Why Google Play Is Changing Its Payment Policy

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earning reports from Wall Street. They've got a spice maker announcing strong third-quarter results and also a stock split. Google Play comes out with new rules, and a retail store chain makes a smart move in preparation for the holiday season.

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This video was recorded on September 29, 2020.

Chris Hill: It's Tuesday, September 29th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only Jason Moser. Thanks for being here.

Jason Moser: Hey-hey!

Hill: We've got another retailer gearing up for the holidays, we have another tech giant -- I'm not sure how to categorize this story, we'll get to it soon enough.

We're going to start with the spice maker though, because shares of McCormick (MKC -0.38%) are actually down a little bit despite the fact that McCormick's third quarter profits and revenue came in higher than expected. They also announced a 2-for-1 stock split. I want to get to the stock split in a minute. I'm assuming the slight drop of 1%, 2%, that we're seeing in the stock is the guidance, because McCormick, if I understand this correctly, resumed their fiscal year guidance, and it was a little bit lower than Wall Street was expecting.

Moser: Maybe. I mean, based on the numbers I had seen, that guidance they resumed was right in the range that had been the average expectations that had been on the street for some time now. But yeah, they had pulled guidance a little while back, and felt comfortable in getting back into it this quarter. You know, I think it's probably a couple of things. I mean, let's remember, this is never a cheap-looking stock relative to its growth rates. And so, right now it's trading at around 33X, 34X full-year estimates. But you're talking about a company that's putting up 5%, 6%, 7% topline revenue growth. I mean, that doesn't quite line up. And so, I understand why the market pays up for it. It's a very high-quality business, but it's also not a stock that is trading at, you know, a really attractive valuation. So, I can understand the tepid reaction.

But they're also going to be making some investments here in the coming quarters, spending a little bit more on marketing and advertising and incorporating some new enterprise technology into the business. That'll crimp margins a little bit in the near term, nothing to worry about, it's all in the name of making the business even better than it is today.

And I think that, you know, you're right, this was a really good quarter in a lot of ways. There was a passage on the call that I think really summed it up. And they said the significant shift to consumers eating more at home is persisting long enough that it has become a habit. So, management there is seeing that the pandemic economy has obviously changed everyone's behavior. Restaurants have been hit very hard; people are having to cook more at home. And what we're starting to see is that people are doing this more and more and it's becoming something that's a bit more sustainable. And that is obviously very good news for them, based on what they sell.

When you look at the actual growth, they put up 9% revenue growth this quarter, which is really impressive given their traditional 3%, 4%; and this was all organic too. And consumer sales in the Americas rose 17% compared to the third quarter a year ago. So, a lot of really good numbers, just a very reliable steady business; I wouldn't let the market's reaction today bother me.

Hill: Do you have a sense of where they spend their promotional dollars? I'm trying to think of any time I've ever encountered a television commercial, a pop-up -- I'm assuming they're spending their [laughs] marketing dollars somewhere, I'm just not sure where it is.

Moser: Yeah, I will say, as someone who has -- we have the Hulu Live streaming platform here at home, among other things, and so we can watch some live TV from time-to-time. And I do see a good number of ads on TV from them. I'm seeing a lot of ads lately. And particularly when the holiday season starts coming into play. Thanksgiving and Christmas are two really key seasons for them, they boost that ad spend a little bit. And they've also been working really hard this year -- they have this really cool app. I mean, McCormick, the tech company, right? They've got a really cool app called the Flavor Maker App, it incorporates immersive technology, it incorporates augmented reality. You can actually scan the spices in your spice cabinet into this app, so then you have an inventory of your spice cabinet on your phone. Which let me tell you, as the cook of the house it's really helpful when you go to the store, and you know that you need some garlic powder or some thyme or something. If you're not sure you have it in your spice cabinet, you can just check your phone and you can confirm one way or the other.

So, it's little things like that. So, you know, it's not one of those companies that has to spend so much that they're in your face all the time, but they definitely do have ways of getting things out there at the appropriate times of the year. And I suspect we'll see more and more of that as we go into this holiday quarter.

Hill: Why did they split the stock 2-for-1?

Moser: Well, honestly, the normal reason, and the reason most companies give -- most management teams give -- is they believe it'll provide greater liquidity. And that's exactly what they stated in the call. They noted it had been 18 years since they last split the stock. So, in 2002 they split it, and the pre-split share price then was $52-and-change. But they noted, they just feel like it provides greater liquidity, it's going to be appreciated by individual investors and employees more. It gives people an opportunity to buy into the stock.

Because the fact of the matter is, now you've got basically a $200 stock; fluctuating a little over, a little under. And we've seen that the market does care about having that liquidity, making it a little bit more accessible to your retail investors, even in the age of fractional shares. So, yeah. I mean, you know, 2-for-1 split that's neither here nor there, it's the same size pizza, but like I noted earlier on Twitter today, I'm twice as rich and I feel pretty good about that. [laughs] And I'm kidding, by the way; I'm not twice as rich. I've got twice as many shares, but it's the same amount of money. So, always remember that, folks, a split is just a mechanism, it's not something that really creates any value in the near-term.

Hill: You know how Apple (AAPL 0.52%) takes a 30% cut in its App Store. Google [Alphabet] looked at the waiter and said, we'll have what they're having. Google announced it is going to start enforcing rules that require app developers distributing Android software on the Google Play store to use its in-app payment system. So, using Google's billing system. Google is going to start taking a 30% fee from those payments.

Moser: Yeah, that's really interesting timing, isn't it? I mean, I guess it shouldn't be surprising given what we've seen going on with Apple lately. And Apple and Google, a little bit different there in how their app stores work. Android -- and I don't use android phones, so I'm sure other Android users out there could speak to this better, but ultimately Android allows users to install apps without actually having to go through their Play Store. But with that said, ultimately, they are trying to line their strategy up a little bit more with Apple. I think perhaps, maybe it's a statement of unity in the sense that they want to communicate the value that they've built in the platform and the operating system for this mobile economy. And I understand that, I do. I understand both sides of it.

Now, it's interesting, they just weren't really enforcing these rules so much. They said 97%, I think, of all developers in that system to this point were complying with the rules. You know, there were a few that weren't. And I think a couple of notables were Spotify and Netflix, which I think they used to actually encourage folks to go through and pay outside of that platform. And you can imagine, those are two very large user bases on their own.

So, to me, I feel like this really does -- it puts Apple and it puts Alphabet in the crosshairs of regulators. It's not going to make their jobs easier, I think, over the coming couple of years, because they're really going to have to convince regulators why they should be able to charge what they're charging. And perhaps we see some goodwill at some point where they reduce that charge. I feel like -- so, as a consumer, as a Spotify subscriber, if I had the choice, I would much rather pay Spotify all of that money, I'd much rather not see Apple or Google get any of the money from my subscription to Spotify, because, you know, I'm supporting Spotify. I mean, I understand I'm using it on my phone, but I'd rather see the business that's giving me that ultimate value there benefit more. I mean, Apple certainly gets plenty of my money from when we buy the phones and the devices and whatnot.

So, I mean, it's not an easy answer, but it does seem like it's interesting timing and perhaps a statement of unity.

Hill: Yeah. And I think, at least part of the calculus that they must have done at Google is, if we're going to get taken down by regulators, it's not going to be because of this. Like, [laughs] you know, this is not No. 1 on the hit list, so we might as well make a few extra bucks along the way. And as you said, Apple is doing it, they've been doing it for years. So, maybe it was as simple as thinking, the downside just isn't that big.

Moser: Yeah, I think you're right. I think that if you think about the business of Alphabet and all that it does, it ultimately is still, it's an advertising play, right? And so, if regulators are taking a look at Alphabet and Google, they're not necessarily looking at the regulatory concerns of that business the same way they're looking at regulatory concerns of Apple's business. So, yeah, I think for Alphabet, for Google to make this move, far less downside because that's not really going to be the primary focus of regulators anyway.

Hill: Just in time for the holidays, Bed Bath & Beyond is partnering with Instacart and Shipt to provide same-day delivery. Shipt is owned by Target (TGT -0.54%). Bed Bath & Beyond CEO, Mark Tritton, his last job was at Target, he was there for a few years. I have to believe [laughs] that he might have called up his old friend, Brian Cornell at Target [laughs] and said, let's do a deal. You know, a smart move for Bed Bath & Beyond. It's one of those partnerships that we're not going to know for a few months how this is really working out for them, but it's hard to say -- unless the economics of this deal are heavily, heavily skewed toward Instacart and Shipt, this seems like almost a no-brainer of a move.

Moser: Oh, I think you're right, it's a no-brainer move. I mean, the Bed Bath & Beyond management even noted, the Chief Digital Officer noted, the important thing is to make sure we get this in place before the holidays. And what we're seeing more and more in the retail space is businesses in the retail space are really encouraging shoppers to get out there and start shopping now as opposed to waiting until November or December. I mean, this is going to be a bit more of a protracted holiday season, I think, from that perspective for a number of reasons.

And so, with Bed Bath & Beyond, obviously a business in a state of turnaround, and I think that what we're seeing Mark Tritton do with the business, it's all encouraging. It certainly seems like it's starting to recover a little bit. And I don't know how top-of-mind Bed Bath & Beyond is for folks these days, given the other alternatives that are out there, but I tell you, when I read this story, when I started digging into it a little bit more, to me, what really stood out from this is the wisdom in Target's acquisition of Shipt back at the end of 2017. I mean, if you remember, they paid $550 million for Shipt right at the end of 2017. And Shipt is essentially -- you know, it's not Target-specific, this is basically Target's efforts at not only bringing fulfillment expertise into their specific business, but also becoming more of a fulfillment company that serves many businesses. In May, on Target's earnings call, they announced that order volume over the course of the quarter for the Shipt business, independent of Target's portion of that order volume, was up 2X, and in April it was up 3X, and they had 60% growth in membership. So, there's a significant acceleration there.

I mean, ultimately Shipt is a $99/year membership. And it gives you access to shops from a number of different customers. Kroger uses it, and obviously Target uses it, now Bed Bath & Beyond is using it. And so, it was a shrewd acquisition at the time for Target that maybe kind of snuck under the radar, we didn't think it was going to be as beneficial for the business as maybe it has become. But if you look at the actual number since that time, and I'm not saying this was all because of Shipt, but Target, since that acquisition, is up 142% versus the market's 25%. And so, I mean, Shipt is definitely a part of that success.

And I think going forward, given the state of things and given the way the retail environment has shifted, this is going to prove to be a very, very smart acquisition the more time passes.

Hill: No, I think you're right. And to Brian Cornell's credit at Target, the guy is just really good at capital allocation. [laughs] You know, it just seems like the longer he stays in the corner office, the more evidence piles up; whether it's the decision they made around pharmacies, the investments they've been making in apparel, the Shipt acquisition, it's really quite a track record that he's racking up there.

You mentioned the stock performance, I'm just going to add parenthetically going back to Bed Bath & Beyond, when we did the Motley Fool Money Fall preview show, which came out on September 4th, Ron Gross talked about [laughs] Bed Bath & Beyond as sort of the stock on a short leash. And he was like, I own shares of this, I believe in Mark Tritton, but, you know, I want to see something. Stock is up more than 20% since then, so hopefully Ron is feeling like he can let the leash out just a little bit more on this company.

But as someone who also owns shares, I was happy to see this announcement. I want to see what the results are, because this is not -- and you indicated as much -- this is not a business that you necessarily think up around the holidays, you know? So, if they can, three months from now, come out with a -- because I think they report later this week. So, you know, 14 weeks from now it'll be interesting to see what their holiday quarter looks like. And if it's impressive, I have to believe, at least part of it is going to be because of these partnerships.

Moser: I would think so. And I do agree with you on Cornell. And, you know, looking back to, I think it was our 2020 preview show for Motley Fool Money where one of our questions was like, keep an eye on _____, they are going to surprise you, in a good way. And I actually had noted Mark Tritton and Bed Bath & Beyond as well, because I feel like you get some fresh eyes in there, someone who's a bit more in touch with the modern-day retail economy. And it does feel like -- I mean, the stock is still kind of recovering, but it does feel like the moves that he is making are setting this business up for the best possible chance of success.

You make these moves and then it's a matter of execution. And with something like Bed Bath & Beyond, it's not that -- I don't know that you necessarily go to Bed Bath & Beyond directly specifically looking for something, a lot of times it feels like you go in there, it's kind of like a TJ Maxx sort of situation, where you go in there, maybe you're not sure exactly what you want, but you're kind of on the treasure hunt and you find some stuff and you walk out of there happier than when you went in. So, that remains to be seen, if they're going to be able to really lure shoppers in and say, we know you're looking for this, we have this, and we have it at the best prices.

Because they've, to this point, really, [laughs] it seems like most of the traffic is generated from those mailers that you get, seemingly, every month, that say hey, come to Bed Bath & Beyond and get this for 20%, 30% off. So, that remains to be seen, execution. But I do like the steps that Mark Tritton is taking, I really, really am impressed with Cornell and Target and Shipt. I mean, I think that is going to just, as time goes on, prove to be a really, really smart acquisition.

Hill: Jason Moser, always good talking to you. Happy National Coffee Day.

Moser: Thank you, Sir; you too.

Hill: As always, people on the program may have interest 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.