In this episode of MarketFoolery, host Chris Hill chats with analyst Emily Flippen about the latest headlines and earnings reports from Wall Street. They discuss three companies: a customer relationship management specialist, a sporting goods retailer, and a multinational lifestyle corporation. The duo break down what's driving their growth, what they are doing to maintain their momentum, and much more.
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This video was recorded on Aug. 26, 2020.
Chris Hill: It's Wednesday, Aug. 26th. Welcome to MarketFoolery. I'm Chris Hill, with me today, once again, back by popular demand, Emily Flippen. Thanks for being here.
Emily Flippen: Thanks for having me.
Hill: To the extent that there is a theme [laughs] about the companies we're going to talk about today, it is, they are all out with earnings reports, and all three of these stocks are up at least 15% today. Well, I won't speak for you, I'm surprised. I'm not surprised that they're up, I'm surprised that they're up to the extent that they are up. So, we'll get to them one by one.
And we'll start with salesforce.com (NYSE:CRM). Second-quarter profits were more than double what Wall Street was expecting. Salesforce's revenue year over year was up 29%; that continues, sort of, the revenue growth that we saw the previous quarter. Shares are up 26% right now. And I was saying to you right before we started, I'm not surprised that it would be up, I'm not surprised if it was up 10% to 15%. This is a very large company. Going into this report, this is a $200 billion company. It's now a $245 billion [laughs] company. We'll come back to the stock, we'll come back to the stock, I'm sort of getting ahead of myself. What did you think of the report itself?
Flippen: The report itself was outstanding. As you mentioned, revenue grew nearly 30% year over year to $5.15 billion in the quarter. This is the first time Salesforce has surpassed $5 billion in a single quarter. So, Salesforce, as you alluded to, is a [laughs] formidable company in terms of size and revenue generation. More importantly, they've been really smart with acquisitions. A lot of the shining stars of this quarter were previous acquisitions, namely, Tableau, which has really proven to be accretive to that company over the past year. It grew 41% in the last quarter, so it's interesting to look at not only Salesforce's core business, the performance that we're seeing just in their customer relationship management platform, but also the success of their investment arm. The places they have put money have been very smart up into this point.
Hill: In terms of the stock being up 26%. [laughs] Sometimes we'll see a company come out with an earnings beat, and particularly if it's a company that maybe has been beaten down or it's in an industry that is trending downward, we'll see a stock pop of this caliber. And part of what's moving is short-sellers covering their short. I can't imagine that's the case here with Salesforce.com, because while it takes all kinds of investors to make a market, I just can't imagine there's a large contingency of people who are betting against CRM.
Flippen: The last time I was on MarketFoolery, we talked about Apple reaching $2 trillion in market cap. And while Salesforce is a big company, I don't think this pop is due to short-sellers trying to cover their shorts, this is just the fact that [laughs] we need to regauge what we consider to be large companies, playing in even larger opportunities. So, I don't expect that Apple will be the only company that [laughs] we see in our lifetime worth $2 trillion. I think that Salesforce is a well-executing company that is playing an industry that continues to grow. This pandemic has proven how vitally important just infrastructure is for companies that are working remotely. And even if companies don't work remotely in the future, these are still platforms that are vital to managing customer relationships, to having data visualization tools, these are industries that do not get smaller with time, so I do not expect Salesforce will also get smaller [laughs] with time, I expect Salesforce to continue to grow from here.
Now, is the [laughs] huge pop we saw today, the 25%-plus pop justified? We could debate it to and from, but five years from now, do I think Salesforce is bigger and more relevant? Of course.
Hill: Well, and if you go back four or five years, I think it was about this time, it was either 2015 or 2016, one of the stories in the news was the potential that Salesforce.com might be up for sale. [laughs] That maybe Microsoft was kicking the tires, that sort of thing. And I remember, at the time, we got questions from our members, from our listeners, saying, hey, I own shares, it popped on these rumors, should I sell it? [laughs] And you know, what a difference four or five years can make.
Flippen: If I could leave listeners off with one number here, it's going to be 63%. Sixty-three percent is the increase that we saw in seven-digit deals year over year for Salesforce. This company is [laughs] past the point of acquisition. The value of the contracts and the customers that they're pulling in is truly outstanding. And if a company of their size, of their relevance, can still pull in such large increases in huge-value deals in an environment like the one that we're seeing today, the future is really unlimited.
Hill: Let's move on to retail. Shares of Dick's Sporting Goods (NYSE:DKS) hitting a three-year high today. Second-quarter profits more than double what was expected, e-commerce sales up nearly 200%. And this continues the trend that we've seen this earnings season of some of these bricks-and-mortar retailers putting up some eye-popping e-commerce growth.
Flippen: If you had told me last year that we'd be covering Salesforce and Dick's Sporting Goods as two winners on the same day, operating in the same environment, I would have said, you are crazy. But so be it, the environment that we're seeing today with COVID, has supported both of these businesses. Dick's Sporting Goods has really put a lot of emphasis on expanding their digital sales. They were up 194% in the last quarter, and that includes things like contactless pickup. So, the management team at Dick's was really proactive in trying to predict where the sales were going to go in the quarter, and being prepared to meet their customers halfway. What I thought was really interesting is just the fact that they were so tepid with their guidance moving forward. They had great hiking, great camping, great kayaking sales in the previous quarter, all the people looking to expand their athleisure wear or trying to get outside to break themselves from the monotony of being in the house 24/7.
But ultimately, Dick's Sporting Goods, you look at it right in the name, right, it's sporting goods, they depend a lot on the back-to-school sales, the team sports. And when you look at where this industry is going over the next couple of quarters, there's a reason why management was a little bit concerned, and they said, we had great comp growth this past quarter, but we don't really know what to expect for the remainder of the year.
Hill: Yeah, and you think back to the latest results we got from Target and the guidance we got out of Target specific to that back-to-school category. And I think, whether it's Target or Dick's Sporting Goods, there's just so much legitimate uncertainty in terms of what is going to happen with back to school and therefore what is going to happen with school sports that, you know, I don't think they're sandbagging. And I'm not saying you were suggesting that, but I don't think Dick's is sandbagging when [laughs] they look at what has traditionally been something they can count on in terms of back-to-school retail sales, and they sort of throw their hands up and say, you know what, we just don't know.
Flippen: It's funny you mention the sandbagging, because in response to an analyst's question that was really poking and prodding at what their comp sales would look like for this next quarter, we got a little bit of a tidbit into what management does expect. Now, they didn't issue guidance per se, but they did offer an opinion in response to an analyst question. An analyst essentially came out and said, so it's safe to assume you had double-digit, around 30%, comp growth in June and July, but that's dramatically going to drop down in August, say, somewhere around 11%. And management said, yeah, that's about right. And then they said that we're going to see this drop, because as I alluded to, delayed sports.
And one thing that concerned me a little bit, in response to management, was that they said, we don't think sports are going to be canceled, we still have inventory built up for team sports in the fall. So, they are very clearly planning on selling through some team sport inventory even in the current environment. I'm not sure if I'm [laughs] as bullish as management is about the idea of team sports coming back. I can understand some school sales, I can understand some schools reopening as the economy continues to reopen, but team sports feels like an unnecessary risk. And a lot of parents, a lot of kids, and a lot of schools may not want to take that risk.
Hill: You dig into the numbers a little bit, one of the things that stuck out to me with Dick's Sporting Goods was e-commerce. And we talked about the amazing growth. As a percentage of overall revenue, a year ago e-commerce was about 12%, now it's about 30%. And I think for all of these traditional bricks-and-mortar retailers that have seen this explosive growth in e-commerce, it's going to be interesting to see how much of that they can continue to capture, and the extent to which they can move the e-commerce as a percent of overall revenue, move that higher and keep it higher over time.
Flippen: It's funny, because a lot of these businesses are focused on how they retain customers that they got as a result of the pandemic. And I think Dick's is doing a great job. They are very open about the fact that they expect curbside will be here to stay, that their consumers, even as stores have reopened, their consumers are still increasingly moving toward pickup services as a part of their regular purchasing.
Now, the question is, how do you keep engagement with those customers up? I understand, once you have their credit cards into their systems, you're becoming accustomed to picking up as opposed to physically going in the stores, but I think the question becomes, how do you make that person make a purchase at Dick's that they wouldn't otherwise purchase? And that customer retention is probably going to be really key for Dick's success into the future. I'm not sure they have a solid plan laid out, but I think it is something that management is consciously trying to tackle.
Hill: Urban Outfitters (NASDAQ:URBN) reported a profit in the second quarter, which is surprising, because Wall Street analysts were expecting a loss. This is actually one of those businesses [laughs] that I think the stock being up 22%, the last time [laughs] I checked, right before we started here, it wouldn't surprise me if at least part of what we're seeing with the pop in Urban Outfitters stock is some short-sellers covering, but hats off to Urban Outfitters, they surprised in the best possible way.
Flippen: I am going to venture to say that this earnings report from Urban Outfitters is probably the most shocking earnings report that I've seen since the pandemic has begun. This is truly not something that I expected. I think Urban Outfitters with their retail presence, while they have a great brand, it is a retail presence that is still heavily dependent on foot traffic, but they proved that their investments into e-commerce have started to pan out. They had a record low markdown rate in the quarter. This is to say they sold through; they have comp growth of 11% without needing to overly discount the inventory that they had in stores. And this is dramatically different from what we saw out of companies like Ross, for instance, which had to dramatically markdown their inventory [laughs] to avoid things like inventory writedowns. So, it's really impressive.
While the store comp growth, that's the physical in-store sales, was down 8%, because stores were closed around two-thirds of the time, ultimately, they had a triple-digit gain in new customers to the brand, which is really all digital. So, the story here continues the same way it was before, digital sales truly making up for a lack of in-store foot sales.
Hill: This is absolutely one of those retailers that I think of, this is something you mentioned with Dick's, the whole idea of essentially the impulse purchase, which is so much more likely to happen when you're in a store. To me, Urban Outfitters [laughs] is one of those stores. I know I'm not the target demo, but the times that I've been in an Urban Outfitters, just walking around killing time while my kids are thinking about maybe buying something, that's where the impulse purchase comes in and that's where the average ticket price goes up; that's what you want if you're Urban Outfitters.
The fact that they were able to report this kind of profit is genuinely surprising. We'll see if they can keep this up. It seems like every time we talk about Urban Outfitters, I'm reminded of the fact that they have other stores. They've got the other store concepts like Anthropologie and Free People, that sort of thing. You know, we've seen this with other companies like Tapestry, where Tapestry has got several brands under the umbrella, and usually one brand is doing better than others during a given quarter. I think of Urban Outfitters as just being overwhelmingly the dominant brand there. Like, are Free People and Anthropologie, are they moving the needle in a big way?
Flippen: I'll tell you what, they weren't really until this most recent quarter. Free People, in particular, what they call the Free People Movement brand -- that's Free People's athletic line. That saw a 175% [laughs] increase in their customer base in the last quarter. Lots of people at home looking for athleisure to sit around and work in. So, I think there is movement in terms of their ancillary brands, Free People being one of them.
I think Anthropologie, for me, is a bigger concern. Anthropologie has been a little bit more of a destination experience. That is to say, if you're going to a graduation, a wedding, a party, you'd go there to look for something a little bit nicer. And they have a little bit of a home dependence as well. And while that should have been strong this past quarter, not the graduation parts, [laughs] obviously, but the home decor aspects of Anthropologie, that wasn't really moving the needle a lot. So, they are trying to move Anthropologie further into home, trying to move it further into casualwear. And I think that is a smart move, but the true story here, for their ancillary brands, are Free People.
And before we sign off here, I do want to have a quote here from management during the earnings call, which I thought was [laughs] a crazy thing to say, but they said it, it was part of the planned remarks, so they clearly meant to say this. "It remains unclear if store traffic will ever rebound to pre-COVID levels." And I think it's safe to say that applies to Urban Outfitters, Free People, and Anthropologie. I think that Urban Outfitters management, for all of their different brands, are very much planning on investing into the e-commerce experience and to the brand management experience as it applies to omnichannel sales. That, to me, is just such an interesting comment coming from a retailer that has been so dependent upon physical stores for so long now.
Hill: That is surprising. I'm thinking back to something you said about Free People and the athleisure wear. And you take that, combined with some of the comments we got out of Dick's Sporting Goods, in terms of the larger trend for, as gyms are closed more people -- or if not closed, the gyms are operating under significantly reduced capacity -- more and more people trying to figure out ways that they can exercise on their own, be active on their own. It makes me wonder what kind of numbers we're going to see out of [laughs] lululemon athletica the next time they report, and for that matter, Peloton.
Flippen: Those are both really important points to make here, which is to say, there has been a general trend, not just toward athleisure, which is definitely what Lululemon specializes in, but toward working out at home. And I have to ask myself, if these trends truly persist after the pandemic, but it does set up companies, whether it be Free People athletics, right, or if it's just Peloton, if it's Lululemon and their recent acquisition of Mirror, a Peloton-esque competitor, if you will, all of these things are investments made with the assumption that working out from home, and athleisure, for what it's worth, are trends that continue to persist for many years into the future.
I don't think I'm ready to 100% buy into that. I think there's an experience that comes with not being in our houses [laughs] that is maybe being discounted right now. But do I think that Peloton, Mirror, Lululemon, and at this point, I'll say it, Urban Outfitters, are going to be selling products that are more relevant to our lifestyle next year, the same way they are this year? You know, that's a bet I'm willing to take.
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.