In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jim Gillies about the latest headlines and earning reports from Wall Street. They've got the turnaround story of Bed Bath & Beyond (NASDAQ:BBBY), they go through the sales report of a food and beverage giant, discuss an iconic brand returning to public markets, and much more.

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This video was recorded on October 1, 2020.

Chris Hill: It's Thursday, October 1st. Welcome to MarketFoolery. I'm Chris Hill, joining me from the Great White North, Mr. Jim Gillies. Good to see you, my friend.

Jim Gillies: Good to be seen, Chris.

Hill: We have got snacks and beverages. We have an iconic brand that is returning to the public markets, but we are going to start with the stock of the day. Don't call it a comeback, Bed Bath & Beyond has been here for years, it's just that all that time someone else was running the company. But now that Mark Tritton has been in the corner office for about a year, we're seeing days like today.

Second quarter profits came in exponentially higher than expected, same-store sales were positive for the first time in four years. The stock is up more than 30% this morning. I'm assuming at least part of what we're seeing with the stock is some short-sellers saying, that's it, I think I'm out.

Gillies: Probably. And congratulations to Mark Tritton and Bed Bath & Beyond for this quarter. Mark Tritton formerly of Target, of course, and a few other places before that; I think Nordstrom, and I think he had a stint at Nike too, although I could be misquoting. Bed Bath & Beyond is in a group of companies, a group of retailers that I like to call the obviously going-to-die crowd. And the funny thing about companies that are obviously going to die, when they get the right mix of management decision making and some help from the environment, and, you know, just a little bit of -- because no one is more aware of a company's struggles, or at least no one should be more aware of a company's struggles than the people inside the company. And that's when you plan your strategy, what are our tools, how we can navigate our way through whatever we found ourselves in.

You know business is not easy, and certainly for this group of retailers that I'm going to hold up, you know, Bed Bath & Beyond is one, Chris, but how about GameStop? GameStop, the seller of video game systems and software, that of course is going to be the next Blockbuster, right? They have been writing that headline since 2009. How about Michaels, the craft store? Everybody knows. Why hasn't Amazon run them over? And the granddaddy of all of these companies that are obviously going to fail, they're obviously going to be taken out, bricks-and-mortar is dead, is Best Buy, which just before the podcast, we were talking about how many listeners realize that Best Buy has been a 10-bagger over the past decade. They went through some struggles, they brought in new management who had a plan. And I'm sure they were mocked, and I'm sure people were skeptical. And they executed on that plan. And Best Buy, which was a sub-$12 stock in 2010-2011 is today roughly a $120 stock.

And, you know, like, I'm going to kick myself a little bit on Bed Bath & Beyond. I actually did a little bit of work about a year ago as I was discussing with one of our Foolish coworkers about this basket of retailers who are sure to die. And we had this one, we had GameStop, we had Michaels on the docket. And I went through what this company's history of cash flow was and what they've done with it, and how they've raised capital, and this is before Mr. Tritton came on. But it laid the groundwork for someone with a better vision to come in and knock the ball out of the park, which you've seen today.

And Bed Bath & Beyond is, as we speak, it's now a 6-bagger since March of this year. And so roughly a year ago, when I did my work, as I was vigorously debating our coworker, I pointed out that in the previous six years here was Bed Bath & Beyond, they had produced $4.2 billion in free cash flow, they had also issued $1.5 billion in debt. And I debated, smart about the debt, because the debt was basically staggered, I think, it's 10, 20 and 30 years. And so, they don't have to pay it back anytime soon. And they had gone on a massive buyback program. They've retired a ton of their shares. Now, slowly melting the ice cube, no one is going to want to own this business, what have you. But at the time stock was about $10, $11. The company was trading about 4X enterprise value free cash flow. I mean, that is rock bottom cheap, Fools, that is something that is going to go away, that's what the market is telling you.

Flashforward to today, and, oh, positive comps; oh, we have a plan. They suspended their dividend and halted their share buyback plan, I believe, in April. But with this report they have generated a ton of cash flow, they've deployed it smartly. They took down some temporary debt, which they had out as part of COVID. They have bought back 20% of that long-dated, not in any danger to come calling debt, they bought that back at a discount, which is brilliant.

So, they're down net debt by about 30% from where they started the year. They have a store optimization program, which is something that a lot of these retailers, the slowly melting ice cube crowd we'll call them, are reducing their store count. Because they don't need it, because they can move to e-commerce, which they've done a little bit. The geography is ably served by less stores, and you see a lot of the traffic that previously went through one store, just transitions to another. And so, they are -- I'm going to steal Ron Gross-ism here -- they are firing on all cylinders. And I'm not sure anyone saw this coming, and I am both thrilled that they are doing this, they are having this success, because everyone loves a comeback. I'm less thrilled that you own it and I don't, but that's mainly because I had this in my hand a year ago, Chris, and I'm holding it, you know, like the skull of Yorick, and I'm looking at it, and I didn't, at least, put a little feeler position out, because as I said, at the time trading for 4X free cash flow, that is close to no-brainer territory for me, so.

Hill: Two other quick data points before we go to our next story. Not surprisingly, digital sales are a big driver this quarter. That goes hand-in-hand with the store closures, so another smart move by Tritton and his team. And also, happy to see that they're suspending the dividend, that they're sticking with the, we're not going to buy back shares. I'm also happy to see [laughs] that they're not offering guidance --

Gillies: Nor should they.

Hill: Yeah, nor should they. No need to at this point. But let's move on, third quarter sales for Pepsi [PepsiCo] grew 5%. And kind of like we saw three months ago, snacks and some of the beverages, particularly the seltzer part of their portfolio, helping to make up for the fact that so many restaurants are closed, so many sports and entertainment venues are closed. And you know, the stock is basically flat, and it's kind of flat for all of 2020, but nice to see that the salty snack part of the business is making up for the, sort of, the tried-and-true Pepsi part of the business.

Gillies: Yes. Well, the Gillies' household, particularly the soon to be 16-year-old member of the Gillies' household has been doing his part to help with the salty snacks portion.

Hill: And shareholders thank him.

Gillies: Yeah, I was going to say, you know, dude, there are other food groups other than Doritos. Yeah, look, it was a perfectly acceptable boring quarter from a perfectly acceptable boring company. And I think you know, Chris, but maybe some of the listeners might not know, for me to call a company perfectly boring, from me, that's a compliment. Because I like businesses that are boring. I'm not a terribly exciting person myself. I enjoy investments in companies that just actually do what we expect them to do and essentially just get it done quarter-after-quarter.

You know, if you're looking for Pepsi to be a 10-bagger anytime soon, like the aforementioned Best Buy that we mentioned earlier, that's not going to happen. They are just a steady bedrock performer for your portfolio, and we all need a few of those so we can go after the more exciting things in our portfolio. So, it was a boring quarter. But boring is nice, because boring says, oh, we went up for +4% on organic revenue growth, total revenue growth went up +5%, EPS is up 10% year-over-year just for the quarter, it's little down for year-to-date, but of course we understand why, because the previous quarter with COVID, no one knew what was going on, so we kind of forget that. They did give guidance, they're pointing to a full-year approximate 4% revenue growth, approximately $5.50 in core earnings. The stock is at about $140, so it's not cheap, but it's not terribly expensive. And again, this is one of those widows-and-orphan stocks you can buy, put it away and we'll see you when you retire.

Hill: I like that Hugh Johnston, who is the CFO at Pepsi, got a little granular on CNBC this morning talking about -- [laughs] because when you think about all of the food and beverages they have across their portfolio, he got granular talking [laughs] about the new Cheetos macaroni and cheese saying they're trying to keep up with demand. As a fan of both Cheetos and macaroni and cheese; I haven't tried it yet, but I can see why it's popular. Did they give any color on the two portals, the direct-to-consumer sites that they launched earlier this year; Snacks.com and PantryShop.com?

Gillies: Sadly, Chris, they did not; at least in the conference call or the presser, maybe in the 10-Q, I haven't read the 10-Q yet, obviously, but. Yeah, no, Snacks.com, I can confirm both of those sites are open and accepting offers as of this [laughs] moment. Snacks.com; and Pantry Shop, I think is an interesting one because you're buying all of your Pepsi/Quaker products simultaneously in the various groups. So, if you want your everyday pantry, you want to get your oatmeal and your healthy chia bars and your rice cakes -- do people still eat rice cakes, and if so, why? You know, you can get all those delivered at the same time, or your snack package, your breakfast package. You know, it's interesting to have it delivered.

I am one of the three people in North America who still likes doing his own grocery shopping. So, I'm not probably the target here, but I know a lot of other people have used it. And I think, probably, if I let my, as I mentioned, the 16-year-old know that this thing existed, it might be his only source of nourishment, so.

Hill: Yeah, yeah, don't make him aware of Snacks.com. The first time I went to that website, I kind of went crazy to the point where, when the box showed up two days later, even my kids were just like, this is a lot of snacks. And I was like, yeah, I may have ordered too many, but I regret nothing.

Playboy Enterprises is returning to the public markets after nearly a decade. And because IPOs are out of fashion, Playboy is going to be doing this through a SPAC. Mountain Crest Acquisition is a current special-purpose acquisition company that is going to be taking playboy public through a reverse merger. And once the deal is done, that company, where I believe the ticker is MCAC, is going to take on the Playboy name and the ticker symbol PLBY.

I guess. You know, I saw this story and I sort of thought, OK, that's one way for Playboy, which is a private company and has been since 2011, I guess that's one way to raise money. I'm hard-pressed though to think that the second round of Playboy being [laughs] a public company is going to go any better for the company and for investors than it did the first time around.

Gillies: That was my initial take as well. And you say, it's one way to raise money, I'd say, it's one way for insiders to cash out; tomato-tomato. The more I think about this though, and I could be spectacularly wrong and it wouldn't be the first time, this might be interesting. I can see a number of things, and I just find this interesting for a number of reasons. First, as you point out, yes, Playboy is private. The SPAC, the Special-Purpose Acquisition Company, Mountain Crest Acquisition company, it's out there now, it's a walking wallet, it's got a bunch of cash there, its stock is just over $10, SPAC went out at $10. You can go buy it today, Chris, if you want. And you can just sit there and wait until this transaction is completed in Q1, if you want to own Playboy.

So, Playboy today is not Playboy of the past. For one thing, magazines have died. So, there are no published issues of the iconic famous magazine. At least no regularly published issues. And I believe they want quarterly publishing versus monthly publishing before that. So, what Playboy is trying to be, or this new iteration, it's trying to be a licensing company. And they're calling it across four major categories, they're saying, sexual wellness, which I'm just going to skip to the next one, which is style and apparel, which is apparel and accessories for men and women globally; gaming and lifestyle, so digital gaming, hospitality, and spirits, so you can get yourself some Playboy branded bourbon; and beauty and grooming, which is fragrance, skincare, grooming cosmetics for men and women.

Okay. That sounds interesting. They're not a publishing company anymore, or they're avoiding that. And I guess, they have a bunch of online stuff as well, which I'll tell people they can go look in their spare time. But they are calling themselves a streamlined high-growth business. The company has $400 million in cash flow contracted through the next eight years. And has products available for sale and in 10,000 major retail stores in the U.S. This is a branding company now.

Now, what you think of the brand and what you associate with the brand, the iconic bunny ears brand, of course, is going to be probably nuanced and varied. I can understand why some people would not want to do with this brand. I completely understand that, it's not been the most, shall we say, progressive brand in history. It has fostered some attitudes, particularly about women, that I think, it's fair to say, some would find distasteful, and I completely understand why. And for those people, they're just not going to be shareholders, and that's fine.

But what I find interesting about this is, it's a licensing deal and we've already had a certain dry run of this. And do you know the magazine Maxim, it was a men's lifestyle magazine, you know, girly pictures and whatever. It was bought by an entity called Biglari Holdings, I'm going to say eight or nine years ago, with the goal they went in to change it from the lad magazine into more of a lifestyle brand and licensing deal, what Playboy is doing.

Now, I mentioned earlier, it's important to have leaders at businesses you respect and trust, Biglari Holdings is not one of those businesses. But I do know that they, even though their circulation and sales are down significantly there, they have turned that profitable, on a small scale, with the licensing strategy. I suspect that Playboy will do a better job. And it will depend on the valuation coming out.

But, you know, one analogy I might throw up as a comparison is, franchising businesses in the restaurant space. So, Restaurant Brands International, which owns Tim Hortons and Burger King. Dunkin' Brands, which, of course, owns your beloved Dunkin' Donuts, those are check cashing businesses. They sell the franchise to a franchisee and then take back 6% of their gross sales and royalties every month, plus X% for advertising. They sell you a system. And so those are very asset-light, cash-rich capital generative businesses. And part of me wonders here, it's obviously not the same as selling, you know, coffee and whatever. But part of me wonders if that is what this business will look like. And if they are truly in the growth business and the cash generation business, this might be an interesting opportunity.

Hill: And you just hit on what I think is the most interesting thing to watch once it becomes a public entity again, the high growth aspect of this. Because now we're going to see, [laughs] through quarterly reports, OK, are you growing? Because that's one of those things where we, as investors and the market in general, get to decide what we consider to be high growth.

Gillies: Yeah. And again, I had your initial take, which was, oh, please. [laughs] Like, it didn't work the first time, it's going to work less well this time. The more I read about, like, ah, I'm going to keep an eye on this one, just out of curiosity.

Hill: Jim Gillies, always great talking to you, thanks for being here.

Gillies: Thanks for having me.

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 on Monday.

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.