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 break down the numbers to see what's causing Stitch Fix's (SFIX 5.00%) run on Wall Street. They've also got the results of a luxury homebuilder, an auto parts aftermarket retailer announces strong same-store sales, and much more.
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This video was recorded on December 8, 2020.
Chris Hill: It's Tuesday, December 8th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you my friend.
Jason Moser: Howdy!
Hill: We got housing, we got automotive. We're going to start with the stock of the day, and that is Stitch Fix.
Shares of Stitch Fix up 45% today. They reported a profit in the first quarter, that was a surprise. First quarter revenue was 10% higher than a year ago. That's good, that doesn't strike me as the kind of revenue growth that would spark a stock shooting up 45%. I'm assuming, at least part of what we're seeing today is short-covering.
Moser: Yeah. I think that's a safe assumption. And I was going to say, you're forgiven if you're wondering why the market is offering up such a strong reaction today to really what were just, kind of, OK results. This is a massive short squeeze. And according to Cap IQ data, there was around 37% of the float going into today was being sold short. That's a lot, you know, that's over a third of the shares, that float on the open market. And anytime you have something like that, you'll see these types of things happen. Certainly, when a company beats expectations or brings results that are a little bit better than the market was thinking or expecting, I mean, it seems like it's a decent business, I don't know that it's one that can really capitalize on some massive market opportunity, because frankly, it's totally replicable, and we've seen that with other retailers and similar offerings. I mean, I've never used it, so I can't speak to it as a service.
I think the big question, really, for this company, I mean, this is a good quarter, congratulations to them, it's nice to see the stock getting some love today, but the big question really is going to be, can they sustain these tailwinds that COVID has created this year? And I'm just not so sure with that. I mean, anecdotally, I speak with people who've used the service, and they stopped using it, they just didn't find it to be all that compelling. I'm just not sure about that longer-term relationship with the customer, and that's what really matters, because you pay a lot to acquire these customers, to get them to use your service. If you're not keeping them, that becomes a real problem down the line. And so, it's really important to be able to keep those customers. And that's the big question, I think, for investors today, and I don't know that I have a firm answer, but I kind of feel like maybe there isn't the same sense of loyalty with something like Stitch Fix based on what we've seen up to this point.
Hill: There have been countless examples of start-up businesses that get some success, get some growth, get some attention, and then someone will throw out, you know, the classic "what if" like, well, what if... and usually the "what if" is followed by the name of a big tech company. That is essentially like, well, what if... you know, we heard this for years about Netflix. Well, what if Apple decides to go into original programming? It's like, well, they could, they haven't yet. Like, we'll see how that's going. So, I'm loathe to, sort of, pull the same trigger with Stitch Fix, like, you know, well, what if Amazon decided they wanted to get into that?
That said, it is one of those things I do have in the back of my mind, and part of it is because I live close to a Whole Foods, and I have noticed [laughs] over the past year, that when I go into the Whole Foods, they have got their own, not clothing, but they've got their own, sort of, meal kit section of the Whole Foods. And every time I walk by it, I think to myself, boy! Are they just, is Amazon just gearing up for a push to just take over the Blue Apron market? You know, that sort of thing. You and I have talked before about the investments that Brian Cornell, in particular, has made at Target (TGT) in apparel. I'm not saying that they are direct competitors, but you know, if we're going to play the "what if" game, Target seems like a likely candidate to go into this space. I mean, it's a tough space, and I think it's a credit to Katrina Lake that she's built the business that she has to this point. But to the point you were making, I do wonder about how high the ceiling is.
Moser: I agree. I mean, that I think is my trepidation as far as this is an investment, because I don't see this massive market opportunity, because there are so many potential competitors out there. But Target certainly could be one. I mean, Amazon is out there doing their own stuff in fashion. Walmart is getting into that line of work as well. And you got all sorts of retailers that are coping with a pandemic economy and going digital and omnichannel.
And so, it's certainly not to say that Stitch Fix is a bad business, I mean, it seems like it's a pretty decent little business, but it may be one where it makes more sense as part of something bigger. I think it's really easy for a bigger retailer to add a dynamic like this and really leverage the infrastructure and inventory that they already have. But, I mean, you know the argument for Stitch Fix, for a lot of folks, I think, is the data side and perhaps there's something there. I don't know. It's fashion retail. I mean, that's just a really difficult market. And 10% growth for the quarter in revenue and customers is fine. Revenue per active client was actually down. It is a constant juggling act with inventory and trying to understand the consumer.
And they're seeing some tailwinds from athleisure, for example, and really shifted a lot of inventory. I think they said on the call, it was something like 150% growth in athleisure inventory, because they saw these tailwinds, because of everybody working from home and just the nature of athleisure, because people don't have to get dressed up to go to work [laughs] so much anymore.
So, it is a very difficult business to manage over the long-haul. We've seen SG&A [Selling, General and Administrative Expense] costs were up a little bit more meaningfully this quarter, it's not a really high margin business. And again, we go back to that apparel industry, it's just a very difficult space. And so, I think, beyond the short squeeze that we see playing out here over the next couple of days or however long this draws out, again, I go back to that question of, is this something, are they going to be able to sustain the tailwinds they're feeling right now? Because if not, again, that revenue growth at 10%, eh! you know, they're calling for 25% for the year, they better deliver on that, because that's certainly part of what's going on today. We'll just have to wait and see, but certainly congratulations to them for chalking up a decent quarter and for getting a little love today in the market.
Hill: And you know, anyone can obviously completely ignore the conjecture [laughs] that I just, sort of, threw out there, like, well, what if Target... like, just put all that aside, you're absolutely right about the revenue. Like, at the end of the day, it doesn't matter who their competition is, if 10% revenue growth is what they're getting, you know, that is reason enough to be skeptical. But to your point, if they can deliver on the 25% growth, more power to them.
Let's move on to Toll Brothers (TOL 1.86%). Shares of the luxury home builder dropped 7%, despite the fact fourth quarter profits and revenue came in higher than expected. Help me understand this, I mean, mortgage rates are low, demand for more living space is up, this is a luxury homebuilder. Why is the stock down? [laughs]
Moser: Well, so this is a business where size matters, and we've seen that play out. If you compare Toll Brothers to something like a D.R. Horton. You can certainly see the advantages in D.R. Horton's model, just because it's so much bigger. But Toll Brothers, as you mentioned, a bit of a more specific market in that luxury home space. So, I think the market opportunity maybe is a little bit smaller, I think the sell-off today really is a valuation thing. It was a good quarter. And frankly, they painted a very nice picture for the coming year. I mean, just if you look back historically, the multiple expansion has been really strong here for this company over the past several years in relation to the growth that they've been recording. So, I think it's more of a valuation thing than anything else.
So, in the release, CEO, Doug Yearley noted, that they're experiencing the strongest housing market he's seen in his 30 years at the company. That's a strong language. [laughs] And so, yeah, I think that it's really shaping up to be a good year for this business. I think it's a bit of a more specific market in the product that they're putting out there, but again, to your point, they're saying that they see the housing market is strong as they've ever seen it, there are a lot of things coming together that's making it a very robust market. I mean, they saw nice growth for the quarter, home sales revenues were $2.5 billion, it was up 9%; homebuilding deliveries were up 10%; net signed contract value was up 63%; contracted homes, up 68%. So, they're seeing a lot of strength out there and they're benefiting from it. I think that really the valuation is what the source of the sell-off today is.
If you just look at the multiple expansion, it really just hasn't kept up with the growth. This is another growth company, it's growing, it's growing modestly, but it's something where the valuation still has to make sense. And this is housing, right, it's not a SaaS business, it's not Tesla, so, [laughs] I mean, we got to try to keep things in context, I guess. [laughs]
Hill: You're saying, it's not Luxury-homebuilding-as-a-Service?
Moser: I mean, we can invent that business model today, Chris, I'm sure, and probably get that stock back even for the day if we wanted to, but we're not going to do that.
Hill: We're not going to do that; that sounds exhausting. AutoZone's first quarter profits came in higher than expected, revenue looked good, same-store sales were up more than 12%. Same question, why is this stock down 7%?
Moser: Well, again, this is coming off of a really stellar quarter that they just recorded a few months ago. So, these businesses have actually, AutoZone, and O'Reilly, and Advance to a lesser degree, they've been pretty resilient through what's been a very difficult time for the retail space, and they don't have the same type of omnichannel presence that is helping other retailers cope. So, it's been a tough year, but the further out you look, the more sense these stocks make, the performance gets a little bit better.
For me, AutoZone and O'Reilly are really the two companies that rule the space. And it's a pretty attractive space when you consider the number of cars on the road today, and that's going to continue to be the case, I think, for a long time to come. It feels like to me, you could call AutoZone the Lowe's to O'Reilly's Home Depot. So, AutoZone is kind of that, I don't want to say a lesser competitor, because that's really doing a disservice to Lowe's, the success that Lowe's has been witnessing and what Marvin Ellison has done there, but I think that AutoZone is just -- O'Reilly is just a little bit of a stronger business I think.
But to your point, same-store sales up 12.3% for the quarter, but if you just look back at the last quarter, 22% same-store sales growth. So, maybe it was a little bit underwhelming compared to what they chalked up last quarter. But this is a business that keeps on doing just really good stuff. The Commercial business continues to grow at double-digit rates, that was 10% for the quarter, that was 17% a quarter ago.
And I think sequential results are important to look at. A lot of times we're comparing things year-over-year, but sequential results are more important this year because of what we've been going through with COVID. So, I just think it's always worth noting that stuff.
You know, they're seeing some operating leverage in the model which is really nice, traffic and transactions were up a little bit. They restarted their share repurchases. So, they brought down the share count about 20% over the last five years. But again, you go back to that omnichannel, that's still just a tiny percentage of the business, like this is like, below 5%. Maybe there's an opportunity for them, and maybe that would be something that could light a fire under the shares. But, hey, it was a respectable quarter in a difficult time.
Hill: Historically, they've done a good job in terms of repurchasing their own stock. And it is going to be interesting to see what 2021 holds for AutoZone, because as you said, they restarted that, you know, if more cars are getting back on the road then that is good for the auto parts business because more time on the road means more wear-and-tear and, you know, that's generally good for business. But we'll see where it goes.
All right. Jason Moser, always good talking to you; thanks for being here.
Moser: Yes, Sir. 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. 40 years ago, we lost John Lennon, but fortunately, his music and legacy live forever. So, rest in peace, John.