Dollar General Saw Improvement, but the Stock Dropped. What's Going On?

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Maria Gallagher about the latest headlines and earnings reports from Wall Street. They go through the earnings reports of a brick-and-mortar retailer, talk about a cybersecurity stock hitting all-time highs, and much more.

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This video was recorded on December 3, 2020.

Chris Hill: It's Thursday, December 3rd. Welcome to MarketFoolery. I'm Chris Hill, with me today from the Financial Capital of the United States of America, it's Maria Gallagher. Good to see you.

Maria Gallagher: Nice to see you too, Chris.

Hill: We're going to talk cybersecurity, we're going to talk apparel, we're going to start with retail. Dollar General (DG -0.41%) same-store sales in the third quarter were up 14%. And yet, shares of Dollar General are down a little bit. And I'm assuming Dollar General has now entered the category of [laughs] stocks that when they come out with really good earnings and really good results, the market says, yeah, that's not going to cut it. [laughs] This is really good, but we were looking for even better than this.

Gallagher: Yeah, I feel like there are a lot of companies now in that good, but not quite good enough stage. I think one of the problems with Dollar General is they don't have guidance, they aren't updating their guidance, but like you said, revenue was really strong, it was up 17.3%. Their net income and operating income were both up 57%. I didn't know how many stores Dollar General has, it has over 16,700 stores. And in 2019, it brought in almost $28 billion in sales. And I feel like, a lot of times, especially right now during the coronavirus pandemic, we're talking about all of this shift to online shopping.

But Dollar General, I think, is proof that retail isn't going away, brick-and-mortar retail. They had, like you said, those same-store sales were up. There was a rise in transaction amount, which offset that lower customer traffic, and their store foot traffic was up 21% the Saturday before Black Friday, and even up a little bit, less than 1%, on Black Friday. So, it's still doing really well in a physical retail space, which I think is not something that we talk about that much right now, during current times.

Hill: Let me go back to the guidance for a second, because I'm curious where you think we're going with companies issuing guidance. Early in the pandemic, pretty much every company said, we're not offering guidance, and every one of us said, we get it, [laughs] who could possibly provide meaningful, thoughtful, informed guidance in an environment like this? Do you think, at some point in 2021, we're going to see the pendulum, you know, a shift back to the point where -- I don't want to say, "punished" because, look, Dollar General, that stock is up more than 35% year-to-date even with the slight pullback that we're seeing today, so it's not like the stock is getting hammered. But I'm wondering if you think there's going to come a point in 2021 where analysts collectively start to ding companies a little bit more for not offering guidance. Do you think it becomes, we get to a point where it's like, no, you don't have an excuse, you should be offering guidance?

Gallagher: I guess it depends on how long until there is some semblance of normalcy returned, right? If, you know, the vaccine happens in the next couple of months, like people are anticipating that, and then people are going back to work, I do think it'll be interesting in terms of comparables, right. So, you will see companies on both the positive and the negative. So, Zoom, 2021, what is their quarter going to be? What will that revenue guidance be versus a place like Target (TGT 0.18%)? Saying, well, now same-store sales can, kind of, bounce back, or a restaurant or something. So, I think the comparables are going to be really hard throughout 2021 and maybe even into 2022.

Hill: It's also going to be interesting to see what happens within industries, because if -- you know, to go back to Dollar General, if lots of other retailers, Walmart, Target, Kohl's, Macy's even, if they start offering guidance, it kind of seems like one of those things where if everyone else in your industry is offering guidance, it makes it a lot harder to get away with not offering it.

Gallagher: Company peer pressure.

Hill: [laughs] Exactly. In some way, I was going to say, do you think that's worse than peer pressure in high school? [laughs]

Gallagher: [laughs] I think it'll be similarly as stressful.

Hill: Shares of CrowdStrike (CRWD 2.03%) up 15%, after third quarter results were better than expected. Wall Street analysts were looking for a loss, but the cybersecurity company posted a profit. CrowdStrike putting up the proverbial nice kind of surprise. [laughs]

Gallagher: Yeah, CrowdStrike had a really incredible quarter, their revenue was up 86%. They added over 1,000 new subscribers and the stock is up over 150% this year because of COVID. I think, when I looked through their earnings, two things stood out to me that were really interesting, the first was just their massive breadth of their capabilities. A lot of times when you talk about cybersecurity and you realize how many cyberattacks happen everyday that are being prevented, it's a little bit hard for our brains to kind of wrap those numbers around. So, all of the data that CrowdStrike collects is stored in one place called the Threat Graph, and they process over 4 trillion signals per week. So, the first thing was just kind of the ability of CrowdStrike to look at those and defend against those kinds of attacks.

And then the second thing is, the "expand" part of that "land and expand" business model. So, their subscription customer base grew 85% year-over-year with their dollar-based net retention rate over 120%. And you can actually see they break out those customers and you can see that customers with over four modules is over half of their customer base, over 61%. And 22% of those 61% have +6 modules. So, as we can see CrowdStrike, there's just such a need for cybersecurity. And when people are on the platform, they just kind of get more and more modules, which is really impressive and what we want to see for these companies.

Hill: The stock is at an all-time high. This is about a $35 billion company, so it's obviously got some room to run. Jim Gillies and I talked about BlackBerry yesterday, which appears to have done a nice job of transforming itself from one time being a mobile phone company [laughs] into now being a cybersecurity company. Is this an industry that investors should have some exposure to in their portfolio? It's just, I don't have any in my portfolio, and it's just, you know, looking at some stuff this morning about CrowdStrike, that was the thought that occurred to me, like, wait a minute, this seems like both an important industry, and one that is growing. Do you view this as, I don't want to say a "must have," but investors should strongly consider, kind of, industry?

Gallagher: I would strongly consider. I have some exposure in my personal portfolio. I think a lot of companies consider cybersecurity mission-critical, they're not something that's going to be cut if you're going to scrimp on something, protecting your customers and [laughs] protecting your data isn't something where you're going to try and cut corners to get the best and cheapest deal. So, I think it's a profitable space and I think it's a growing space and I think it's a really critical space for so many companies and people.

Hill: It's a great point. I was sort of chuckling just because there was a report this morning about 3M and how 3M is going to be streamlining their spending, let's just put it that way. And you know, it's like, oh, we're going to cut marketing costs and, you know, that sort of thing, and it's like, yeah, to your point, [laughs] I don't think 3M is saying, yeah, we can cut back on the cybersecurity, that's no problem.

Gallagher: Yeah, we don't need to protect your data anymore, anyone can have it if they want.

Hill: Exactly. Shares of Stitch Fix falling a bit today after getting an analyst downgrade. And, you know, the headline for this is basically, and I think I agree with this, because the headline appears to be, hey, look, Stitch Fix, this stock is up above 50% for the year, so you shouldn't really back out the truck on this one right now. Do you agree with this?

Gallagher: It's interesting. So, Stitch Fix is one of those companies that I kind of have mixed feelings on, because I think that the idea is something that's interesting and I know people who really like the product, but I think that customers are moving rapidly on to spending online, so approximately 3X as fast as pre-pandemic. So, they're actually expecting about $30 billion of market share to move online in the next year. And then if you compare that to what Stitch Fix did last year, they grew their active clients by about 9%. So, they now have 3.5 million clients, which is more than I would think, but I think the question now with Stitch Fix is, what's the endgame, you know, how many more people will buy a subscription service for clothing?

And something that I also found pretty interesting about the company is they talk a lot about how they are data-driven, and I had a hard time finding a lot of data on their customers within their investor presentations and the way they talk about it. So, they say things about, you know, very general statistics but they don't talk about how, I would like to see personally, somebody buys a box in year one, and then they're likely to buy this many items in year two, or this many items in year three, what's the value of that customer over the long term. And for a company that is so data focused, I'm surprised they don't break out those more granular numbers to understand their customers more.

Hill: It's a little bit like the revenue guidance that we were talking about earlier. I think that's part of both the promise and the challenge of a business like Stitch Fix is, you know, to the extent that they have proprietary data, they have to be careful about how much of it they choose to share in investor presentations, because on the one hand, they don't want to give away any secrets they have, on the other hand, they want to convince people [laughs] like you that they know what they're doing, and they have, you know, serious growth potential ahead of them.

And in some ways it's impressive that the stock has done what it's done this year, because, you know, we were joking right before we started recording today, with our colleague Karen about, [laughs] you know, she made the comment like, yeah, do they have a sweatpants option, [laughs] because I'm just looking for comfy clothes here. So, I don't doubt that they are dealing with legitimate challenges, but it really is hard to see, in part because I am not one of their customers, it's hard to see how they get in the regular habit of shopping with them, in the way that, and this is an unfair comparison, because I'm going to talk about a couple of companies that are not apparel retailers, in the way that like, Target and Walmart have sort of made it easy for people to shop.

Gallagher: Yeah, it's interesting. So, they did shift a little bit out of things like workwear or blazers into athleisure, their athleisure revenue grew 350% year-over-year last quarter. So, they are trying to pivot and shift, but I think it kind of begs the question, who is their customer and how many of those customers exist. To your point about breaking out those numbers, because if it's proprietary, you don't want people to take that if you don't want them to. But I think a lot of times with some more vague numbers it'll be like you advertise them if you want people to know them, like CrowdStrike says, so many of our customers have +6 modules, and you kind of don't say anything if you maybe don't want people to know those numbers of your customer retention maybe.

Hill: This is a $4 billion company. They got smart management, Katrina Lake and her team; it's an established brand; there is clearly value there. Do you think in three years Stitch Fix is still a stand-alone public company? Because again, it's $4 billion, it really seems like the kind of business that a larger company, whether it's Amazon, Walmart, or Target for that matter, it really seems like someone could swoop in and, for not a lot of money, make them an offer they can't refuse.

Gallagher: I think that would be a really good idea for a lot of people, because I think it could, you know, get new customers for these bigger retailers, and then also expand the inventory of Stitch Fix and expand their capabilities, especially if it's bought by someone who has really sophisticated shipping and logistics, if you think about an Amazon, or a Walmart, or a Target. So, it could be really helpful and advantageous for both if there are some sort of acquisitions, because I don't know what this addressable market is and I don't know what amount of penetration it is with Stitch Fix right now.

Hill: Maria Gallagher, always good talking to you; thank you, my friend.

Gallagher: Thanks so much 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.