In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earnings reports from Wall Street. They discuss Beyond Meat's (BYND 1.98%) latest report and competition in the plant-based meat market. They also look at a homebuilding business, a win-win partnership in the retail space, and much more.
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This video was recorded on Nov. 10, 2020.
Chris Hill: It's Tuesday, November 10th. Welcome to MarketFoolery. I'm Chris Hill, with me today is Jason Moser. Good to see you.
Jason Moser: Good to see you. How's everything?
Hill: It's going alright. We got a bunch of things to get to. We have a retail partnership; we've got some homebuilding news. Let's start here though, on yesterday's show we talked about McDonald's (MCD 0.88%). McDonald's had announced plans to unveil a plant-based burger in 2021, and while that didn't do a lot for shares of McDonald's, it did send shares of Beyond Meat down about 8%, 10%. And they're falling an additional 20% today after Beyond Meat's third quarter report came out.
They had a big loss, revenue was much lower than expected, they had a couple of writedowns. Boy! This was not a good quarter for Beyond Meat, Jason.
Moser: Yeah, I agree with you. I mean, I'm not going to try to cupcake it, it wasn't a good quarter. I wouldn't call Beyond Meat a stay-at-home stock necessarily, but in theory, it should benefit from more time at home and less eating at restaurants. And it did to a degree. I mean, a lot of success was kind of pulled forward earlier in the year. And we saw that play out a little bit in the quarter. It's a little bit of a tale of two businesses here. The Retail channel sales were up 39% from a year ago. Food Service revenue, however, down 41% year-over-year. And the reason why that really matters is because retail is by far and away the largest part of this business, I mean, it's 80% of revenue through the first nine months of the year. So, that difficulty in Food Service does play out in the business, but we can see at least, I mean, regardless of the sell-off today, I think there's a reason to be optimistic of the business based on its retail presence.
But all in all, you look at topline growth, it was just under 3% total. That is clearly a problem for a stock that's valued the way this one is. I mean, it's not a knock on the business, don't get me wrong, it's a new business, it's young and it is growing, going through a very difficult time, but it's not profitable. They had no free cash flow to speak of. It's not really a very high margin business either, so you know, you couple all of that with a market where there are certainly a lot of substitutes these days. I think they make a good product and they have a very good brand that resonates with a lot of consumers, but it's a market where there are a lot of substitutes, so it's not something where they can just, kind of, go in there and own the market with no real effort.
And to that point, they are going to continue spending a lot on brand awareness, on promotional activity, that will play off the financials in the near-term. What we want to do is watch margins over the longer haul, look for efficiencies of scale, look at potential pricing power of the business, and if we see that play out, then you see things are kind of turning a corner, but just yet, not the best of the quarters this quarter.
Hill: I'm glad you mentioned the margins, because that's one of those, it's a little bit in the weeds, but I think it's really important for investors to understand that that you can look at this growing market, and I think we all agree this is a growing market, and you can be excited about this particular business, and as you said, the brand, their opportunities for growth, you can be excited about all of that, but you really [laughs] need to reconcile with the fact that, as you said, this is not a high margin business, this can be a good performer, but [laughs] this is not the kind of margins that we see with, I don't know, collaborative software. [laughs]
Moser: [laughs] No, definitely not, this really is not a tech company, it's not a SaaS business. I mean, just please don't confuse [laughs] those with this. And it's always going to be that way. I mean, I think there is going to be a limit on the pricing they can exercise, just because it's food; I mean, it's food. You don't typically have the opportunity to exercise a whole lot of pricing power when you have so many different substitutes out there.
You know, back to the success that was, kind of, pulled forward earlier in the year, they're not really seeing any of the stockpiling tailwinds that they saw earlier in the year. That stockpiling was a thing, it really did exist, we certainly heard the same kind of language in McCormick's call a little while back. They have continued to suspend guidance; they don't see enough clarity there to be able to offer an idea of how the next several quarters are going to play out.
Now, with that said, along with the spending and the brand awareness, they are creating more distribution relationships. The point of distribution grew 55% from a year ago, and that's great. The interesting distribution agreement they came up with that -- and I'm not scratching my head, I guess I'm just wondering how big of an impact this could have. The Beyond Burger, starting in January 2021, is going to be available at 7,000 [laughs] CVS pharmacy locations around the country. And then Beyond Meatballs will be available at 5,000 CVS pharmacy locations around the country.
Now, that's good, I think, in the sense that you're getting more distribution, and 70% of the population is located within five miles of a CVS. And given CVS' efforts to become more of a healthcare company, that's stoking traffic, and so I'm trying to figure out if that results in a meaningful bump in sales or if it's more just incremental. We'll just have to kind of wait to see there, but I do think the most interesting part of the quarter was the McDonald's story.
Hill: My initial thought when I saw the CVS news was that it would be incremental, but I think we can agree that if it's not incremental, [laughs] if it's truly meaningful, we're going to hear about that on subsequent conference calls.
Moser: [laughs] I'd imagine so. I mean, it reminded me of that headline a while back when we heard that, I think it was Walgreens that said they were going to start selling sushi, [laughs] and I mean, it didn't really line up. I'm not sure I really am going to Walgreens to get sushi, but you know, they gave it the old college try, so to speak. I do think the McDonald's story to me is fascinating, because if you read through both companies' calls, if you read through McDonald's announcement on this McPlant platform, and then you read through Beyond Meat's earnings call and their reaction to the McDonald's news, two very different reactions. McDonald's clearly is playing offense here. And on the other side of the coin there, Beyond Meat tried to -- it's like they couldn't really tell you it was a good thing or a bad thing, they felt a little bit more on the defensive there. And it's a little bit less clear from Beyond Meat's perspective how that may impact the business. I think they were trying to play down the impacts there, whereas McDonald's is like, hey, listen, this was built exclusively by us, for us, and it sounds like that's where McDonald's is placing its chips going forward. When it comes to a plant-based menu, they're not going to be relying on a partner like Beyond Meat. Whereas Beyond Meat is, kind of, hemming and hawing and saying, well, we're still going to be a part of the McDonald's universe, and they couldn't really offer any color as to how.
So, it sounded like it caught them a little bit off guard, and we'll see how that plays out. I mean, that's not going to be fatal for the business, but it is a sign, you know, maybe other restaurant companies out there decide to try to do their own thing, we'll have to wait and see. Clearly, the food service business matters, it doesn't matter as much as the retail, but it'll certainly be a story to keep an eye on.
Hill: If Beyond Meat had a rough quarter, D. R. Horton's (DHI 1.28%) fourth quarter was pretty much everything a shareholder could hope for. Profits and revenue came in much higher than expected for the homebuilder, they raised their dividend, they raised their guidance for 2021. And shares of D. R. Horton up more than 4% this morning.
Moser: Yeah, it's been a very nice time to be in the homebuilding business if you are a D. R. Horton, particularly over the last five years. Over the last five years, they generated over $5 billion in cash flow from homebuilding operations, growing consolidated revenues by 88%, earnings per share up by 216%. And if you stretch that out over a longer period of time there, the stock is up almost 450% over the last 10 years. You know, homebuilders are, kind of, flying under the radar for a lot of folks, myself included, but D. R. Horton is an exception, I think.
It's the largest homebuilding company in the U.S. as measured by the number of homes closed, big focus on first-time and first-time moving-up homebuyers, big presence in Southeast and the Midwest. And so, you know, the guidance that they set last quarter, they set guidance for consolidated revenues in the range of $5.5 billion to $5.8 billion, and to close approximately 18,000 to 19,000 homes. And the actual numbers came in, consolidated revenue well above their expectations at $6.4 billion, and homes closed for better than 22,000. And so, you know, the growth there has been really impressive, and part of that is due to the interest rate environment, it's creating a lot of demand, there is clearly a shortage of homes which is playing out very well for D. R. Horton. I mean, I tell you, it looks like 2021 is shaping up to be another good year, they're calling for revenue in the $24 billion to $25 billion range, and homes closed between 77,000 and 80,000; that's 20% growth at the midpoint for both metrics there. It's hard to look through this quarter and find something to be concerned about.
Hill: Shares are up nearly 30% year-to-date. And I know we've talked in the past about the housing industry writ large and, sort of, if you're an investor, what's the best way to sort of get into that? And you and I and others have said some versions of the following sentence. Well, don't leap in with the homebuilders. You know, you can get into the housing industry by looking at businesses that play into that, whether it's home improvement, like, Home Depot and Lowe's, or materials businesses, like, Sherwin-Williams. The way D. R. Horton has been performing over the last, I would say, 6- to 12 months, [laughs] they are making a good case for, hey, [laughs] if you want to get into the housing industry, this is a really, really solid performer right now.
Moser: I totally agree, and you know, it's a market that, yeah, I mean, you're right. We've always thought, you know, play it in sort of an ancillary fashion. You can touch the housing market by investing in a lender. You know, we had Ellie Mae, for example, before they were acquired, Home Depot and Lowe's have always done very well through the years. And, you know, D. R. Horton is just one of those homebuilders, that because of their scale, because of their expertise in the space, they've always been just a very good operator. And then you add to that the current environment -- and you know, it sounds like this environment is going to be with us for a little while. And at the end of the day, you need a roof over your head, right. Given that they're focusing on that first-time and first-time moving-up homebuyer, that's a really big opportunity.
And just, you look at the numbers that they've chalked up over the last decade, you look at their efficiency, the scale, I mean, it's really hard to argue against what this business is doing.
Hill: Target (TGT +2.33%) and Ulta Beauty (ULTA 2.19%) have announced a deal to open makeup and beauty shops inside of Target stores. This is going to be starting in the second half of 2021. Essentially these will be many versions of an Ulta Beauty store in more than 100 Target locations across the country. We don't know the financial terms of this deal, but shares of both are up. Ulta Beauty shares are up more than Target. This really seems like a win-win.
Moser: That was my impression when I first read through this deal earlier this morning. I really do feel like it's a great deal for both sides. I would venture a guess that Target sees more foot traffic than Ulta on a daily basis; I think you'd probably agree with that. Obviously, Target has a massive footprint around the country and elsewhere, but I mean, this is really a domestic play here.
And with Ulta, Ulta has always been, I think, a really good performer. I think they got caught in a difficult situation with the pandemic here earlier on, because so much of their success has really relied on foot traffic and physical presence, right? They have that dynamic to the business that is, you know, that salon dynamic, where if you're going to get your hair done, you can't get that done virtually, right, to get to actually be at the place.
And when you look at things like haircare products, styling tools, services, I mean, that makes up a good 25% of their sales. So, it's not crucial, but it certainly played out on their financials earlier in the year. This deal with Target, I think, is really smart just from a number of angles; for Ulta more so than Target, I think. Because Ulta when you look at cosmetics, skincare, bath, and fragrance, those categories altogether, I mean, you throw haircare products in there as well, but you're talking about 75% to 80%, if not more, of total revenue there. And that really just lines up with the kind of stuff that Target is selling to begin with.
And so, yeah, I mean, in regard to the actual finances of the deal, that's unclear, and maybe it's just kind of a quid pro quo thing here where Target gains traffic and Ulta gains sales by virtue of that traffic, and Target benefits from incremental sales from that traffic, I'm not sure, but they're definitely going to gain another traffic driver, so to speak, in a very relevant category. This is a category that it's very resilient. I mean, it's just amazing to look at this market over the years and to see its resiliency.
And I think Ulta has a very strong brand in the space. For them, I think it was always trying to figure out, how they could go beyond just the Ulta store, and I think this is one way to do it, you know, they've also made a lot of investments in e-commerce and some immersive technology plays there to bring more augmented reality into the app to allow people to try things on virtually, so to speak. But, yeah, I think all in all, I think it's really interesting to see how big the loyalty program is going to become with these two companies and their relationship combined. I mean, there are a lot of things you can do with that.
And then, add to it Target's expertise in shipping and logistics, right, they own Shipt, and they're doing a lot of great stuff with Shipt, and so I would imagine that'll be another way that Ulta will be able to utilize those resources that Target has.
Hill: Yeah, the loyalty program was one of the thoughts I had, because Ulta Beauty has done such a good job over the years. And you know, all credit to Mary Dillon, the CEO at Ulta Beauty and sort of the way she has run this business over the last few years in particular.
But I think there are a couple of things that bear watching, first and foremost, and again, we're you know we're talking about the second half of next year that this is going to start, but I think one thing to watch, obviously, is how quickly does Target decide this is working for us and therefore we're going to expand this? I mean, right now we're talking about somewhere in the neighborhood of 6% of Target locations in the U.S. I think they're being very smart and just sort of saying, no, we're not going to upend every location we have, let's test this. So, if they start deciding, no, we need to roll this out and make this a priority in more locations, that's one thing to watch.
And as you indicated, the loyalty program, I mean, if this becomes not just a way for Ulta to move more merchandise, but to get more people signed up, if they start accelerating signups into their loyalty program, that's a huge win for them.
Moser: Yeah. And the way these companies are using technology these days, they're doing great things with data. And the more you can partner up with companies that are thinking that way, it's just you're finding more ways to personalize and target, no pun intended, deals for specific customers for specific things. I mean, you can just do so much with it.
And I think it was interesting from -- I did notice how they were saying with Target, I mean, they're going to be training a certain swath of employees at Target to really become beauty consultants. I mean, you're not going to just go into a Target, for example, and just buy some Ulta stuff. There are going to be resources dedicated toward giving customers information and different perspectives and ways to look at all of these different Ulta products. I mean, you're not going to go in there necessarily flying blind. And I think that's excellent from a customer service perspective.
I kind of feel like maybe that's attractive from an employee perspective, I would imagine there some employees that would like to be an expert at something, like it's always fun to say, hey, I'm really good at this one thing or I'm an expert at this one thing, I have been trained in this one thing, it gives you a little bit more of a potential career path. And with the two companies together, maybe that career path could go in one of two directions, either Target or Ulta, and I think that both companies seem to be doing really well.
So, yeah, I just think there's a lot to like about this deal, obviously, a lot to learn, but I think based on what we know, a lot to like.
Hill: Jason Moser, thanks for being here.
Moser: Thank you.
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.
