In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and quarterly reports from Wall Street. They discuss and compare the performance of various digital platforms vis-à-vis Slack (WORK). They go through the quarterly reports of a major apparel company, a U.S. snack and grocery chain hitting an all-time high, and much more.
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This video was recorded on September 9, 2020.
Chris Hill: It's Wednesday, September 9th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you, my friend.
Jason Moser: Yes, sir, good to see you too; how's everything?
Hill: Going all right. We've got more earnings, which always makes me happy that we have earnings to talk about. We've got a couple of different versions of retail. We're going to start, though, with Slack. Shares of Slack are down 15% at the moment, despite the fact that second-quarter revenue came in higher than expected. I want to get to a comparison that is happening in the [laughs] financial media with Slack. I want to get to that in a minute. But first, what did you think of Slack's results, their guidance? And when you look at the 15% drop, do you think, yeah, I can see that?
Moser: [laughs] Yeah. Well, I'll be interested to hear this comparison, because I don't think I've seen the -- and this reminds me of something too -- I had a little comparison of my own, so I'll be interested to see if they match up here. But to me, you know, watching Slack as a publicly traded company, to me, it's starting to feel a little bit like a Twitter story unfolding here. One where you felt like or feel like maybe there's a future that could be so much brighter than it is, and it's ultimately just kind of resulting in mediocrity. And I mean, listen, Slack has been a publicly traded company for a very short period of time, I get that, maybe I'm wrong here, but I will say, as a user of Slack, I mean I'm not all that big of a fan, it's OK I guess, but they have some work to do on the user experience side.
And from a business perspective, I do understand the market's concerns there, it wasn't a bad quarter, it just wasn't one that really wowed you. And certainly, it prompts the question of, what kind of role does it play in our future work lives? I mean, you look at some of the numbers, revenue is slowing down. In a market where there are a lot of these businesses that are, sort of, dictating this new paradigm for us and their revenue is accelerating, whether that's DocuSign or Teladoc or what have you, Zoom, another good example. Slack's revenue is actually, the growth is actually slowing down a little bit. Now, they did see an acceleration in paid customers, and that's good, that's what matters, but net dollar retention rate was down to 125% from 136% a year ago and management did note that that was due to COVID concerns, customers downsizing, hiring freezes and slowing down in hiring. So, I mean, you can see how it's being impacted by the COVID-19 economy whereas other businesses like your Zooms of the world are flourishing, Slack maybe not so much. So, you just start to wonder exactly how important it is in this new workforce.
Hill: So, I will just preface this by saying, I have no dog in this fight, I don't own shares of Slack, I'm not shorting Slack. I do wonder though, about the comparison to Zoom. And I've been seeing this this morning in the financial media, and you know not a lot of people, but some people saying, well, look at Zoom's growth, Slack isn't doing that. And that confuses me a little bit, because I look at them and I see, I understand why you might go to that, but those are two different businesses. And I think in terms of market opportunity, they're pretty different. Zoom has found a consumer audience that it might never have found [laughs] were it not for the pandemic. I don't see Slack, or for that matter, Microsoft Teams having the same exposure to consumers. You know, it's easy for me to imagine that at some point a year from now, two years from now, there are people who maintain their Zoom accounts and maybe they even, at some point in the future decide, yeah, for some added bells and whistles, I'll pay some nominal fee per year or per month to have this, I don't see that with Slack. So, I'm not saying the 15% drop today is irrational and unfair, but the Zoom comparison strikes me as slightly unfair.
Moser: I would agree with that to the extent that I think Zoom is a far more important business. I think Zoom has greater implications in how we do things going forward, whether it's work or personal or school. You see a lot of different avenues that they can pursue. And a lot of that, I think, has to do with pursuing video first as opposed to Slack really pursuing, you know, channel communication first. That's just the difference in the businesses themselves. So, yeah, from that perspective, I do think Zoom is a more compelling business just because of the nature of what it does. And I don't think those comparisons are necessarily -- I don't think it's an apples-to-apples thing, I think it's kind of a lazy comparison, to be honest with you, because they are fairly different.
And when you look at the actual numbers that are being lobbed up here. Slack is guiding for a 32% revenue growth for the third quarter, 38% at the midpoint for the year. I mean, you compare that to what Zoom has been doing and obviously they're on two different planets. And I think that comparison probably is what takes a little bit of the wind out of the sales for Slack in the market, at least in the near term. So, I think the key for them really is, it's going to be, they need to figure out how to become something more. It's still very much the same Slack that we've been using at work for the last 3+ years, right? And if anything, it's gotten more cluttered; it's difficult to find things. They need to work on that user experience to some degree. Because we talked about [laughs] the whole Microsoft Teams and Slack aren't competitors. I mean, OK, and yeah, the sun is not hot, whatever. I mean, if that's the game we're playing. But clearly, Microsoft Teams and Slack are competitors. Microsoft Teams and Zoom are competitors to an extent as well.
And so, the thing about Microsoft Teams is it combines all of that, right? You've got the chat, you've got the video, and it integrates all with the Microsoft operating system that so many people are working with around the world. And so, that's going to be something they have to overcome. And so, yeah, I think that while those comparisons aren't really an apples-to-apples thing, I think it also exploits the challenges that Slack faces, because right now they still don't seem to be innovating or evolving to become something more, whereas you can look at those other businesses and think, you know what, I can see all of these different avenues where they could go.
And Slack, I'm not necessarily seeing those same avenues. They're trying to work with that Slack Connect product and maybe there's some potential there as it connects businesses with other outside entities, but if that's going to be effective, they really need to do more work on the interface side to make it as useful as possible.
Hill: Here's what lululemon athletica (LULU 0.41%) did in the second quarter; profits and revenue came in higher than expected, digital sales were up 155%. I guess that wasn't good enough for Wall Street, the share is down 9%, 10%. This seems a little unreasonable to me, this seemed like just such a rock-solid quarter for Lululemon.
Moser: It was a good quarter; there's no doubt about it. And really, hats off to the team that has been guiding this company forward over the past several years, because Lululemon's, that's a $45 billion company now, man! When you look at where they were just a few years back, that's a tremendous turnaround. And so, you look at something like Under Armour and you look at Lululemon. We were comparing those all along the way here, two very mercurial leaders. One transition seems to have worked out very well, the other one obviously has not. And so, maybe there are some lessons for Under Armour to take there.
So, I think the selling, the market is going to do what the market is going to do, but Lululemon is performing very well, and the stock is being given a nice multiple today, even with the selling today. I mean, to your point [laughs] there, the 157% direct-to-consumer net revenue, that growth is just astounding. I mean, it makes sense, but it's still astounding. And it really does show that they were prepared, to a degree at least, to be able to deal with a very quickly changing retail space.
They did take a pretty big hit on the cost side, operating margin fell more than five percentage points, and there are a lot of costs, sort of, figuring out how to adjust the business a little bit. But all in all it is a business that continues to perform well, they have a strong brand, they've identified their customer base, be it, perhaps, a niche one to a degree but they've even done a good job of extending beyond that core audience into casual attire and crossing that stereotypical clothing for women and offering more options for men as well. So, they've done a very good job, I think, of growing the business and pursuing new avenues of growth.
And today's market reaction notwithstanding, a very good quarter, a business that's obviously doing a lot of things well, and I suspect that'll continue.
Hill: I like what CEO Calvin McDonald is doing in terms of the way he is [laughs] basically saying, we're cautiously optimistic as we are gearing up for the holidays, but, no, we are not going to give any sort of formal guidance. It's going to be really interesting to see, they made the acquisition of Mirror. So, if Lululemon's foray into essentially the equipment space, and it's going to be interesting to see what those numbers are like to the extent that they can sell that product, it's not going to be available in a lot of locations before the end of 2020, but I think that's one thing to watch.
And to your point about the stock, it's 20% lower than it was a week ago. I mean, this is one of those things -- I get what you're saying about the rich multiple, but it's at a 20% discount from where it was a week ago for people who are thinking, yeah, but I feel like [laughs] this is one I want to own a few shares of, it's on sale right now.
Moser: Yeah, I don't think that's a dip that is indicative of a business that's performing poorly. I think that's a bit of a knee jerk reaction, perhaps some profit-taking, I'm glad you brought up the Mirror acquisition. I mean, I think that's a really clever way for them to extend beyond just apparel. You have a lot of different ways you can even go with that. I mean, if you think beyond just exercise, imagine incorporating immersive technology, right, imagine incorporating some augmented reality or something like that into that Mirror to allow people to actually shop from home, trying things on, in that Mirror. There are really a lot of possibilities there. And I thought that that acquisition I thought was really clever, very complementary to that business. And I think that one actually worked out pretty well.
Hill: Shares of Casey's General Stores (CASY -1.12%) are flat at the moment, but this morning they hit an all-time high after Casey's latest first-quarter results. Here's another one; digital revenue [laughs] up 162%.
Moser: [laughs] I was going to say, man, we live in an age now where you can have 7-Eleven delivered and Casey's is killing it on the digital revenue front. I mean, it's truly [laughs] a new paradigm, Chris, like it's a different world now, isn't it? You know, this was another business that really performed well for the quarter. Earnings per share of $3.24 compared to $2.31 from a year ago. I thought it was fascinating to see how they were able to exercise some profitability on the fuel front while they actually delivered fewer gallons, gross profit actually grew 39% thanks to some smart management pricing there on the fuel front.
And then when you look at the actual stores themselves, the stores maybe they didn't perform so well, understandable to a degree, but digital revenue really took up some of the slack there, grew 162% for the quarter. Casey's rewards customers now they have 2.5 million+ members, up 25% just from April of this year. And listen, Chris, you want to talk about the strong drivers for the performance this quarter? Beer and pizza. You know what I'm having for dinner tonight. [laughs] I mean, that's just -- you want to talk about the idea, I saw that in the call, I was like, man! And again, that makes sense, you know, we've seen, I mean a lot of people are eating on the go and the people are drinking a little bit more beer and wine and spirits these days. So, it's nice to see that they can make their money a few different ways. And so, yeah, wow! this is really, it's really performing very impressively given everything that's been going on. And even when you look at their top line, their top line has come down a little bit, but really the market is excited because I think, again, a big store presence out there. Clearly very efficient and effective operators. They know what they do and they do it well.
Hill: It'll be interesting to watch that rewards program number over the next one to two years, because just anecdotally, you know, we hear from members and listeners in the Midwest who are such big fans of this business, to have 2.5 million rewards members, it seems like that's a number that has some room to run if they decide that's a priority and they really want to push that program, which if they're doing it right, yeah, they would want to.
Moser: Yeah, I'd imagine. So, you see the value in that loyalty club, the rewards-style membership. And I mean, Starbucks has always been one that's -- I always felt like they probably could do a little bit better than they're doing, but still, I mean, that's been a strong lever for them. Chipotle is really benefiting from growing that program out. Panera always had a very strong presence there. It's just a really nice way -- Ulta, another good one -- it's just a really nice way to keep your customers engaged, know what your customers like. And in this age of data now, I mean, it's easier than ever for them to parse through all that data and really personalize the experience and reach out to those 2.5 million loyal customers. And I'd bet that next year this time we'll be talking about a lot more than just 2.5 million.
Hill: Real quick before we go, you had mentioned on Industry Focus -- and for those unfamiliar, Jason is one of the hosts of our Industry Focus podcast, every Monday he's hosting banking and financials with Matt Frankel, so check it out for crying out loud, but only if you're interested in, you know, [laughs] learning more about investing and stocks and doing well in the market. But anyway, you had mentioned on Industry Focus, you were going to be doing a little shopping in the market of stocks. We have trading guidelines and restrictions at The Motley Fool, so I know that there is a point in time on either side of buying or selling a stock where you or me or anyone for that matter can publicly talk about that, is the window clear, is that something you can share at this point?
Moser: Yeah, the window is officially clear, Matt and I spoke about it on Monday's show, and that wasn't yesterday, or not this past Monday's show, but before the holiday weekend. So, we've had plenty of time pass by, but we talked about two stocks that we were going to buy. Matt had talked about Lemonade and my company was Bill.com; it's one that I've talked about before, I think, on Motley Fool Money, and on MarketFoolery, as well as Industry Focus. But ultimately, they're trying to help businesses make paper-based manual transactions just obsolete. I mean, we talk about that War on Cash and this really is kind of a, it's an extension beyond the consumer and really to a business that's trying to help other businesses, small- and medium-sized businesses.
And so, it's a SaaS business, where they are able to make money from their customers on a monthly subscription, which is nice. They benefit also from the number of transactions conducted through its platform. At the end of the most recent quarter here, they had more than 98,000 customers using the platform, which was up 28% from a year ago. They processed $25.4 billion in total payments through their platform with over 2.5 million network members. Okay, so not customers, but members of that network that can accept payments from customers in that network. And so that all kind of goes back to the advantage, the competitive advantage the company is trying to build, this network effect where customers connect with others to pay and be paid, and that frees them of then having to constantly solicit or share bank account information and routing numbers. You know, once you get into a system like that, then you can just click "send," it's a heck of a lot easier, and that's what Bill.com is building out.
Just a neat business. I mean, the risk right now with a business like this is the valuation, no question. But for me, it's a really neat one, it's one that I knew I wanted to own after I dug into it. And I really was just waiting for the right time to open a starter position, and so that's what I did. It's Bill.com, ticker BILL. And I'm very happy to say, Chris, that I am just dead-even on this investment right now, so it's working out well so far.
Hill: Way to take the long-term view.
Moser: Hey, listen, I mean, every day counts, every day counts.
Hill: Absolutely. Jason Moser, thanks for being here.
Moser: Thank you.
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.