In this episode of MarketFoolery, host Chris Hill chats with Motley Fool Asset Management's Bill Barker about the latest headlines and earnings reports from Wall Street. They've got some merger news from the hospitality industry and some stock buybacks to share. They also go through L Brands' (BBWI 1.05%) latest earnings report.
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This video was recorded on Aug. 20, 2020.
Chris Hill: It's Thursday, Aug. 20th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Bill Barker. Good to see you, sir.
Bill Barker: Good to be here.
Hill: We've got stock buybacks. We have got some retail earnings. We're going to start with the hospitality industry.
Two stories, really, in some ways at opposite ends [laughs] of the hospitality spectrum. We've got reports of a potential merger between two hotel operators overseas. Accor, which is based in France, and InterContinental Hotels, based in England. Although IHG owns hotel brands like Crowne Plaza and Holiday Inn, neither of the stocks are really moving a whole lot on this news. But this would be interesting to see play out, in part because, I think this would create the largest hotel company in the world in terms of properties.
Barker: It might. And they're hotel operators rather than, sort of, owners, for the most part, of the hotels. So, they're both reasonably asset-light businesses. If they were more in the business of owning hotels themselves rather than providing management services, I think they'd both be in a lot more trouble as stocks today, because that's a lot of near-empty properties in a lot of cases. And so, they're hoping that they get their management service bills paid on time by all those hotels who are owned by other companies. But they're the ones who create the brands or have acquired the brands over the years. They've got a lot of different brands, both of these companies, many of which you would know. But the sense that the merger makes is Accor is strongest in Europe, and as well, in some parts of Asia and the Middle East. And IHG, InterContinental Hotels Group, stronger here in the U.S. with the Holiday Inn, Crowne Plaza, and also, very strong in China. So, it's a good geographical merger, potentially; although it seems very early based on the reports to conclude that this is going to go anywhere.
Hill: Yeah, based on the stuff I read this morning, there's definitely some smoke, we don't know if there's going to be fire yet. So, we'll see how that plays out.
Also, Airbnb has filed paperwork with the SEC for a confidential IPO. And I have no idea how this is going to go, because right now Airbnb is not disclosing financial information and they're not disclosing how many shares are going to be offered. So, as someone who has used Airbnb on multiple occasions as a customer and has enjoyed the experience, based on [laughs] what I'm getting from Airbnb so far in terms of information, I have no interest in this whatsoever.
Barker: Right. No, you would not, as an investor, want to go too far down the road of thinking about something that won't provide you any of the numbers. And the numbers are unlikely to be attractive right now, which is one of the reasons why they are probably thinking they need the money. As bad as things have been for the hospitality industry, and I think they're projecting, or analysts or somebody is projecting that their revenue could be half of what it was last year, nevertheless this might be a better time to take advantage of stock market enthusiasm for companies like Airbnb then at other times. It's valued, its last round of raising money was valued far cheaper than it was back in 2017. So, things haven't been going their way, obviously, but they probably need the money.
Hill: But at some point, they're going to have to give up some information, aren't they? I mean, if they file an S-1?
Barker: Yes, yes. I mean, unless there are really trusting investors out there. Like, I just love the name, whatever's going on, I'm with you --[laughs]
Hill: Yeah, put me down for 1,000 shares, I don't care.
Barker: Now, there are some investors like that out there, but they're not deep-pocketed ones. I think there are some people throwing money around these days in the market without looking too closely at the numbers at times, but not enough of them to fund an Airbnb IPO. So, yeah, this all seems a bit preliminary, and I think there's more to follow. And whether this is something that moves quickly, I don't know, they may just be putting enough of what they need to do out there now so that they can act quickly if they have to, but it does raise a lot of questions as to why there isn't more information about the financials, if they're serious.
Hill: Before we move on to our next topic, real quick, back to Accor and InterContinental Hotels. Are the Accor brands, sort of, higher end? I mean, I'm more familiar with Holiday Inn and Crowne Plaza, those are not luxury hotel brands, so I'm wondering if at least part of the thinking behind this merger is if Accor has some higher-end brands than you're getting, sort of, the full spectrum of hotel offerings?
Barker: Well, they've got plenty of high-end brands. They've got brands at luxury, premium, mid-market, and budget. And so, maybe in this country, Fairmont and Sofitel would be some of the ones that people would be more familiar with, although Sofitel is much bigger in parts of Europe. Fairmont is a United States and Canada-based group, which people might be familiar with. And the InterCon brand is quite high up there too. So, I mean, probably most of us know Holiday Inn much better than InterContinental, but InterContinental is one of the leading brands for hotels as well.
So, they both have a range and they both have plenty of exposure to the middle market. Now, one of the things that you, kind of, want right now is to have exposure to the middle market, because that's more domestic travelers. And as we know here right now, nobody wants us traveling to their country. So, those U.S. dollars are not arriving in European or Asian hotels. But people are beginning to travel where they can. And for the most part that's within their own country these days. People aren't getting on international flights. I think Qantas came out today and talked about not expecting global travel to really return until mid-2021. So, you know, you've got to have exposure to some of the things that are being used, that is the domestic travel. Of course, Airbnb has got exposure to both, but both of these brands have exposure both to a lot of places geographically and a lot of different tiers of the hotel market.
Hill: Intel announced an accelerated plan to buy back $10 billion worth of stock. CEO Bob Swan says that the shares are trading "well below our intrinsic valuation." And that may in fact be the case, but this is -- look, I know they've got the money, this is a $200 billion company, Intel has the money. The optics really aren't great here for Intel.
Barker: What optics were you hoping for from Intel? [laughs] What would you prefer than them saying, hey, our stock is really cheap, we're going to take advantage of that.
Hill: Well, I think that in normal times, this probably would not be something we'd be talking about on the show. These are not normal times, there's been a pretty dramatic cutting back of share repurchase programs. In some cases, it's because companies, you know, their businesses are troubled and they're looking to shore up the cash. In other cases, some companies are laying people off and it would be, among other things, [laughs] impolite to be buying back your own stock at a time when you're laying off employees.
So, in the case of Intel, it's not that they're laying people off, it's that -- look, we talk all the time about capital allocation, and some companies are better at it than others. If I were an Intel shareholder, I would be wanting them to plow that $10 billion not into their own stock, I would want them to plow it into speeding up the timeline on this next-generation 7-nanometer production technology, where they came out recently and said, oh, yeah, we're actually about a year behind schedule on that. Well, that's kind of your business, so maybe you want to speed that up.
Barker: Yeah, I have a feeling that that is a bigger problem with execution than capital allocation. That they haven't been skimping on the amount of capital allocated to getting the newest generation of chips out there. So, you know, they have been buying back shares rather consistently over the past 20 years, really. And they have been knocking off around 100 million shares a year; this is going to be 166 million. Instead of raising the dividend, they're going to buy back shares. They're both really return of capital to shareholders, of course, share buybacks have gotten bad press from some. But in the case of a company that is not laying off people, but needs to ramp up and perhaps incentivize some of its people to get moving a little bit faster, or a lot faster -- I'm sure shareholders would prefer a lot faster on this next generation of chips -- I don't think this really moves the needle on that or that it is a capital allocation, which is in any way preventing the needle from being moved on the speed with which they can get the next generation out.
It's reasonably close to a non-issue as, in terms it's a big headline, $10 billion; buying back shares of $10 billion, you know. But what's the market doing with that today; what's it up, you know, 1%, 2%.
Hill: Well, right. Stock buyback plans, under certain circumstances, and I think this is one of them, under certain circumstances, they're just so uninspiring. Like, if you're an Intel shareholder, you're not jumping up and down at this announcement. It's like, well, we've got nothing else to do; we have no better ideas. This is one of those buyback plans where they might have just led with, because we don't have any better ideas, we've decided to just take this $10 billion and buy back our own stock.
Barker: It is. And it's a timing thing. Which is, hey, our stock just collapsed 15% to 20% on the latest news. You know what, the news isn't that bad, and to prove that we're going to buy $10 billion back. So, take that, you know, market. Well, the market is looking to that, like, uh, I will give you 2% of your share price back. [laughs] You know, that's not the problem. The problem is not that you have too many shares out there; that's not the problem.
All right, you've got a few shares less, so we'll give you something for that. We agree to a degree that your share price is maybe a little bit too low today, but not much.
Hill: L Brands posted a profit in the second quarter. The parent company of Victoria's Secret and Bath & Body Works also saw revenue come in higher than expected. And shares are up around 6% today and close to a 52-week high, I think. This was, at least in terms of the profit, a surprisingly good quarter.
Barker: Yes. I heard recently, I think yesterday, that as of right now L Brands is the top-performing of Fortune 500 stock for the quarter, the quarter having begun at the beginning of July, which was about the bottom for L Brands share price. So, it's a nice little starting point for this particular story, that their stock has recovered somewhat. It's a stock that used to be $100/share back in 2016; got down to about $10 in April. So, that is the bigger picture here.
All right. It's tripled since the bottom, which is nice if you acquired all your shares at the bottom. But it's a tale of two brands right now: Victoria's Secret and Bath & Body Works. They're going in very different directions right now, and this quarter was further proof of that. Bath & Body Works did pretty much all the heavy lifting. And that is the company that is now the one that you're mostly going to watch going forward, because they're trying to get rid of Victoria's Secret.
Hill: I like that the management of L Brands, while on the one hand saying, we're not going to offer any guidance for the rest of the fiscal year, went out of their way to lower [laughs] expectations for the holiday season. I mean, they were pretty direct in, sort of, warning about. Look, holiday season is usually a big time for us, don't read anything [laughs] into -- you know, please don't think that we're going to sell anything this holiday season.
Barker: Yeah, they talked about trying to move some of the sales from the fourth quarter into the third quarter, and point out that the vast majority of their sales, especially the Bath & Body Works sales, occur during the holiday season. And if malls are places that you either can't get into or largely going to be choosing not to get into, that's really, really tough for this company, because they are heavily invested in malls. And their online operations have been doing better and they highlighted that and they had some, sort of, eye-popping numbers on the growth of the online sales for this quarter. But you know, you're comparing that to last year when people really weren't turning to these brands for their online purchases.
So, it's nice that they have an online operation that is doing better today than it was before today, but they know the challenge that is facing them. If Christmas is not a big shopping-in-person, at-mall shopping season, they need to lower expectations. And there is no way to count on that being a tailwind for them.
Hill: Last week on Motley Fool Money, one of the things we talked about was how, for anyone who is going into a grocery store or CVS or anything like that, and seeing Halloween candy for sale and thinking like, am I crazy or is it starting earlier this year? You're not crazy. Hershey has worked with all [laughs] these retailers to get Halloween candy in sooner. Starbucks and Dunkin' are both rolling out their fall menus earlier than usual, earlier than ever, in fact. And it was nice to see that Bath & Body Works is following suit. Because on their websites, they're promoting the pumpkin cupcake candles, which, you know, if they pull that off, and they're pretty good with the candles, that's probably a nice scent, a nice autumnal scent.
Barker: Have you had your first Pumpkin Spice Latte of the season?
Hill: I don't drink those. [laughs] Although I am partial to ...
Barker: Have you had the first one of your lifetime yet? [laughs]
Hill: No, I haven't. But I'm a fan of the pumpkin -- I think they call them a muffin, but really, it's a cupcake. At Starbucks, they've got like this pumpkin with cream cheese in the middle, and it's not even remotely healthy and quite decadent and pretty delicious. It's one of the rare foods [laughs] items at Starbucks that I enjoy.
Barker: How are we doing Halloween this year? Has The Grand Council put out any guidance on Halloween 2020?
Hill: I don't think so. In the same way that, I think, we talked on yesterday's show about Amazon has not given any guidance on when Prime Day is coming, The Grand Council has not provided guidance on Halloween.
Barker: Yeah. I think that's going to be a tough one. So, I'm fortunate in that my kids aren't out there trick-or-treating anymore, because I think that's going to be a tough challenge.
Hill: But you know what we should both do? I mean, just in case, because this could be, like, a last-minute decision by The Grand Council. We should just stock up on Halloween candy just in case. And what's the worst that happens?
Barker: And it's in the stores right now.
Hill: It's in stores right now. What's the worst that happens, we end up eating it, is that so bad?
Barker: You'd be foolish not to stock up on Halloween candy right now, because at these prices, it might all be gone by Halloween. And then what are you going to do?
Hill: Yeah, then you're in trouble.
Barker: Then you're suffering. [laughs] There's no way, there's no way there will be enough candy this year. So, I actually fear for Halloween, we're going to have to reschedule probably for some other point in the year.
Hill: You know what, if college football is -- if there are colleges and conferences saying, we're going to move this to the spring, I'd be fine if The Grand Council [laughs] came out and said, we're moving this to March. Like, all right, that's fine, I'll buy some candy in March.
Barker: I think it's one of those things that maybe we do need to revisit. Like, there are certain things that are changing at this time and new systems are being adopted and people will end up using them more, because they work better. And something like a Zoom will be used more after this as people just continue using more. And maybe the placement of Halloween, could it be better, could it be at a better time of the year? What do you think?
Hill: Well, I'm loathe to move it. First of all, I'm not on The Grand Council, so I don't have that kind of authority. Second of all --
Barker: That's exactly what somebody on The Grand Council would say.
Hill: [laughs] Secondly, you know, the pumpkin; you need the pumpkin. That's like, they go together like peanut butter and jelly. So, that's when pumpkins are grown, so if we're going to move it, I wouldn't move it much in either direction. Maybe bump it up earlier in October, but I wouldn't ...
Barker: Bump it up earlier, maybe when it's a little bit lighter outside for the kids, you know.
Hill: Sure, a little bit lighter, sure. We go to early October? I'd be up for that.
Barker: Yeah, something like that. Talk to your people.
Hill: I'll talk to my people and you talk to your people and then we'll both make sure we're stocked up on candy. 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.