In this episode of Industry Focus: Consumer Goods, Emily Flippen is joined by Motley Fool contributor Dan Kline to bring you four stocks to put on your watchlist. They talk about the companies' operations, products, customer base, and financial performance. They also talk about their future growth potential, what makes them an attractive investment option, and much more.

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This video was recorded on Aug. 25, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, Aug. 25, and I'm your host, Emily Flippen. Today I'm joined by Motley Fool contributor Dan Kline to discuss some successful, yet what I consider to be relatively under-the-radar, consumer goods winners. Dan, thanks for joining, as always.

Dan Kline: Oh, thanks for having me. The goal here was to find some companies we just don't pay any attention to. And it's not always fair, like, we spent a lot of time talking about J.C. Penney, and it probably doesn't deserve it compared to these next four we're going to talk about here.

Flippen: Yeah, definitely. I'm really excited to talk about these companies. And they're companies that I know we've mentioned a lot in passing on these Consumer Goods episodes of Industry Focus. They're companies that play off of the industries that we discuss, while at the same time, we really haven't taken the time to delve deeper into them as individuals. So, the companies that we're going to be talking about today, to give all of our listeners a brief preview, are going to be Ross (ROST -0.13%), Boston Beer (SAM 1.17%), Scotts Miracle-Gro (SMG -0.87%), and Mattel (MAT -0.06%). And I know I personally want to start with the one that I'm the most excited about. We talk about its brother company constantly, TJ Maxx. TJX, I should say, and that's Ross.

Kline: Yeah, Ross is a TJ Maxx-style store, a Marshalls-style store. You go in, you're hunting for discounts. It has that sort of fun bargain hunting. Pre-pandemic, it felt like they were springing up everywhere; there's two within 5 miles of me when I'm at the other house in Davenport. There's at least a couple in the West Palm Beach area. It is a massive store, but it's also one that doesn't have the cachet of, say, Marshalls. It's probably closer to TJ Maxx in terms of its customer base, and that makes us forget about it. But some of their numbers were interesting. Emily, do you want me to go into where they are post-pandemic?

Flippen: Yeah. This is where I think I'm the most interested, because as we talked about last week, we've gotten a lot of insight into the performance of some of their sibling companies. [laughs] I really don't know, competitors, I should say. Although they don't necessarily compete; they're really riding the same tailwinds. But ultimately, we have looked at the numbers last week, so I am curious to see how Ross has performed post-pandemic or during pandemic, I should say.

Kline: Yeah. So, it was mixed. On the positive side, comparable store sales were only down 12%. And I say "only" because stores were close to 75% of the time during the quarter and they don't do a digital business. They may have a website, but it is not a digitally driven business. But here's the negative, and here's how I see it kind of badly. There was pent-up demand. People rushed into these stores when they were allowed to. They bought a lot. And then their sales trend backed off. Trends have not materially changed from the second quarter, with comps for the first two and a half weeks trending down at mid-teens versus last year. That sort of meant there were a lot of people out there that are like, you know, I need some new sweatpants, I need a shirt, I need some socks, whatever it is, and then once they bought it, they weren't that excited to go back to the store.

And I do think that's a big problem. It's also causing some inventory problems. I thought the issue would be ease of inventory, that there'd be too much stuff out there for these companies to buy. And that's kind of what TJ Maxx has said. But Ross actually sold out of a bunch of stuff and had bare shelves for a while. Emily, if I go into a store and there are bare shelves, that is a big problem to me.

Flippen: Yeah, this is such an odd issue that Ross ran into this last quarter. They expected foot traffic to essentially fall to nothing during the pandemic. And for a lot of their stores, it did. Similar to what we saw last week, their stores were closed around 75% of the quarter, so that was understandable. But when they were opened, what they were doing was massively discounting a lot of their old inventory just to get it out of the stores, but they didn't expect that foot traffic would pick up as quickly as it did, so they simply didn't [laughs] have the supplies in stores. And what I found a little bit scary as an analyst is listening to this earnings call, or I really should say reading their most recent earnings call, and reading their response to some of the analysts' questions when the analysts would ask, well, do you expect you're going to [laughs] fix your inventory soon? Their response was kind of mixed. It was really a roundabout answer of saying we're working on it. We don't have a timeline, but it's something we know we need to fix.

And you had that quote from management from the last kicker essentially saying that their comps for the first two and a half weeks of this quarter have been trending down versus last quarter. Which to me says, either your foot traffic is falling off, which is possible, [laughs] or more likely, you just really haven't fixed your inventory issues yet.

Kline: Well, and they are related issues. If you go to a store and it doesn't have that much, you're not going to go back. If you go to a TJ Maxx and it's jam-packed and you don't buy anything, you're going to go back a week later. You know, my son wants to go every day to TJ Maxx because he's looking for name brands at good prices. But there's a fundamental retail issue here that I find troubling. They're a discounter in the first place, but they heavily marked down their inventory because it was "old." And I understand that in markets where things are seasonal. I will point out that I live in a market that's always the same season; it's summer and super-summer. Why would you not go in with your regular prices first and then mark things down if they're not selling? If you weren't going to replenish the inventory -- now, I understand if you have a lot on order and your shelves are going to be full, you want to blow out what you have and just make as much money as you can, but why, if you don't know how much inventory you need? Are you selling it because clearly you've lost opportunity here, you discounted something that somebody would have bought at full price? And maybe you wouldn't have as many transactions, but you'd probably have more revenue. So I don't like the way this company is run at all.

Flippen: I like that you pointed that out. I almost wonder if management was treating this quarter the same way they would have if this was 2019. And they saw the sales they had and they thought to themselves, we have to move this inventory before back-to-school, before the holiday season, and they marked it down, but the ending result is, at the end of the most recent quarter, their inventories were down almost 40% in comparison to where they were last year. I do have faith that Ross is going to get the inventories back. I mean, there's no way [laughs] you run Ross permanently with 40% less inventories than you did a year prior. But I agree, I think it's concerning that the experience you have as a consumer, taking potential risk depending on where you are in the U.S. and going out to these stores and then having a lack of supplies in the stores that you're visiting that doesn't make you want to revisit.

Kline: You also have, Emily, a lot of the items at, whether it be a TJ Maxx or a Marshalls, they're kind of stock items. Like, a men's blue dress shirt doesn't change with fashion or the season. So it seems odd to me when, OK, a lot of women's apparel changes whether it's actual seasons or just there's new. But there's also things like athleisure, where I'm not sure the design of black yoga pants changes all that much. And the same could be true of things, like, socks and underwear, like, there are just staples and they sell that. You know, a blank T-shirt or even a logoed T-shirt or a fashion T-shirt. It really seems to me that they should have been buying stuff other people couldn't sell. That's kind of what TJ Maxx and Marshalls has come out saying; we're going to cherry-pick some designer deals. And you know, you go to a Marshalls right now, and they might have a lot more Ralph Lauren than they would normally have because it is seasonal or it is fashion-related and they're going to move on. This feels to me like a company that's stumbling around when it really should be thriving, but financially it's doing reasonably well and they're sitting on a whole lot of cash, about $4 billion.

Flippen: Yeah. And actually, I have two thoughts about that. The first being, the reason why discount retailers can be appealing for investors is that they're not in the business of trying to merchandise, they're not trying to predict what next season's trend is going to be and predict what's going to sell out, what's not going to sell, how they stock their stores. And I am concerned a little bit about their control of inventory that Ross is trying to be [laughs] a little bit more of a predictor of what's going to be popular and less of a picker-upper of whatever they can get on the cheap. Again, we don't want to see these discount retailers moving into heavily merchandising their stores. To me, that doesn't differentiate them too far from what ended up being the downfall of companies like J.C. Penney.

But you mentioned their cash, and I'm happy you did, because you can make the argument that part of the reason why they weren't more aggressive and purchasing some of this discount inventory, they ramp up their own inventory levels was because of their cash position. They do have $4 billion, [laughs] over $4 billion in liquidity. But this is a company that has a history of buying back its own shares, just taking the cash that it generates and "returning it to shareholders" in the form of buying back its own stock. Maybe if they hadn't been so aggressive about this process in the years past, they would have had more money to purchase inventory when times were hard.

Kline: I also feel like investing heavily in, not omnichannel, but having a digital sales component. And I don't know what that looks like, that might look more like a Woot!, where they take five or six items a day and just prioritize them and try to build a real fan base that's excited to see what the megadeals are going to be. That's a really good way to have your clearance rack to get rid of stuff, but this entire business is about flow of inventory. That's all you're doing, like, it's shopping as sport. Nobody goes to a Ross store because they need something specific. They go because they need something, like, maybe you know three months from now you're going to a wedding and you need a dress, so you're willing to stop by Ross a few times early in the process to see what they have, and when they don't have it, you'll end up going to Macy's or whatever else it is you might go and buy that item.

But this is the fun of the treasure hunt. And to do that means quickly rotating inventory, moving people through your stores and giving them an incentive to go. Part of the marketing for a Ross or a TJX or Marshalls is me calling, Emily -- which is going to be a really weird call for me to make -- hey, Emily, I just got the greatest shirt at such a good price at Ross; this is not the kind of conversation Emily and I have off-air, but you get the gist of it. Maybe I would tell my mom, oh, my God, I found a suit at Marshalls and it was, you know, $99, and normally it would go for $499. That is part of the branding, part of the experience here. And right now, I think they're going, well, pandemic, we don't know what we're doing, it's like, we'll just hold back. And that might be fine to conserve cash in the short run, but it's going to send customers to your rivals. And once that behavior changes, hey, they might recognize that TJ Maxx and Marshalls are better stores than Ross. And I do think that fundamentally they are, and that is a problem. So this is a company with a lot of potential, but I don't know that they've been doing a great job realizing that, which is magnified by the pandemic.

Flippen: Let's talk about a company that has been realizing its potential, although I think that potential has changed over time. [laughs] And the reason why I say that is because Boston Beer, ticker SAM. Obviously, the maker of the infamous craft brew, if you will, has been getting a huge boon over the past few years, and especially during the pandemic, but not for beer, [laughs] for their seltzer, Truly Hard Seltzer. I'm interested to hear your thoughts about this, Dan.

Kline: So, first of all, the first time I knew that Boston Beer owned Truly was when we did the show prep for this show. There is not a lot of connection between the Sam Adams branding and Truly. I am a semi-regular drinker of Truly, not because I have any specific thoughts on what the best hard seltzer is, but because they stock it on Royal Caribbean cruise ships. So it is sort of like what I would have in the pool during the day when you're trying to not have too much alcohol, but you want a little bit of a drink, it's a good product. Twisted Tea is not one I've tried either, but again, these were kind of early-to-market players in what has been a really growing category.

Emily, let me ask you, is there a big difference between one seltzer and another? I've had, like, three or four brands and I largely don't feel there is. What are your thoughts?

Flippen: [laughs] As someone who is grossly against the idea of carbonating water, I'm not sure if adding alcohol to it makes that value proposition any more compelling to me. But in my personal taste, no, there isn't a ton of differentiation. But that being said, there are plenty of people in my life who definitely favor one form of hard seltzer over another. And the reason why I think this is important is because Truly has done an amazing job of converting seltzer connoisseurs from White Claw to Truly. And the reason why I call out White Claw is because White Claw has, and has had for many years, the vast majority of the hard seltzer market. They were the first to market with the hard seltzer, they just completely took over the entire industry. And then we had a lot of big players come into the game, and that includes big alcohol conglomerates like Constellation Brands and slightly smaller alcohol [laughs] conglomerates like Boston Beer. And Boston Beer came out with Truly, what they did was used their amazing distribution to get Truly put everywhere. And people who were consuming seltzers for the first time were picking up the Truly because it was the one that felt the most familiar to them over a White Claw. So, they're actually expanding their market share much to White Claw's defense.

Kline: So, Emily, I'll jump in and I'll say, because you asked, is this a bubble, do they run the risk of being in the same trouble they were in when the whole craft brew market sort of exploded and they became like the not cool craft brew company for a while? Which is crazy, because they've always been an innovator; they've always had really exciting seasonal products. But I do think that distribution network is unbelievably important. We are largely buying our alcohol in liquor stores and grocery stores. We're not ordering it online. That's not even legal in many places. So, the fact that they can -- you know, whatever the next thing is, maybe the next thing is alcoholic lemonade. I saw that on the shelf. That exists. So maybe that's the thing. And if somebody else has a hit with it, Sam Adams could come up with their version of it and jam it down your throat at retail, and you'll see it. And that is an inherent advantage.

If you and I tomorrow came up with the best-tasting hard seltzer ever, and everyone agreed that our ability to build a distribution network is really, really difficult. I will point out there are close to 70 hard seltzer brands. Everybody, Coca-Cola, is getting into this market, and they historically have done very little with alcohol. This is a massive growth category. And I'm actually not sure we've seen anything close to the peak. It's such an accessible beverage for so many people. And regular seltzer is also something people are consuming more of. It fits a lot of health trends. It's lightly alcoholic. I think there's a lot of upside. But, Emily, there's been a lot of growth; this has been driving Sam Adams.

Flippen: Yeah. If you actually take a look at the numbers for the most recent quarter, they had an outstanding quarter, as one might expect, for alcohol sales during a pandemic. Their total revenue was up 150%, but management was clear to mention that only around 8% of that was beer volume itself. So despite the fact that they are, in fact, Boston Beer, known for Sam Adams beer, right now the value proposition is really two things. It's Truly and it's Twisted Tea. These are really the only parts of their business that are growing.

When you think about beer, the big opportunity for Sam Adams is actually the company they acquired earlier last year, which is Dogfish Head. And the co-founders of Dogfish Head brewing company chose to get payout in Boston Beer stock. That's a testament of faith to the management team over at Boston Beer, but at the same time, when I see numbers like 150% revenue growth but only 8% beer, it makes me feel like, despite the fact that I think Dogfish Head could have been a really smart acquisition, they have a great collection of beers -- is it really the area that you want to be investing right now, when [laughs] Truly is just the only thing dominating?

Kline: So let me jump in and say they had 8% growth in beer at a time when restaurant sales went way, way down and bars are closed. Sam Adams has also done a really good job controlling taps and having access, where there's often a regular Sam's and a Sam seasonal tap, there might be a Dogfish Head in some cooler bars -- those sales largely went to zero. So the fact that they're posting growth, that's a good sign, that means they have beers that people have gone out of their way to get, instead of being the only craft beer in an uncool bar or a beer you've heard of in a too cool bar.

So I actually really like what this company has done from an execution point of view, because I think, look, can they keep innovating? If they come out with, you know, I joked hard about kombucha tomorrow or --

Flippen: Not a joke anymore.

Kline: Yeah, that's probably not, or you know, hard coffee, which is something that a lot of beer makers have been experimenting with; you know, cold brew that's mixed with alcohol. Sam Adams, if one of those works, they can get it to retail, they can get it into bars. And I just think they are playing with the big boys, with the absolute biggest players, with the Constellation Brands, with the Diageos, you know. And that's something that the most clever people cannot do. White Claw does not have the distribution muscle, and I have no idea who owns White Claw, but they are not in my grocery store. They are not in all the liquor stores to the extent that I see Truly.

Flippen: And part of that is because, as you mentioned, White Claw is private, so they simply don't have the scale that a lot of bigger companies, Boston Beer being one of them, the scale that they have in terms of distribution, which, like it or not, is one of the indicators of success in the alcohol space. So I'm excited to see what keeps coming from them.

I like the fact that Boston Beer continues to defy expectations. There was a huge run-up to the craft brew market, and then that craft market crashed, and what did Boston Beer do? Well, they didn't roll over and die. They kept innovating. And while they are not the first people to the hard seltzer space, I always think there's value in being No. 2. We've seen numerous situations in which the second player has come in and taken the lessons from the first one and just executed better. I think MySpace and Facebook are great examples of where the No. 2 has won. So I think in this case, the No. 2 is picking up; I'm not ready to say that Truly is winning in the hard seltzer space, but they're certainly picking up market share. And that, to me, bodes well for a company like Boston Beer into the future. Despite the fact that I do, kind of, think seltzer could be a bubble right now. [laughs]

Kline: So, yeah, look, beverage trends change. Right now, we're stuck at home. We're maybe not exercising as much as we want. So grabbing a hard seltzer seems like maybe a better choice than a higher calorie alcoholic beverage. Now, that may change, or somebody might come up with something. And look, these are drinks for nondrinkers. [...] It's not the same as having a scotch on the rocks. And those trends tend to change. But I feel like all Sam Adams has to do is be aware of the trend. So if hard ciders come roaring back or hard lemonade or hard coffee or hard whatever it is, I mean, hard soda was a trend a few years ago and it was all terrible so it didn't work. Maybe they'll figure that out. They don't have to be the first mover. They can follow the trend and lean on their experience and their operations to make it happen.

Flippen: And another company that is also kind of playing off trends here. And if anybody knows me, they know why I'm saying that it's playing off a trend. We'll get into it, but that's actually Scotts Miracle-Gro. They had an outstanding quarter. We mentioned it in passing, I believe, in a previous Industry Focus episode. But as we've all been stuck at home, if there's one thing we're all doing -- well, I'm not doing -- if there's one thing it seems like everybody else [laughs] is doing, it's gardening, and it definitely helps Scotts.

Kline: Yeah, I live in a building, so if I started gardening, as do you, that would be a real problem. [laughs] We have only shared areas. But yeah, their revenue was up 21% in a business that usually just grows at the rate of GDP. So this is a trend, but here's the question, and it's a really big question. So you plant a garden. You're very proud of the fact that you grew a couple of tomatoes and a squash or whatever else it is. At the end of the pandemic, do you go, well, that was fun, and go back to your life and plow over your garden? There's obviously going to be an increase in their business of people who did this and liked it. What you don't know is what level of increase that is. And some level of people who gardened are going to expand their gardens. They put a toe in the water; they had a good experience; they're going to buy more. So this is a tricky company to look at as a business.

Flippen: [laughs] Yeah, and it's really split up into two different segments here -- that's the U.S. consumer segment and what I'm going to call the cannabis segment. And you mentioned the U.S. consumer segment grew 21% last quarter, which is truly outstanding, because they sell fertilizer and gardening equipment, essentially. But one of the things that management noted, and they were pretty tepid with their guidance for this segment moving forward, was that a large portion of their sales did come from people who were either nonprofessionals in the space, meaning they had just picked up gardening as a result of the pandemic, or they were previous gardeners who left the gardening space and then came back because of the pandemic. And to quote management here, their biggest key to whether that segment continues to grow, that's the U.S. consumer segment, the biggest key to determining whether or not it grows is actually keeping those new customers engaged. And I think that's a hard task, because gardening, in general, tends to be a little bit niche, I think, in terms of a hobby. And I'm not sure there's much that Scotts as a company can do to keep those people engaged to the point where they think to themselves, yeah, this is something I'll continue to do even post-pandemic.

Kline: I don't know the Scotts gardening podcast, or all the engaging content they could create around gardening. And I'm teasing a little bit, but that's how you do it. Look, I think they're being very tepid because they don't know if the pandemic goes on another year and people have food insecurity, they might garden. If people are bored, because even people who are still working, if you're working from home, you might notice you have more time. I don't have more time, but a lot of people have more time. And that might leave you time to garden. That could become next year, and all of a sudden, you've planted two seasons. Well, maybe you're a farmer now. Maybe you're a gardener. I think they're underselling the fact that they've acquired new customers. And yeah, those customers may come in and out of the market. The other thing they haven't really talked about is there is some level of migration to the suburbs. It is not as massive. It's not people emptying out New York City, just closing it down, but it is happening. And there are going to be more people that -- you know, vacation home sales increased a lot; they're going to be people living in a vacation home where they could garden that are commuting to, like a city dwelling where their work is, and they're only doing that. So there could be societal shifts that really benefit Scotts Miracle-Gro. I actually am kind of bullish about this company.

Flippen: [laughs] And you can't be bullish on Scotts Miracle-Gro without knowing what is truly the biggest growth driver for this company. And I can't help myself but to mention it, and I don't think it's a complete picture of Scotts unless you do mention it, and that's their Hawthorne division. This is essentially an acquisition they made in the years prior, which is the largest hydroponics distributor in North America. Which is to say, if you are a person who is growing plants hydroponically, that is, in a body of water as opposed to a pot of soil, then they are likely the people you're getting that equipment from. And Scotts owns this company. There are a handful of smaller distributors that Scotts is also invested in, or competitors own, but ultimately it has been growing like gangbusters. And this is in no small part thanks to the explosion of people growing cannabis. Companies, professionals, individuals growing cannabis hydroponically. It's become a huge growth driver for Scotts.

The sales in this division, that's the Hawthorne division, over last quarter were up 70%. So it's great. The consumer business being up just over 20% is great, but 70% growth in Hawthorne, I mean, that's insane.

Kline: Emily, is this no longer a wink-wink, nudge-nudge business. Obviously, on the legal commercial end, they can acknowledge selling to a legal grower, but it used to be, you know, people would go in and buy hydroponics and pretend they were growing tomatoes or what not, but everyone sort of knew. Do they acknowledge what this is being used for when they talk about this?

Flippen: They do. They're really open about it. And part of the reason why they're open about the fact that their customers, in this case, tend to be large cannabis growers, is because that actually does pose a substantial risk to investors, because cannabis is still illegal at a federal level. It's something they disclose, if you look through their SEC filings, the fact that they deal with people whose business is illegal at the federal level has to be disclosed, even though it's legal at the state level. I mean, they're not working with people who are blatantly breaking state laws. So they're selling to legal and licensed producers. But ultimately, there's a genuine risk there that comes from serving the cannabis industry that Scotts is now exposed to. This is by no means a safe investment in the sense that nobody knows how the cannabis market is going to continue to develop, but what we do know right now is that it's growing insanely quickly. And in key states, like Oklahoma, that have great medicinal markets, you need hydroponic supplies. And Scotts Miracle-Gro has been there to serve those people for both their tomatoes and their cannabis.

Kline: And, Emily, they're basically the only player in hydroponics. Do they have competitors in the soil space?

Flippen: Yeah, they do, actually. So there's a fair number of competitors. You'll notice that in the soil space, they actually sell a lot of their own branded products really well. So Scotts Miracle-Gro has a great name behind it that helps it compete, but when you look at the hydroponic space, they've just been heavily investing in smaller competitors. They actually got invested into a company called AeroGrow, and they made a really lowball acquisition offer to get the rest ownership of that company; I think it was the remaining 20%. It's just crazy to me, the amount of interest we'll see from Scotts Miracle-Gro, not just in things, like, gardening and soil, but in actual supplies for industries as well. I think their management team is being very forward-looking with where they're spending money.

Kline: A company that sells dirt on to a company that sells toys. It's funny. Emily asked me about this, and we're talking about Mattel, and her comment here is, I know virtually nothing about toys. That makes sense. You don't have kids. You didn't run a toy store, like I do. And I actually didn't know a lot about Mattel, because one of the areas Mattel doesn't sell to is independent toy stores. It's not that you can't buy from them; it's a pretty big hurdle to buy from them. And frankly, your independent toy store is likely to want the differentiator of not selling Uno and Barbie and, you know, the typical stuff you buy from Mattel.

This has been a very difficult business. So they own Barbie, Hot Wheels, Fisher-Price, American Girl, Thomas & Friends, Uno, and Mega. Some of those products are selling really well during the pandemic; a lot of them are being really hurt by retail closures. So in some markets, even stores that were open, like, Walmarts and Targets were not allowed to sell nonessentials. In other cases, Amazon wasn't prioritizing toy delivery. So I know I sent one of our colleagues' kids some toys, and it took, like, three weeks for them to get there. That's going to hurt them. But that said, their sales were down 15% at a time when there's nothing to do. And that's a red flag to me. They lost $46 million. That's compared to losing $51 million last year, so it's about the same, which I guess is managing risk well. And in the first six months of the year, they've lost $196 million, which is about the same as last year.

Their supply chain has actually held up pretty well. They have alternate sources. They plan pretty far ahead. It helped them that the worst of the supply chain disruptions were not during the Christmas season. But Emily, I have to say, of all these companies, this is the one I like the least. They own some really great brands, and they've done nothing with it. There've been some Barbie DVDs and some Hot Wheels direct to DVD, or probably now direct to streaming things. But these feel like brands that could be major somethings, and they aren't.

So I sold Hot Wheels. You know how I got them? I went to Walmart and we bought them for $0.88 and we sold them for $1. Like, it was not attractive to go to Mattel. I feel like this is a company that's always dealing with cyclicality on its brands. You know, hey, Barbie is cool now, but now she isn't, now she's an astronaut, now she's -- you know. And they really haven't figured out how to manage that. So I have to say, I see a lot of red flags here.

Flippen: Yeah, it's interesting, because when I think about toys, while Mattel comes to mind, so does a company called Hasbro. And it's one thing that we always say is there's value in intellectual property, of course, but there's [laughs] only value if you do something with the intellectual property. Just sitting on intellectual property doesn't mean anything by itself. I think Hasbro has done a great job in creating value from their collection of brands, from their intellectual property, but I don't see the same innovation happening at Mattel. That being said, it's really hard to imagine a world in which we're not buying Barbies or Hot Wheels. These are toys that were popular when I was a kid, maybe when you were a kid, Dan, I have no idea, but they're still popular now. And there's value in those. So it's hard to imagine Mattel going away entirely.

Kline: I don't imagine them going away entirely, or certainly those brands. You know, someone is going to want it. But here's the problem. So, Emily, when I was a kid, it was probably acceptable to play with Barbie until you were 8 or 9, I'm guessing. Now, what do you think the age would be where Barbie is an acceptable toy?

Flippen: Well, I honestly wouldn't have the first clue, but I would imagine kids are playing more with iPads at a younger age than they were when I was a kid.

Kline: Yeah. It's a real challenge that the life cycle for that has shrunk. And there is, of course, also, like, an adult collectible Barbie market, you know, which is always made fun of by -- Smithers on The Simpsons is a big Barbie collector. That said, Hot Wheels should be timeless. I have never met kids that do not want inexpensive cars that they can play with. And they haven't done a steady job creating value there. And again, I don't think it's so much their toy sales. You know, when you think of something like the Transformers movie, which is a Hasbro product, I believe, they license that, and then all of a sudden there's crazy new interest in the Transformers. So, where is the Barbies, Hot Wheels, whatever, where is the Uno television game show? I don't know what that would look like, but you can't tell me that when we have The Floor Is Lava on Netflix, that someone wouldn't license the Uno brand, which everyone knows how it works. You know, there needs to be a lot more.

And they've tried things with production studios. It largely hasn't worked. They admit they're in a turnaround, but this feels to me like a brand where I'm not so sure I'm comfortable with management. I'm not so sure, like, why are you spending so much money? Their sales are still strong and they're losing not a lot of money, but they're losing tens of millions of dollars and hundreds of millions for the year. And that seems to me, this might be the weakest company on the list here today.

Flippen: It'll be interesting to see how their business performs during the holiday season this year. And I know this is a typically cyclical business in terms of the fourth quarter being strong for toy sales, but with the interesting effects that we're seeing in holiday sales during this pandemic, and overall contraction in the economy, I think it'll be interesting to see where sales do fall, if they go in the direction of a company like Mattel or if they go elsewhere.

Kline: I will point out that Uno has been doing really well. It's not a board game, but according to some list it is the No. 1 selling board game; I guess card games are lumped in. And that makes sense; it's an all-ages game. I know I've played more Uno in the past few months than I've played in the past couple of years. It's usually a game my son and I bring on a trip and pull out every now and then if we're really bored. But I do think it's going to be a strong holiday season. They're going to have a Baby Yoda plush; I think that is an important major seller. And I think the fact that they do have a lot of things -- part of the reason Hot Wheels is a great toy for a pandemic is you can buy a lot of them for very little money. So I do think in a value-driven holiday season -- now, there's going to be some families that say, we're still working, Mom and Dad are still working, we didn't have child care expense this year, we didn't go on a big vacation. You want a PlayStation5 and all the games? You can have it. That's going to happen in some households. A lot of households are dealing with either added cost or less income.

And they're going to be looking at clever holidays. And getting someone the Barbie they really want, a game of Uno, and 30 Hot Wheels cars is a really good way to make it feel like an active Christmas without spending a ton of money. So I do think they're well positioned for at least part of the holiday market. But the other thing is, we don't know what the holiday market is going to look like with this weird -- it starts in October. So I'm not sure how those trends and the lack of people rushing to toy stores. I used to joke that the last week before Christmas, if we put out bags of leaves, we could have sold them, because the people in the store were desperate. They just wanted something. So that's the point. We couldn't get new inventory. We were down to, like, unpopular train sets. So I do think that would normally benefit them, but if you're not seeing the shelves, and I don't know, people, are they going to stores? Store traffic, mall traffic, we read yesterday, has basically gone back to pre-pandemic levels. So if Target and Walmart are devoting the space to toys, they should be in a pretty good position this holiday season. I'm not sure that solves their underlying management woes.

Flippen: Before we sign off here, I'm going to steal a question from Mac Greer's playbook on MarketFoolery, where he asks the deserted-island question. And it's a little unfair, but the stocks that I'm going to ask you today: Ross, Boston Beer, Scotts Miracle-Gro, and Mattel. Between those four companies, if you were stuck on a desert island and you had to buy one, which one are you buying and why?

Kline: I'm going to buy Boston Beer. No question. I think they have the best infrastructure, they are very difficult to compete with because of their ability to execute. And realistically, if I'm on the island, I'm probably going to want a beer, you know, [laughs] or maybe a seltzer. I guess that doesn't come with the pick here. But that said, I like Scotts Miracle-Gro a lot. I think they've aligned themselves well. They've positioned their products as best-in-class, and I'm not entirely sure there's that much differentiation between the bag of dirt I buy, you know, that's enhanced dirt. I'm sure there's other brands that do it just as well, but the only name I know in the space is Scotts Miracle-Gro. And the fact that Truly could become the hit it is, and I didn't know it was a Boston Beer product, that, to me, speaks everything to their ability to control store shelves, and that's the market. So this is actually a stock I would buy, so.

Flippen: Well, grab yourself a Truly and sit on that deserted island, it sounds like a nice day to me at this point. [laughs]

Kline: That is something I did more than a few times last year on various cruises, you know, sitting someplace quiet, looking out at the sea and having a Truly. Looking forward to doing it again.

Flippen: [laughs] Well, thanks again for joining today, Dan; I appreciate it.

Kline: Thanks for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for his work behind the screen today. For Dan Kline, I'm Emily Flippen. Thanks for listening and Fool on!