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 look at the latest earning report of a jeans company and discuss its strategy and spillover gains to other retailers. They also discuss Howard Stern's extension deal and much more.

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This video was recorded on October 7, 2020.

Chris Hill: It's Wednesday, October 7th. 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: It's great to be here, Chris. Thanks.

Hill: We have a couple of stories in the entertainment business, but we're going to start today with earnings from Levi Strauss (LEVI 0.26%). Online sales in the third quarter grew 52%. And as we saw with the previous quarter, i.e., those online sales are helping to make up for store closures, which have been happening during the pandemic, and shares of Levi's up more than 7% this morning.

Gillies: Yes, and I love it, because we'll bring it up a little bit later, they're bringing along another company with them which is up about 8% and I happen to own the other company that's in the denim space. But we'll look at Levi's here. Yeah, this is another case of, we had a few of these in the last couple of months, it's pandemic-style reports. So, in isolation, the report looks awful. Sales are down 27% and their earnings are much lower and they wanted it to be, I think, the net income was down about 78%. But viewed in context of the pandemic, where they did have a bunch of store closures, as you said, expectations were super-low here.

And so, what Levi's did was they had sales of about $1.06 billion versus expectations of just over $800 million in sales. They turned in $0.08 of earnings per share, and the market was expecting a $0.22 per share loss. Cash flows are actually up year-to-date over last year, Chris, their free cash flow is higher. This is mainly due because the company has intelligently managed their working capital, it's not because, you know, there's some secret sauce here, they really clamped down on their capital. But overall, their report was much better than Wall Street was expecting.

You mentioned the 52% online sales growth, I guess if you have a brand of -- and a fit of Levi's that you like, you could just easily order it direct from them or from one of their partners like Amazon. They've been less promotional, spending less there, that did cut about 15% of their workforce in July. But things are much better than were anticipated, it was pretty rock bottom anticipated, and the stock is up, as you said, about 7% today.

Hill: Should they be -- and maybe they're doing this, I haven't looked closely at any comments that have come out from management. Should they be rethinking the physical store strategy, should they be pouring even more resources into online? I don't say this to demean the business, but it's not like they have a lot of SKUs, [Stock Keeping Unit] [laughs] you know, it's not like they're selling an enormous variety of products, they're a jeans company.

Gillies: Yeah, they probably have more than you suspect, just different varieties and some upper-wear shirts and what have you, denim; other ancillary products, we'll call it. But yeah, look, I think every company in this kind of retail space is probably rethinking their physical retail strategy, and I think they should be. You know, maybe you don't need as many stores, maybe you don't need as many outlets and so I would suspect they're doing that, but I suspect everyone is doing that in this environment.

I know some other companies, I mean, I can make some direct comparisons, but some smaller companies or other companies are in active shutting down stores or they're saying, hey, this geography is ably served by -- we've got three stores in a certain geographical area, we can probably cut it to one or maybe two. And so, I can think of a couple of retailers that are doing that. But you know, I wouldn't be shocked.

I like a lot of the moves that these guys are making, the balance sheet at Levi's looks pretty great actually. They got about $1.4 billion in cash against $1.6 billion in debt. They have cut their dividend for the second half of this year, so they're husbanding cash there. I don't think you were buying Levi Strauss for their dividend, but you know, it's a little bit of cash that they do husband, that I suspect will probably come back in 2021. But, yeah, given the other stories that we're going to talk about today, this was the bright spark.

And like I said, I own shares in a company called Kontoor Brands (KTB -0.20%), which is the dumbest name, but they own the Lee and Wrangler jean brands. And so, because the success that Levi's is doing, they report about a month before Kontoor does, so the market is inferring that Levi's results probably will spill over to Kontoor Brands. And so, Levi's is up about 7%, as I mentioned, Kontoor is up about 8%. So, I'm quite happy to see that.

Hill: And take heart, my friend, as long as Truist is around, Kontoor Brands is not the worst name out there.

Gillies: It's no trunk, I'll give you that, but ...

Hill: That is true. Five years ago, AT&T paid $49 billion for DirecTV. Now, AT&T is looking to sell DirecTV and the bids they're getting are not $49 billion and they're not higher than $49 billion. [laughs] The New York Post is reporting, AT&T is moving ahead with this despite the fact [laughs] that bids are coming in around $15 billion.

Where do you want to begin? [laughs]

Gillies: [laughs] Well, Fools, we're going to say now that the happy sunshine portion of the podcast is now over and we're about to get into the opposite of that. Yeah, so AT&T bought DirecTV about five years ago, and paid $49 billion in equity; $67 billion, Chris, if you include the debt. And the news stories this morning were saying that the bids were "Well below $20 billion." This, I think, is indicative of a number of things. First of all, they made an acquisition at what looks like if it wasn't the tippy-top of a specific market, in this case we'll call it linear TV or TV, you watch a program on a certain channel at a certain time. If they didn't manage to top tick this, they came pretty darn close.

At the time, they were hoping to put it with their own direct offering; I believe it was called U-verse. I could be wrong with that, but I believe that was the name of it. So, when they bought DirecTV, they had about 20.3 million customers; U-verse had another 5.5 million or so. So, you get about 26 million paying customers there. Today, they're not being terribly specific, but the number of customers today of the combined operation is well below 20 million. Their offerings have shifted, so they continue to morph and the waters are somewhat muddy, and of course, they bought Time Warner at some point.

A lot of this, I think though, is, you know, they started almost immediately after buying it, they started fidgeting with what they had bought, and arguably undermining the brand that they bought. Like, they bought it to change it and kind of gut it, which strikes me as odd, but it also strikes me as probably roving bands of different executives within the halls of AT&T fighting over the spoils and fighting with what their vision was. There was no unified version; it doesn't look like.

And then it's also, I think, an example -- I'm going to call this the Research In Motion example, and that's going to be a little bit of a weird comparator, but maybe not once I explain it. This is an example of management clinging to the past and refusing to acknowledge where the world was going, because their livelihoods depended on it. So, this is very much a Charlie Munger question, what are the incentives? And if you understand the incentives, you can probably understand what's going on. So, I call it the Research In Motion example. In 2007, some company called Apple released some product called the iPhone, and Research In Motion laughed, basically, because they were the kings of the smartphone and everyone likes their keyboard on their phone and our security is better.

Hill: And had a market share north of 40% in the mobile phone market.

Gillies: Yes. And what Apple is doing, the iPhone is a toy, it's a toy, people want keyboards. How did that work out?

Hill: Not so great.

Gillies: Right. Not so good. But I mean, like, but they chose to not acknowledge that, oh, wow! There's some uptick here, and oh, wow! Look, this company called Google [Alphabet] has brought out this other operating system that can power practically any hardware phone, called Android. And as late as 2011, you were seeing them, you know, kind of still pushing back and not really committing to where the smartphone market had gone.

And if you actually watch the market share for operating systems, Chris, 40% market share in 2007 for BlackBerry was down to about 1% by 2011. And Apple and Google had each gone to about 40% a piece. But they just refused to see what was in front of them, similar to, I think, what AT&T management refused to see what was in front of them. And so, they refused to acknowledge that cord-cutting and people stepping away from linear TV was real. Here in our house, you know, we're watching Netflix, we're watching Amazon Prime, we have a Canadian HBO-Starz hybrid, it's called Crave, we're watching that. We've, of course, got Disney+ and on and on, my kids love YouTube. We haven't had a cord, we haven't had a direct connection in, I don't know, it got to be at least 10 years.

And so, here's AT&T, where I'm going to say, if you are a long-suffering AT&T shareholder, since this deal was made the stock price today is lower, so you've lost money. If you've managed to reinvest the dividends, yeah, I think you're slightly up, but that is cold comfort, especially, where you could have invested in an S&P index fund at the minimum. And it's just, you know, now they're just gassing, they're throwing their mistake back over the side for probably a third of what they paid for it.

Hill: And I should point out, John Stankey, who's the CEO at AT&T, he just got there. Randall Stephenson, the former CEO, was the one who pulled the deal on this. So, I think Stankey is probably just looking to recover whatever amount of cash he can. And yet, I think [laughs] it says something about, sort of, the state of AT&T's management across the board, that I don't know if you saw this, Pivotal Research, an analyst firm, put out a report today about Netflix. Increasing the one-year price target for Netflix to $650/share; it's currently around $510, $515, something like that. And part of this firm's thesis is, and I'm paraphrasing -- in terms of the competitive landscape -- they have a line that basically says, yeah, we're pretty sure AT&T is going to screw up HBO Max. For all of the excitement around HBO Max, and the horrible branding mess they made of it, they still have good programming there. And yet, one Wall Street firm is like, yeah, we're pretty sure they're going to screw that up.

Gillies: Based on history, that's probably a good bet.

Hill: It's probably a good bet. Let's move on to shares of Sirius XM (SIRI 4.53%); up 5% this morning on reports [laughs] that the satellite radio network is close to signing a new deal to keep Howard Stern for a reported $120 million/year. You and I spent [laughs] time this morning, on our own, trying to figure out what amount of money SiriusXM paid Howard Stern since he started working there, I believe it was January of 2006? And it's somewhere in the neighborhood of $1.25 billion.

Gillies: Yes. Yeah, this is his fourth five-year contract. And look, Howard Stern is a senior citizen at this point. He's like, what, 66. I mean, shouldn't he be taking it easy? But then again, if you pay me $120 million, I'll probably show up for work once in a while. And look, this is not $120 million going into Howard Stern's pocket. It's paying for the show, it's paying for his productions and for his staff. So, he's doing fine. But you know, we'll say that this is for the Howard Stern property, not Howard Stern the shaggy-haired individual.

Hill: But this is kind of similar to what we just talked about with Research In Motion, with changing technology, because SiriusXM, I was saying to you, they almost had to do this deal because there's some percentage of people, based on surveys, it's maybe in the neighborhood of 15% or so, the No. 1 reason they subscribe to SiriusXM is because of Howard Stern. So, it was very much in the company's interest to figure out a way to keep him there. So, he was in the driver's seat.

Gillies: And what happens when he does decide to ride off into the sunset as well, that should be what -- I mean, because if it is 15%, 20%, Chris, I mean, SiriusXM is in a -- they have a monopoly position in an increasingly irrelevant industry, right? I mean, what are they beyond Stern? I mean, sure, they bought Pandora. The stock price today is lower than when Stern debuted. Now, they have gone through -- I mean, they went through the merger with XM in 2008, and they bought Pandora in 2018, and they've issued a bunch of shares, but, you know, if you've been a long, suffering shareholder in Sirius, unlike with AT&T, which is eerily similar, you're definitely down, if you've been holding here. And if you bought -- like, again, you might be a subscriber, and you, oh, I want to hear my Howard Stern, I want to hear what crazy hijinks he gets up to nowadays. But if you were an investor -- and I'm just coming here as an investor perspective -- if you bought Sirius because the king of all media was coming, you are in the hole today after +15 years, including the dividend. A running to standstill stock for a decade-and-a-half is, can we agree, that's suboptimal?

Hill: We can. And, you know, it's a reminder that particularly when people are starting out investing and, you know, a good guidepost is to start with the businesses that you're familiar with, start with the businesses that you understand, because the more you understand how they make money, the better, in general, you're going to do as an investor. But that is not a place to stop, that is a place to start, you know, take the old Peter Lynch-ism of, look around you and what are the products and services you're using. You can be a very happy SiriusXM customer and very satisfied as a customer and not go anywhere near that stock.

Gillies: Yes, it's the Peter Lynch, as you say, it's usually truncated as buy what you know, it's more a case of, if you like the product, maybe you'll like the stock. And in this case, you can like the product, you probably should not like the stock. So, 15 years going sideways, it's up 5% today, whoop-de-doo, I don't think the future is going to look any different than the past, recent past, for Sirius. So, I'm not a big fan of owning the shares today. Good for Howard Stern, though, I guess.

Hill: Yes. [laughs] Yes. Sure, you know, through a bizarre set of circumstances should we end up in a bar with him somewhere, sometime, we can confidently say, I think you're going to pay for drinks.

Gillies: Yeah.

Hill: Jim Gillies, good 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 tomorrow.