In this episode of Industry Focus: Consumer Goods, Emily Flippen is joined by Motley Fool contributor Dan Kline to discuss how retailers are evolving to make themselves a better fit in today's world. They look at some game-changer announcements and talk about how retailers are developing customer loyalty and trying out new stuff to stay relevant. They also discuss the advantages and disadvantages of their approaches, a possible turnaround story, and much more.

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This video was recorded on September 1, 2020.

Emily Flippen: Welcome to Industry Focus. It is Tuesday, September 1st, and yes, you did hear that correctly, it is somehow already September. I'm your host Emily Flippen, and today I am joined again by Motley Fool contractor, Dan Kline. We're going to discuss some evolving retailers possibly fit for today's age. Dan, thank you for joining.

Dan Kline: Emily, Merry Christmas!

Flippen: [laughs] It'll be here before we know it.

Kline: Would it shock you if tomorrow is Christmas? It wouldn't change anything for me. Florida makes it weird anyway, but this whole pandemic has made it absolutely worse.

Flippen: I'm still holding out for Thanksgiving myself; which is my favorite holiday. Although, with the pandemic, I'm not sure what Thanksgiving is going to look like for a lot of families.

Kline: Oh, God! Zoom Thanksgiving sounds awful.

Flippen: Brrr! If Thanksgiving wasn't already challenging enough. [laughs] Well, today we're going to be talking about some companies that have nothing to do with Thanksgiving or holidays, unfortunately; maybe we'll get around to that at some point in the future. We're going to be having a conversation about four retailers in particular that have come out with some interesting news, whether it be earnings or press releases over the past week. It's going to be Nike, GameStop, Ulta and Dick's Sporting Goods, just to give you a little bit of a preview. But, Dan, I know that you feel like the biggest news over the past week has actually come out from Nike.

Kline: Yeah, I actually feel like it's a hint of a game changer, so basically what Nike did is they got rid of wholesale accounts; and that's not something you usually see someone do. So, basically, they said to nine, let's call them second-tier wholesale accounts, you know, this wasn't major retailers, this is a company like EbLens, which is a struggling discount retailer. They said, hey, we're not going to sell to you anymore, because we want to focus more on premium partnerships and direct-to-consumer.

Here's the problem. In retail, it can be out-of-sight, out-of-mind. And I understand that Nike has a big brand, that Nike has people like my son who download their app and is following sneaker releases, but Nike also sells to plenty of people who are just in a store, they need sneakers, and they're somewhat brand agnostic. That's how people end up owning Skechers, they went into a store not knowing what sneaker to buy, they tried some on and they found the right price. I doubt too many people seek out some of those brands. So, this is a real risk for Nike in my opinion.

Flippen: So, this is really an evolving structure for them, because they came out last year, they left Amazon, that to me seemed really big. Amazon being the giant retailer that it is, especially in e-commerce, with the intention of doing it themselves. So, the fact that they're limiting their partnerships, let's say, taking out some of the lower-tier retailers, seems to me to just be an expansion upon a strategy that they have already taken. But what left me scratching my head here is the idea that they kept some relationships with retailers that I really just don't understand why they did that. They said they're keeping a small number of "strategic partners," but these partners include, like, Foot Locker; Dick's, which we'll talk about more; and Kohl's. Are these people going to be cut next or [laughs] are they truly strategic partners?

Kline: So, I'd be very worried if I was Kohl's because they cut Dillard's, which is a very similar profile. But here's the problem, Kohl's generally doesn't sell top-tier Nikes, they sell, you know, your $80 Nike that's now $60. They sell the failed $200 Nike for $120, but it's one that really didn't do well and Nike can't just get rid of them through their own discount stores or outlets. So, this is really a case of, if I was Foot Locker, I'd be planning on what's next. And here's the problem, Foot Locker without Nike, is that still a store? I'm not so sure it is.

Flippen: I can't imagine how reliant upon some of these smaller retailers, and I realize that Foot Locker is larger, but there are a handful of smaller places similar to Foot Locker that heavily depends upon A. foot traffic, but B., brands like Nike staying in their stores. So, what happens to Nike's retail footprint after this? Do they move entirely online, do they keep building out their own branded stores? As you alluded to at the beginning, I would have to imagine a fair number of their purchases are people just walking into a store and buying Nike.

Kline: So, I'm not sure I agree with this approach by Nike, because a lot of sneakers sell to kids, kids need to try sneakers on. Unless Nike's goal is to force Foot Locker out and then go into every mall in the country -- if you're a parent and you're shopping in Kohl's and Reebok is there, New Balance is there and Nike isn't, you're just going to buy your six-year-old whatever is there. Like, my kid, I make him try on sneakers, even if he's going to buy them online, I make him try on that same model, maybe they don't have the color he wants, because his feet change sizes. Shoes: I'm an adult, on some things, I'm a 10; on some things, I'm an 11. Nike's run narrow, so I tend to have to buy a full size bigger. I'm not entirely sure where Nike is going with -- even if this isn't alienating Dick's and Foot Locker, and maybe they very quietly reached out and signed some sort of extended agreement with them, but if I'm Dicks, I'm not putting any effort into displaying Nike's unless I get that assurance.

Like, this to me is, I get why you want your top-tier releases to be on your own platform, because that has a special audience, but, Emily, do you put a lot of thought into what sneaker brand you're wearing as a an adult who I'm assuming is not a sneakerhead?

Flippen: I am not a sneakerhead, unfortunately. I give it absolutely no thought, personally, but I am part of the group of people that prefers to try shoes on. And I don't normally care that much, if I purchase something, I'm fine buying clothes online, but shoes, to me, are a relatively rare purchase. And if I'm buying something like running shoes or everyday shoes, I want to ensure that they're comfortable and I want to make that purchase once. I value the try-on experience, although I recognize that's not the case for everybody. To me, this says though, that they're going to lose a lot of, maybe it's short-term, maybe it's long-term, but they're going to lose a lot of sales from people who do like to try-on, unless they build out more of a strong retail presence, but even then I'm not sure if I'm [laughs] specifically going to a Nike store to buy shoes.

Kline: Who doesn't like to try-on shoes? It's a risk to buy shoes without trying them on. My wife has been buying sandals and sending them back once-a-week during the pandemic, because she found ones that fit, but she doesn't like how they look, so she's trying to find other ones. The last time I bought running shoes, I went to Fit2Run at the mall. You know what they don't sell at Fit2Run, which is a small chain -- I don't know how many of them there are -- they don't sell Nike. So, I went in, they taped me running, which is an amusing thing to tape, and then they show you what you're doing wrong. I'm not a pretty runner, apparently. And they show you what you're doing wrong, they look at your shoes, they see how they're worn out and they bring you a bunch of brands. And they bought me brands I'd never heard of. My middle name is Brooks, I had no idea there were Brooks sneakers. And I tried on a bunch of different ones. And of course, you're going to try it on. You know, I'm a 46-year-old man who shouldn't be running, so having the exact right shoe is important. And I really do think Nike will build out its retail presence, but if I'm Nike, I'm not so sure I want to be in malls. I don't really know that answer, when I go into A-tier malls, yes. But is some of their clientele not shopping in A-tier malls? Yeah, absolutely. There are Foot Locker's in every mall pretty much, or Champs or Shoe Palace, whatever place you want to say is selling Nike, I think this is a really risky strategy.

Now, again, they might be bookending this by giving assurances to Foot Locker, and Kohl's, and Dick's and making deals so they know they're going to have the brand. But they have a major physical presence in Foot Locker, it's like half the sneaker display, maybe a little less than that, because you have Adidas and Reebok as well, but those are pretty much the brands. So, I don't know, this is a peculiar move to me.

Flippen: We could do a whole show just talking about this move by Nike within itself, I will expect that in future quarters, maybe in future years, we'll get more information, we'll follow-up this conversation. But I want to make sure that's not too pessimistic, because while we might be naturally a little bit skeptical, there's a whole segment of professionals, especially analysts, who are really excited by this move, because it gives Nike a lot more control over their channels, but more importantly, it gives them control over their brand.

And as we're taping here, we're taping live, I'm seeing a comment from one of our viewers who mentions Nike Apparel, for instance. That is a great example of where Nike has built out its own brand. And by having tons of distribution partners there's a really strong argument that Nike is just devaluing its own brands. And by bringing more of that direct-to-consumer in-house, maybe there's an opportunity for them to be a lot more focused not on things like shoes, but on expanding Nike as a lifestyle brand.

So, off of that question, I kind of want to pass it off to you, what do you think it takes for a retailer, whether it's apparel or footwear, whatever it may be, what do you think it takes for a consumer goods retailer to be successful in a direct-to-consumer approach?

Kline: Yeah, it's obviously connection to the brand. And Nike has that with sneakerheads. Look, my son got up at 10:00 in the morning; well, not got up, he was awake anyway. But got on his phone at 10:00 in the morning and had everything ready to go, and people use bots and there's a whole resell market. And I question that with Nike, if there is a resell market, and there are people who are ready to buy these shoes and put them on eBay, then either sell more of the shoe, because there's more demand than there is supply, or charge whatever the resale price would be. Like, it feels to me like Nike isn't really taking lessons from the concert industry. In the concert industry what they're doing with variable pricing is if there's more demand, they charge more per ticket, it doesn't always lead to a sellout, it leads to higher gross. Nike should be focused on the highest gross, but here's the problem, only one segment of their business is the core customer, the brand loyal core customers. I wear a lot of Nike t-shirts because there's a Nike outlet near me and I know what size fits and it's really easy to buy, and when they're on sale, you can pick up two for $25, it's a well-wearing t-shirt. If they didn't have a physical presence near me, would I care if I was wearing a Nike t-shirt or not? No, I'm not going on their website to order Nike t-shirts. Are they going to say sacrifice the casual customer, the person who's just wearing sneakers, wearing t-shirts, doesn't care?

And I really feel like Nike is two brands. Any person who's really into Nikes, knows that my $80 Nikes aren't the same as their $240 Nikes. They don't even think of them that way, so there's premium Nike and there's regular Nike. And they're not devaluing regular Nike by having it in Kohl's or even having it -- they basically did what Under Armour should have done. There is a clear differentiator in their brand, and even in their outlet store. If you get some ugly color or weird size of a really expensive sneaker that didn't sell well, people will hide those in the store so they could go get the money to pay for them. And that's what something that ostensibly didn't work well enough that it ends up in an outlet store. So, I don't know.

We don't know the whole strategy here, but it does feel to me like, I'm a huge fan of building your relationship with your customers and selling direct, but it limits your customer base if you leave stores, and it also makes marketing for new customers really difficult.

Flippen: It's the old saying, if you're going to take the shot, don't miss, right? So, this is Nike doing their best to take the shot, and hopefully they don't miss. But speaking of a company that may have missed its shot many, many a time, and at the risk of having this be the story that causes me to have a second fit in two days, let's talk about GameStop. And GameStop is basically a trigger word for me at this point, Dan, so I'm going to let you lead on this story.

Kline: So, GameStop is in a really interesting position. This is ostensibly a failing business; except they've managed their failure really well. So, this is a company that said, we're not going to take in as much money, so let's spend less money. And essentially, let's buy ourselves time to figure out what we might do. Is our business going to be selling Funko pops, is it going to be bringing in events, is it going to be having gaming in the store? They don't know those answers, they do have some test stores where they're trying stuff. And this company is going to get a couple of more chances.

The next generation console is going to be a sales driver, because right now there's some physical -- besides the people who want to get the console itself -- there is some physical advantage to buying a game on CD. One, it feels like you own it more than when you buy it digitally. But two, it's less time to download. There is still usually a lot of downloading to play a new game, but I have really good internet at home, and if my son asked to buy a game, it might take all afternoon to download that game, so there's a reason to go to the store and physically buy the game. That's going to be true for the next, let's call it, two years, maybe three years, depending on how much pressure there is because of the pandemic to improve internet speeds; which in some markets, there has been pressure.

So, GameStop has to do a reset, and they're not losing money. They're also in a position where they have -- they know they have to make their store base smaller, and there's two things working in their favor. When C-list malls close, they can't charge you rent for a store they're no longer renting you, so that gets them out of some unfavorable leases. And in most cases, they have relatively short-term leases, one to three years. So, they have the ability to say, you know what, we're in the top-tier mall, or we're in the best strip center, we're not going to keep that second store that's two miles down the road that probably never made sense.

So, this is a very strange business, because it isn't J.C. Penney, this isn't a company that's losing $400 million a quarter and has no runway left. They actually have runway, the question is, what exactly are they going to sell? Like, what is their business? Should they bring in books, like, I don't know what the company looks like. And I really would look to Books-A-Million as an example of what they could be, and maybe they become a little bit of everything with games as, you know, the pop culture peg, but not necessarily the driver. I would not be envious of any of the leadership of this company of being in a position to decide what's next, but at least they have time and money to try.

Flippen: So, we're going to open Pandora's box here with me, because I have strong opinions about GameStop. But the reason why we're having this conversation today is because yesterday we found out that the Founder of Chewy, which is the largest e-commerce pet store here in the United States, who left the company before it IPO'd is now running his own fund, his own venture fund. His name is Ryan Cohen. That fund took a 9% stake in GameStop on Monday. So, there is a new [laughs] presumably active investor coming in investing into GameStop and it's causing a lot of confusion, I think, from the market. Because there's two ways to read this story. One is, this is a clear business that, to your point, Dan, generates cash, has short-term leases, is probably overly sold short, that this fund could make a quick turnaround, right, a quick pop, earn [laughs] a few million bucks and then be on their way. But there's the other side of this that says, look, this Founder of Chewy, which has become a huge success story against a larger e-commerce retailer like Amazon, the Founder of this company who has been waiting to invest, waiting to do something post-Chewy, now buys an almost 10% stake in GameStop. To me, and this is just my opinion, that reads turnaround story. And not everybody [laughs] agrees with that or agrees that it's a good idea for Cohen and his fund to get involved in GameStop, but if there was somebody who is well-positioned to take his experience and apply it to a company like GameStop, it's probably Cohen.

And it's just such an interesting conundrum in my mind, because this is a company that, to your point, has been horribly mismanaged, I mean, [laughs] for decades. This trend, right, the trend toward digital downloads of games, that's not a surprise; that didn't surprise anyone. But GameStop just had a constant revolving door of managers who came in, got their payday, never attempted to change anything and then left. Is this the opportunity that GameStop was waiting for?

Kline: So, here's what I'm thinking. Ryan Cohen has an idea, because look, I have a background in retail, and if I was all of a sudden the CEO of GameStop, I would just make massive changes. You know what most malls don't have anymore? Toy stores. I would figure out how to pivot into some version of a game store that's also a toy store, that's a lot of fun to be, that's really interactive. I don't know what that would look like, but it'd be a massive pivot. I don't know what Ryan Cohen's idea is, but I think there must be one. You don't buy 10% of a company if you don't want to have a voice. That said, his brilliant idea was, hey, let's try Pets.com again. And it worked because the pandemic helped get them business, they were a finely executed company. If you used Chewy, it worked. Why did they get a whole bunch of new customers? Because Amazon was out of stuff during the pandemic. I couldn't get my kitty litter during the pandemic, and then amusingly ended up with 11 bags of it that were filling up my house, because my wife and I both scrambled to buy at other places. I don't know that Chewy was going to be a successful company had the pandemic not happened; they were losing money.

So, it's important to know that their growth was accelerated. And again, really well-executed, but it's not a brilliant idea, but GameStop might not need a brilliant idea. Maybe GameStop could be the new K B toy store in a day we don't have Toys"R"Us, and that might make sense. I don't know, but I'm curious to hear what he has to say. [laughs] And Emily is eager to talk; I could see her here.

Flippen: Why are you doing this to me, Dan? You know I'm a shareholder of Chewy, I'm a huge fan of Chewy. I am not going to derail this conversation any more than I already have, other than to let listeners know, I strongly disagree with the statement that Chewy would have not been a successful retailer [laughs] if it hadn't been for the pandemic, but it is a discussion probably made for another day. Hey, maybe that's a deeper dive that we tape on Industry Focus one day. I feel like I could see an argument that it's tech, but I think it's mostly consumer goods.

Kline: I'd be curious to see exactly where they were pre-pandemic and what their cash situation was, because it wasn't like they weren't growing. And I'll point out that for a lot of digital companies, this has been an accelerant. Chewy is one of the few that I believe, and I'll leave it at that, that they will keep those customers. You know, I've been ordering from Omaha Steaks, I'm not going to be doing that when it's easier to go to the grocery store. But that said, a conversation for another day, and perhaps next week, so.

Flippen: Perhaps next week. [laughs] So, now that we've already taken up maybe 20 minutes or so here, let's move on to the third story of today. And also, a company that I'm a shareholder in; that's Ulta Beauty. They came out with earnings last weekend. I can't say the numbers looked pretty, but they are definitely better than I was expecting.

Kline: Oh! The numbers were stellar. I believe you sent me just, like, the word "Wow!" or something like that. And you knew I was on air, so you didn't send me all the info. But look, this is a company that on-the-fly changed its business to a digital model. And their stores are reopened, but they can't do makeup testing, and they can't do a lot of the things that they would normally do. But they basically said, OK, it's a pandemic, people can't try stuff on, can we build a tool so people can? And I was very skeptical of that, you know, this does not feel to me like a tool that would work well, but apparently it does. And look, they made money. And if you can make money, their comp sales were down 26.7%, but if you can make money as, what I would call, a brick-and-mortar retail pureplay that happened to sell some online, because again, once you figure out what color lipstick you buy, there's no reason you couldn't order some online, but this was an in-person driven business. I am very impressed with management here.

And this basically says, when we get to some semblance of reality, when you can go back to having business as usual, how much better is their digital business going to be? And that's money that's going to be taken away from say, CVS or Target, meaning, oh, my God! I'm almost out of my makeup, I can't get to Ulta, do I just buy some when I'm in Target anyway, or do I replenish online because I already have an account, I set it up? This is a company that, you know, their digital acceleration, which I didn't expect to work all that well, you know, it was jump started by the pandemic. And there's no reason to think that won't keep customers more loyal.

And look, this might cost them some foot traffic, but who cares, they can adjust store counts, they can do other things with space, they can use those stores to fulfill digital orders. Because the main goal of their store should be getting you in, getting you a makeover and showing you what the right products are, and then setting you up so you can get them however you like, in-person or digital. And they've done that smashingly well.

Flippen: Yeah, you kind of nailed the thesis right there. Right now, the majority of their sales do come from people walking into their stores, but once people make that switch to purchasing online, not dissimilar to the way that a Chewy's [laughs] customer would purchase online, once they make that switch then it tends to be a relatively recurring purchase. Once you know what makeup works for you and that you use a certain amount of it on a daily, weekly, monthly basis, you can make a prediction about if and when you're going to need more. And that opportunity still is ahead of a company like Ulta Beauty.

What I thought was really interesting was that management actually had a fair number of interesting stats, let's say, in the most recent earnings call. They mentioned that around 21% of their guests right now are what they call omnichannel members; that doubled its penetration rate year-over-year. Omnichannel just means they're either purchasing online or doing store pickup. And they actually mentioned that these omnichannel customers are what they called "the most engaged and productive members of their community." They spend a lot more on average, they purchase a lot more on average; I think historically spending around somewhere, like, 3X that of an in-store guest. So, the question naturally is, are the people they are adopting during the pandemic to be purchasing online, are they also going to adopt the same purchasing trends as their previous omni-store customers? I don't really know the answer to that yet, but I definitely think it's an encouraging trend.

Kline: Yeah, I'm also not sure it matters if those customers prefer to go back to buying in-store when there are stores. Look, you might see Ulta Beauty shift some of its stores. They might find out that, yep, we had a store in a location that wasn't great, that people were traveling out of their way to get to, and maybe that store doesn't make sense and we can close it. There will probably be a handful of select closures. But that said, I do think there's some joy to shopping for these products, especially with the -- you know, they're focusing more on wellness and skincare and other things that we've all thought about a lot, because we're rubbing hand sanitizer on 6 billion times a day and drying out our hands. So, they're going to learn some lessons. And I don't think anybody knows exactly what the post-pandemic world looks like. And by that I mean, you know, there might be just some things where, like, maybe Emily doesn't like buying makeup in a store and it was a hassle, but she still wears a little makeup, so she just places her Ulta order or maybe you enjoy getting a makeover every now and then and learning new things. I don't think it matters, I think they've locked in loyalty for their customers, and that's really important.

Once you've signed up on somebody's website that removes a major barrier. I can't talk about this enough. You know, Amazon's biggest advantage is they have your credit card. Starbucks has a massive advantage in that they can email you and say, hey, Emily, you want two-for-one Frappuccinos? As in, man! it's been a bad couple of months, two-for-one Frappuccinos, I deserve that.

Ulta has all sorts of optionality now to communicate with customers and figure out what you want from a store. Maybe customers want different things from stores than they did pre-pandemic, but they've locked in the customer, and that's the important thing.

Flippen: And lastly, let's talk about Dick's Sporting Goods. I'm going to pass it off to you first, Dan, this is a company that reported earnings last week. And I think we have very different reads on if this quarter was a good quarter or not.

Kline: This was a great quarter. So, they delivered $2.71 billion in sales and $3.21 in earnings per share. This is a great quarter, but it's a yellow flag is not a red flag for investors. So, what are people doing this Summer that's different? They're camping more. You went camping. They're kayaking. They're doing things that, you know, stand up paddle boards, stuff that you can do that takes you away from other people, that are pretty expensive one-time purchases. Now, I'm not saying some people aren't going to fall in love with stand up paddle boarding and become regular stand up paddle boarders, and I don't discount the fact that Dick's is losing sales on, say, basketballs and baseball stuff and other things they normally sell. But they're selling some very expensive stuff that isn't going to be repeated.

Next Summer, we're all going to take normal vacations, and the people who like camping are going to go camping, and that might be a bigger group.

But again, with the exception that I likely the underlying Dick's business, this is a lot like Kroger. People are going to grocery stores because they need to go wherever they can to get supplies, and that's increased their sales. But what Dick's should be doing with this money and what they have done is continue to invest in their omnichannel, continue to try things, like the couple of full discount stores they've launched as a way to get rid of their own excess inventory, because you are not going to get this massive spending in camping and hiking and all these categories, people buying fishing rods because they can't figure out what to do. You know what's not that fun? Fishing. And I'm sure some people love it, and I'm teasing a little bit, but a lot of people are going to try these hobbies and go, yeah, next Summer you know where I'm going to go? Disney World, that's a lot of fun. I'm going to go back to the Bahamas or Puerto Rico or whatever wonderful place you can visit. So, I would be very wary as an investor of going, OK, the Dick's turnaround is complete. This is a company that was doing OK, that will likely be doing a little better post-pandemic. But these numbers, maybe this quarter and next quarter, they're outlier numbers.

Flippen: I couldn't agree more with everything you just said and I'll just quickly add that, when you look at a company like Dick's, traditionally speaking, back-to-school season, which we've talked a lot about, have been strong. Think about team sports, kids going back to school, going back to their sporting events; that's always been a big driver of growth for them. And what I thought was really interesting is that, despite guiding for maybe a more soft [laughs] team sports season this year than we had last year understandably, they were still building out inventory as if they were going to sell it through at the same rates. That to me is a little bit scary, and those are the purchases that are more routine, somebody buying a new pair of cleats on a somewhat regular basis, buying new balls, I don't know; I clearly don't play enough sports, [laughs] the terminology is lost on me.

Kline: Yeah, I'll give you an example, I played hockey growing up. And as you get bigger, every year you need new skates, Dick's doesn't sell skates. But every new year you're going to need new hockey pads; you need rolls of black tape, you know, to tape stuff on; you need two or three sticks a season. And look, a lot of youth sports aren't playing, it seems odd to me. Now that said, there's not a ton of innovation in, say, like baseball shirts or cleats. So, there's not that much risk of having something sit on the shelf and that it's going to go bad, you know, in a year or two. I don't know what the life cycle of a basketball sitting on a shelf is, but if you don't have it in the direct sunlight, it's probably multiple years. So, there's not a huge amount of inventory risk, but I do think they're being overly optimistic.

But let's talk about, sort of the ongoing advantage; and it's come up for all of these companies. 70% of their sales are from loyalty reward members. There has been a massive increase -- sorry I'm losing the number here -- a massive increase on digital sales; a 194%. It's just what we talked about with Ulta. They now have a relationship with that customer and they could say, hey, remember us? That takes away a piece of the Amazon edge. Amazon doesn't do particularly well with sporting gear. You can't touch it. You don't know what it is. They sell a real mix of quality, whereas Dick's tends to sell a relatively high-quality product, you're not getting a cheapo basketball at Dick's, you can go to Target for that.

So, I do think whatever the bounce is post-pandemic for Dick's, it's not going to be these numbers, but they've increased their customer base. And look, I'll tell you as a customer, Dick's is a fun store to walk around if you like sports. You know, there's always stuff to look at. And frankly, even if you're not going to buy a kayak or a stand up paddle board, it's still a good place to walk around and dream. So, I actually think they'll be stronger than they were before this; and they were in OK shape heading into the pandemic.

Flippen: I agree that I think Dick's will be around post-pandemic. When I think about the retailers that are niche enough to exist in a physical and digital world in the future, I think Dick's has somewhat of a special market in that sense. But here's the reason why I'm an Ulta shareholder, but I'm not a Dick's shareholder. Ultimately what's being sold at Dick's are not the routine purchases that you'll typically make at Ulta. And while there are some, we talked about the different sporting equipment that comes on a somewhat seasonal basis, ultimately the big kayaks, right, the boats, whatever it may be, the oars that you're buying at Dick's this quarter, it's unlikely that you're going to replenish those on any sort of recurring basis.

Now, that does not mean that Dick's is a bad business by any means, it just means to me that I, as an investor, have a little less insight into what their sales look like on a somewhat cyclical basis in comparison to a company like Ulta that I know, I understand how people use skincare and makeup, right, that's a routine purchase. So, in my opinion, these are both companies that are doing well to exist in a physical location; they're controlling their niche in a sense. But at the same time, Ulta, to me, is just still better positioned, just from the products that they sell.

Kline: And Ulta also has, like, you're not going to, if you can get to an Ulta or go online, you're probably not going to stop whatever makeup you're using and buy something similar, whereas as a parent, if I'm at the mall and my son needs new running sneakers and he's not super-partial to something only sold at Dick's, well, he might buy the same sneaker at Nike, at Foot Locker, and it might cost 5% more, but I'm already at the mall. So, they run the risk of just, sort of, sales opportunity. And having more digital contact with customers will help.

They are also heavily into apparel. And apparel is very risky in terms of trends and what people like and what they're willing to spend. I worry about how much Target is competing on the low-end with some of the Under Armour-style shirts that they sell that might lead you to not buy more expensive stuff at Dick's. I like the Dick's business, but you're right, it has a lot more risk than Ulta does.

Flippen: I did this last weekend. I sprung it on you then, and I'm going to spring it on you again, mostly because Mac Greer Slack-messaged me afterwards and thanked me for the shout-out, but I want to give you Mac Greer's desert island question. If you had to invest in one of these companies, if you're stuck on a desert island, had to buy one, which one are you buying: Nike, GameStop, Ulta or Dick's?

Kline: So, Mac got mad at me for teasing about the constructs, so I won't mock Mac, but mad. That said, I'm going to buy Ulta. I actually think it's a business that if they can do well in a pandemic where nobody cares that much what they look like. I think right now we're putting less effort into appearance than maybe we normally would. Not us, of course, because [laughs] we're broadcasting live to tons of people.

Flippen: I'm not wearing makeup right now. [laughs]

Kline: You know, I've had to blow-dry my hair more times than I ever have, because normally I'm not taking a shower and then immediately going on camera. But if they can survive this, how strong is this company going to be going forward? Actually, I like Nike; I would own Dick's, I don't, but I actually think they're a pretty strong retail story; I wouldn't touch GameStop. But that said, the clear strength here is Ulta Beauty.

Flippen: And maybe I should have thrown another company in there. Let's pretend I threw Chewy in there, is it Ulta or is it Chewy?

Kline: Oh, it's Ulta. And that said, I do like Chewy. And I think you would probably look at the Chewy growth and say, OK, they would get to where they are now, you know, three years from now, but the pandemic has been great for them, because when Amazon can't fulfill orders, and you have to look someplace else, you're not switching back. And I think [laughs] that's very important for their business.

Same with Ulta, once they have you captured, you're not switching back to somebody else's makeup, they have a good experience, they have a strong brand, they've managed to be inexpensive and upscale and that's really impressive.

Flippen: Well, we should definitely circle back around, to tape an episode sometime, maybe after Chewy reports earnings next. I think that will be an interesting conversation. But until then, Dan, as always, thank you so much for joining.

Kline: Thank you for having me.

Flippen: Listeners, that does it for this episode of Industry Focus. As always, you can always shoot us an email at IndustryFocus@Fool.com, if you just have some feedback for us or want to say, "Hi!"

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

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.