In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Emily Flippen about the latest headlines and quarterly reports from Wall Street. They talk about the first-quarter report of Nike (NKE -1.12%). They've got updates from Tesla's Battery Day. They discuss the fourth-quarter results of an online retailer revolutionizing clothing and much more.
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This video was recorded on September 23, 2020.
Chris Hill: It's Wednesday, September 23rd. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Emily Flippen. Thanks for being here.
Emily Flippen: Thanks for having me back.
Hill: We're going to get to Battery Day, we're going to start with some earnings, and no better place to start than Nike.
Shares of Nike up 12%, and hitting an all-time high after Nike issued a first quarter report that was highlighted by, what else, amazing digital sales. Although, I should say, their profits did come in much higher than expected too.
Flippen: Yeah, Nike had profits of $0.96/share versus the $0.47 that was expected, so they definitely beat on both the top- and the bottom-lines. And depending on how you read this earnings report, and the story that you're telling, you can paint two very different pictures for Nike here. Skeptics will tell you that their total revenue year-over-year still fell 8% despite the fact that it was up on a quarterly basis. So, this was by no means a blowout quarter in terms of their top line. But if you look at the bigger picture, Nike has been changing their distribution strategy. And so, the fact that sales weren't down more when they cut so many large distribution partners over the past few months is actually pretty astounding.
And what we're seeing the market react to here, in my opinion, is actually the stellar growth of online sales. Online sales grew 82%, more than doubling in certain regions of the world. So, this is really a testament, not only to renewed demand for Nike's products, but it's a good first step in a changing distribution strategy.
Hill: We also saw that show up in their inventory. And the way they're managing their inventory was a little bit of a challenge last quarter, they brought some of that down this quarter. So, nice to see that improvement. It also seems like Nike is optimistic about the holidays; is that fair to say?
Flippen: Definitely fair to say. What's notable about where you saw their sales come in this quarter is that despite the overall contraction compared to the year ago period, sales for footwear, their Footwear division, which is really core Nike, still grew. So, I think they're optimistic about renewed demand, especially heading into the holiday season, but more importantly, especially because they put so much emphasis on their digital sales, which is really going to be what catalyzes people to order. People, [laughs] I think it's a safe assumption, are not going to be traveling as much this holiday season, potentially not going to be giving gifts that they aren't able to order online as much as they were last year. So, the fact that Nike has reinvested so much money into really connecting direct-to-consumers in a manner that establishes more of a relationship between Nike and consumers is potentially going to be good for them in holiday sales.
But what's worth pointing out here is that they did cut a lot of partners. We talked about it previously, but they cut Zappos, they cut Dillard's. So, their foot traffic, the people walking into a store and buying a pair of Nikes, that's probably going to be down for the foreseeable future. They're going to need to prove that they can pull those customers back into their digital sales to make it worth it.
Hill: And this is something they've been investing a lot in over the last few years. So, I mean, this is one of those quarters where you see those investments pay off. But to your point, when you cut off partnerships like that, then you're doing so with the confidence that you're going to be able to make it up on your own.
Flippen: And that wasn't an apolitical decision, in the sense that it seemed like Nike shareholders were split down the middle about whether or not they believed cutting their partners and their distribution wholesalers really was the best move for the company. I tend to be on the side of, I like Nike controlling more of their line, controlling more of their relationship with consumers. I think long-term that can give them some pricing power, but I have no doubt [laughs] in my mind that short-term you're going to see the impact in terms of their topline growth. I think margin profile on the long-term improves as a result. But let's be clear here, cutting out what they deem to be lower-tier wholesalers to focus on specialized partnerships, that was not a move that was universally perceived to be beneficial to the company, it really was a change in strategic direction.
Hill: Shares of Tesla (TSLA 0.91%) down 7% this morning in the wake of Battery Day, which also doubled as Tesla's shareholder day. What is your headline? There was a lot of news that came out of what we heard from Tesla and from Elon Musk. I have my observations, but I'm more curious about what your observation was.
Flippen: I think my big headline is probably, "tired." And it encompasses a lot there; and you're kind of laughing, Chris. But I think what we saw this Battery Day was not too dissimilar to what we've seen in previous Battery Days, which is to say, Tesla made a lot of big promises that haven't really been proven out yet. And historically, the investors and the market have like these big ambitions. Tesla is known for going big, right, and they've made a really successful product in a really successful company based on big ambitions.
But the problem with this Battery Day, and the big takeaway I think I have is the fact that the timelines that were given were further off than people may be expected. I think the assumption with a lot of investors is that you take whatever timeline Tesla or Elon Musk give you, and you add a couple of years to it. [laughs] So, the fact that a lot of their big initiatives, I'm thinking in particular about their million-mile battery; although, he didn't use that terminology exactly. Their battery improvements, their cheaper cars, these are all things that they're pushing off until 2022, 2021. And that's further [laughs] than people expected it to be. And then you also take those dates and you add in a level of, OK, well, you really haven't made deadlines in the past, so we're going to add a couple of years to that. Ultimately, it made a lot of really exciting news for Tesla; seems like it's still a few years off at the best.
Hill: Yeah. I mean it seems like [laughs] the sell-off that we're seeing today is some portion of the investing community saying, we don't like the version of Elon Musk that gives what on the service appears to be reasonable timelines. You know, Musk basically saying, yeah, here are the batteries, they are not really going to go into mass production until 2021. The cheaper model of our vehicle, it's going to be a few years before that's widely available. He got a question about their profitability; was just very straightforward saying, yeah, I know our valuation makes it seem like we're printing money, we're not. [laughs] Our profit margin is pretty small. So, I think that's what we're seeing with the sell-off today. Of course, if you step back, this is a stock that is still up north of 350% in 2020.
Flippen: Yeah, whenever we talk about a 7% sell-off in Tesla, it always makes me want to chuckle a little bit, because that's the volatility that you A. get with Tesla, but B. depending on how long you've been a shareholder, you probably didn't even notice the company was down today, because that's how insane of a year that it's been for Tesla.
I think adding on to the level of concern there was, just about the tepidness about Musk and management during this Battery Day, I think there's a strong argument to be made that the company is trying to be more prudent about the goals and the deadlines they send out for investors, especially as their business model proves out. But it was only a couple of years ago, back in 2018, that Elon Musk promised a $25,000 electric vehicle within three years. That wasn't that long ago; clearly that's not happening. So, in my mind it was maybe some tepid guidance that is more realistic than the guidance they've given out previously, or maybe this was [laughs] the aggressive guidance, and maybe we're not looking at a lot of these ambitions until much further in the future.
Hill: Stitch Fix (SFIX -6.07%) ended the fiscal year not with a bang, but with a whimper. Stitch Fix's fourth quarter loss was much bigger than expected. Shares are down 16% this morning. I guess, if you're looking for a silver lining, it would be that revenue was up, and that was not the case three months ago.
Flippen: Exactly. So, despite the fact that they lost $0.44/share versus the year ago period, when they gained $0.07/share, so they did switch to a loss there, they still did grow revenue 11%. So, that within itself, hey, you're already [laughs] better than Nike, in the sense that you're growing your topline; not that that's an apples-to-apples comparison. Other good news, active clients grew 9% to 3.5 million, so they're making up some of the clients that they lost over the pandemic period.
I think what the market is reacting to here is not just the swing to a loss, it was expected that they wouldn't make money this quarter, but actually their direct buy. And this is interesting, because Stitch Fix is launching essentially a shopping platform on their box platform, that allows you as a Stitch Fix customer to see curated items and purchase them directly as opposed to getting them in a fix. And that within itself grew 30% after adding in a feature that curated that list closer. On face value, seeing the engagement from customers would seem to be a good thing in Stitch Fix this quarter, but I think in reality, when you compare it to Nike, which grew 82% in their online sales, seeing direct buy only grow 30% when their competitors, their clothing and apparel competitors, seem to be going gangbusters over the past quarter, that's probably where a little bit of the inherent skepticism comes in.
I don't know quite how to feel about this, this quarter. I think ultimately looking forward to Stitch Fix, what they're going to need is to get their costs down before they could figure out how to manage their inventory and manage their business. And I think they're moving in the right direction, as sad as it is to say, they're moving in the right direction of trying to lower their overhead cost of stylists by hiring stylists in lower cost-of-living cities. That, to me, for a company that isn't making money is probably the first step on to figuring out how to right-size this business.
Hill: I think you're absolutely right. And Stitch Fix seems like one of those businesses; they just need to survive, they just need to get through this, because it's easy for me to imagine that -- and it's not just my imagination, it's talking to friends that I have, co-workers, I'm starting to see articles pointing to what I'm about to say which is that people are ready for this pandemic to be over. And when I say, [laughs] they're ready, it's not just we want to get back to some sense of normalcy, it's people are going to be celebrating when this is over. That's going to show up in the form of travel and vacations, we're absolutely going to see it in terms of people treating themselves to, among other things, clothing. So, Stitch Fix seems like a business, to your point, if they right-size the cost, if they can get through the next 12 months --
And by the way, even with the drop today, the stock is still up 35% year-to-date, so this is not a business that I look at as being in tremendous peril. But if they can just put their heads down and get through the next 12 months, and with any luck, 12 months from now we are much closer to normal, I think that sets them up to arguably a more profitable business model.
Flippen: That can be the case. I think where I grow hesitant as an investor is looking at the tens of millions of Americans that are unemployed right now, and Stitch Fix, to the extent that this pandemic continues, and that our economy is impacted, Stitch Fix is a business while only going after about 3.5 million customers right now, it's still a luxury. And it's a business that, when time gets tough and people need to cut corners, Stitch Fix is an easy thing to cut out of your life. So, I think, obviously, for the people that are still paying for the services, hopefully they haven't been impacted by the pandemic as much, but in terms of growing that active customer count, this is a really challenging environment to do it within.
Regardless, I think there's a market for Stitch Fix. The question for me has always just been, how big of a market is that truly? We don't know yet. There is a belief that Stitch Fix will revolutionize clothing, and I'm not sure that's going to be the case. But I also don't think that this is a product that goes away entirely; it has sticky customers, it has customers that make repeat purchases, that engage with their direct buy. So, there are clearly people who love it, there are clearly people who hate it. [laughs] The ideal, kind of, addressable market is somewhere in the middle. The question mark for me as an investor, and if you're an investor in Stitch Fix, where your question mark should probably be is, how big of a market does Stitch Fix truly serve?
Hill: Emily Flippen, always great 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.