad that we started with Target, because it's going to make Lowe's earnings look [laughs] less impressive coming off of a doubling of expectations. But Lowe's was still an outstanding quarter. They did beat expectations, earned $3.75/share versus just under $3 expected, so outstanding earnings beat. To your point, same-store sales were up 34%, but they doubled that expectation; it was expected that they do 16%.

And expectations are wishy-washy. Again, like I said early on, I don't like to put too much weight onto what Wall Street expects, what I do put weight on though is that we saw earnings come out of Home Depot yesterday, they had 25% same-store sales, absolutely astounding, but 34%, maybe there's an argument to, kind of, show how Lowe's business is different than Home Depot. And to me, that comes down to the core customer of Lowe's. The person who is typically shopping at Lowe's is you or I, somebody who is not a professional contractor, maybe they're looking to start a garden or do some remodeling on their own. Those are the people that are more likely to visit a Lowe's versus a Home Depot. And despite the fact that these businesses largely move in sync, it does go to show that Lowe's, [laughs] despite its attempt to get pro customers, does a great job of attracting the layman, which is the person doing the most purchasing this past quarter.

Hill: And Marvin Ellison, I think has been CEO for maybe 18 months; I think it's closing in on two years. And like Brian Cornell at Target, not offering any guidance. But you know, there was, I think, a decent amount of enthusiasm when Ellison took over at Lowes, and it's really starting to show up in the performance of the business and the stock.

Flippen: You know, to be honest, I was always a little bit skeptical of Ellison. I'm a bitter daughter of a former J.C. Penney employee, right, so I have that natural level of skepticism. But I have to give credit where credit is due, Lowe's is making a turnaround, both in attracting those pro customers, obviously, pre-COVID, as well as, building out their fulfillment and their omnichannel presence. Those are both key to competing with Home Depot. So, it'll be interesting to see where it goes from here.

What I will say is, I made a statement on Motley Fool Live, which is something we do here at the Fool, essentially comparing Lowe's and Home Depot last week. And I said to myself, I like both these companies, but essentially, it's like Coke [Coca-Cola] and Pepsi, [PepsiCo] ultimately, I'd rather own Coke, in reference to rather owning a Home Depot. And someone rightfully pointed out, well, Pepsi has outperformed Coke over the last five years. And so, that does have me scratching my head a little bit. Home Depot is a great, steady performer, but Lowe's is out to prove something. And I think Ellison definitely has his work cut out for him, but he's living up to the hype.

Hill: When Brian Cornell said that Target is taking market share, one of the businesses they are probably taking share from is TJX, this is the parent company of TJ Maxx and Marshalls, among others. They lost more than $200 million in the second quarter. And they were pretty clear about the fact that the third quarter is not going to be a whole lot better.

Flippen: For a lot of the same reasons that we mentioned before, back-to-school sales typically is a big boon for TJX and they're concerned about what that looks like moving forward. And despite the fact that sales did fall 30% this quarter, I'm not ready to write this off as a bad quarter for them yet. They were closed, their stores were closed about one-third of this quarter, so there's a good amount of sales that just simply weren't happening, because a large portion of TJX's sales are that basic foot traffic, people walking around and making purchases in stores. They essentially have no online presence. They do have an online presence, but for consumers, they're more accustomed to going to Target to make their online purchases than [laughs] going to TJX.

But one silver lining to this earnings report, there was some really strong double-digit comp growth at HomeGoods. So, their home division, very much the expectation of what we've seen from Lowe's and Home Depot, is still performing relatively well. Theoretically, people are investing in their homes to what they're seeing every day, while they work remotely. So, that was a silver lining here, but to your point, they are really not projecting out anything outstanding for the remainder of the year, they're highly dependent upon getting feet inside stores to make their sales.

Hill: I was surprised to see that TJX's market cap is not too far off from Target's market cap. I mean, Target is up today, I think the market cap is around $77 billion, TJX is around $63 billion, $64 billion company. I would not have guessed that. I realize they have an international presence that I don't have a great grasp on, so I'm sure that's part of it as well. But just in terms of, you know, because I know [laughs] a lot of people are probably looking at Target and this latest quarter and the stock hitting an all-time high, and thinking, gosh! Is now really the time I want to buy? I mean, it's still below $100 billion in terms of market cap, so it really seems like it has a lot of room to run.

It is going to be interesting to see, with TJX, the extent to which they look to maybe sell off some of their brand -- I mean, they have a bunch of brands, and typically we've seen businesses, in this situation, focus on maybe their better operators and selloff some of their -- I'm not saying they should just go out and sell [laughs] Marshalls and sell TJ Maxx, just so they can double down on the HomeGoods, but it wouldn't surprise me if, in the next year or two, they start to kick the tires on that idea.

Flippen: Really? I would be surprised by that; I'm not ready to write it off. And the reason why I'd be surprised by it is because I think there's a common theme among expectations for what TJ Maxx will do and Marshalls will do in the future, mostly because we've seen a lot of retailers go out of business, a lot of apparel retailers in particular, go out of business. And I think the idea is fueling that maybe there will be cheaper, more accessible inventory that will fuel growth at some of their apparel stores. And despite the fact that apparel was down last quarter for a company like Target, the fact that it bounced back pretty quickly at Target this quarter maybe goes to the argument that people aren't [laughs] done with clothes entirely yet. So, maybe the feet are back in the stores at some point in the future. In my opinion, I think managing that inventory will be critical though.

We've seen inventory sync companies in the past, the reason why TJ Maxx has been so effective as a business, is because it doesn't try to merchandise. They're not trying to predict what will be trendy, they're getting their hands on the brands that they can for cheap. They need to keep that strategy, otherwise inventory is going to be a really big burden for them moving forward.

Hill: Since we talked a little bit about market cap, before we wrap up, I should probably mention that this morning Apple crossed over the $2 trillion market cap line. [laughs] Shares of Apple up more than 50% year to date.

You know, we talk from time to time about the law of large numbers; Apple is breaking that law. [laughs]

Flippen: $2 trillion is hard to wrap your head around, isn't it?

Hill: It really is. And when you look at what Apple, Microsoft and Amazon have done in terms of their growth just in 2020 alone, all three of those are breaking the law of large numbers.

Flippen: I hear people express a certain level of skepticism about the size of companies, saying to themselves, we've seen the huge run-up, Apple is a great example, there's no way that they can grow from here. And while I am in no business [laughs] of defending the current valuation of Apple, what I will say is, the world does not get any smaller. We haven't seen that happen yet.

I will expect that $2 trillion, at some point in the future, [laughs] is going to be a relatively normal market cap for companies, we only continue to grow, so your expectation for what a large company is, or what a small company is over the past 20 years should not be your expectation for what a large or small company is over the next.

Hill: Emily Flippen, always good talking to you; thanks for being here.

Flippen: 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 tomorrow.