In this episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Maria Gallagher about the latest headlines and earnings reports from Wall Street. They talk about what makes Sportsman's Warehouse (NASDAQ:SPWH) a great business. They also discuss why an online consignment luxury retailer may be undervalued. Finally, Maria shares her favorite CEO picks for 2020.
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This video was recorded on Dec. 22, 2020.
Chris Hill: It's Tuesday, Dec. 22nd. Welcome to MarketFoolery. I'm Chris Hill, with me from New York City, it's Maria Gallagher. Thanks for being here.
Maria Gallagher: Thanks for having me. Happy almost holidays; Happy Merry Christmas!
Hill: Yes. We've got luxury retail to talk about, we've got a CEO in the spotlight, but we're going to start with the deal of the day.
Sportsman's Warehouse is being taken private. Great American Outdoors Group, which is the parent company to Cabela's; people are probably more familiar with Cabela's. So, Great American Outdoors Group is buying Sportsman's Warehouse at $18/share, which is about 40% higher than [laughs] where the stock was trading yesterday. You know, there is still a little bit of gap right now, the stock is trading at about $17-and-change, but this looks like a good deal.
Gallagher: Yeah, it's pretty interesting, I hadn't been familiar with Sportsman's Warehouse, as someone who is not very outdoorsy, growing up in New York. But it has 112 store locations, it has product offerings for fishing, camping, hunting, boating. And so, this merger seems like it's really logical; it will get to expand its product offerings. One of the other companies owned by the Great American Outdoors Group is Bass Pro Shops, which is a company I had heard of. They have premier hunting gear, as well, they can get more boats and ATVs. As well as, they have different conservation efforts; the Great American Outdoors Group is one of the leading conservation movements. So, they protect wildlife, they introduce people to nature, they work with the legislation. And so, it's kind of a cool merger, I think.
Johnny Marris is the head of the group, and he actually founded Bass Pro Shops in 1972. So, I think it's a really interesting group that I hadn't been super familiar with, and it's one of those companies that, because it's not necessarily focused in cities, sometimes it might be overlooked.
Hill: It's also great to be talking about a retailer, you know, still in the mix of things, still viable, being taken private, obviously. But, you know, you think back on how many retailers we saw -- I don't want to use the word "niche" but certainly...let's call it "specialized" because Sportsman's Warehouse has its category in the same way that Sur La Table has its category for kitchen goods and that sort of thing. And Sur La Table didn't make it, you know, [laughs] they're going into bankruptcy. And we've seen so many retailers really take that hit this year. So, it's nice to see a business like this continuing on into 2021.
Gallagher: Yeah, and it's interesting because they've actually done really well this year. And I think it's helped in the way that people are going more outside and you don't have as much to do. So, camping is more of a social distance activity, fishing, all of the things that are kind of right within their wheelhouse, and they also own a nature resort, the Great American Outdoors Group also owns Big Cedar Lodge in the Ozark mountains in Missouri, which hopefully, as things get to open up, you can -- people will be able to go back to that. And so, I think it's kind of this really interesting niche, and they have a community center as well. So, through Bass Pro Shops there's something called the Braggin' Board, so people can share their victories, hunting, and fishing, and camping, and things like that. So, they really operate in this, kind of, cool niche that has been really propelled with people having more and more incentive to be outdoors, socially distant. And then they also have this, kind of, community that helps keep it strong. So, I think it makes sense, and I think it's going to be a strong merger for both of them.
Hill: Although, you just touched on something with regard to the stock that I do think is interesting, which is that Sportsman's Warehouse, I mean obviously it's having a great day, it was having a good year. 2020 was good for this stock even before the big pop that we're seeing today. You go back the previous five years, though, it's only been public since about 2014, it really hasn't been a great run. So, part of me looks at this and thinks, OK, is the leadership at Sportsman's Warehouse, were they sort of aware of the fact that, hey, we're having a good year, but in the full public life [laughs] of our company it really hasn't been that great, and we should just take this offer and go private, because on the surface that's how this looks. Like, we've had a great year, and this is how we're going to cap it off and exit stage left.
Gallagher: Yeah. And I think that that is a good strategy. If that's what management is doing, it's going to work in their favor.
Hill: Shares of TheRealReal (NASDAQ:REAL) are up more than 10% after the company got an upgrade from one Wall Street firm. TheRealReal is a secondhand luxury goods seller. There are a couple of different directions I want to go in, but first, Maria, let's just start with the upgrade. Do you look at this business and think to yourself, yeah, I understand why this one firm is upgrading this stock, because I think it's undervalued.
Gallagher: Yeah, I've been following TheRealReal for a little over a year at this point. And I think it's a really interesting business, like we just talked about in terms of owning a niche, TheRealReal has this really interesting one with online consigned luxury items. And so, you have a lot of different online marketplaces for different needs, but in the way that I think Etsy has really carved out this niche in terms of handmade online, luxury is a niche that really only TheRealReal serves. And a lot of the buyers and people who want to get the clothing need it to be authenticated, because it's these top-tier brands, and so it's not something that anyone can just, kind of, start up and do and make it really easy. And so, there are lots of different online retailers, like Poshmark or different thrift stores, but this is the only one that really specializes in luxury. And so, I think that that makes it kind of more interesting than I would think, because it's the higher order volume brands anyway. And then it has this kind of distinction compared to other online retailers.
Hill: You make the comparison to Etsy. Etsy is about a $25 billion company, TheRealReal is just under $2 billion. I'm not going to ask you, well, when is this going to 12X and get to the size that Etsy is. But I guess, I look at a business like this, and one of the questions that comes to mind is, how big is this addressable market? Like, I understand the value proposition for consumers with something like Etsy better than I can understand it for something like TheRealReal.
Gallagher: Yeah, that's a really good point. And so, the thing that's pretty interesting about this is that it's really opening up the ability for more people to get into this consigning luxury market. And so, it does have more of a niche addressable market, right, it's people who want to upgrade and get things that are higher quality and known brand names, but those names have, kind of, this long-term staying power, so it's also interesting in that way where it's names that you'll be familiar with, like, the Prada or Tiffany's or Gucci or Chanel; things that they have brands with staying power. And so, it kind of is opening up this opportunity for more people to get the ability to purchase these at a more reasonable price. And you already know the quality of the goods most of the times when you're purchasing it. So, I do think it's a bigger addressable market than you might think it is, because it can just, kind of, draw more people in that maybe wouldn't go into a Chanel or a Prada on their own.
Hill: Is this a stock you own or is this just on your watchlist at the moment?
Gallagher: It is a stock that I own, yes; I've owned it for a little while.
Hill: Last thing and then we'll move on. One of the things that Etsy has done a good job of, particularly over the last, let's call it, 18 months or so is, investing in their platform for sellers. Because while it's natural to look at Etsy through the lens of consumers, in order for that business to work and for the stock to reward shareholders, they got to make it work for the sellers as well. What, if anything, can you tell me about how TheRealReal is making similar moves, because again, they've got to make this work not just for people like you and me who might be looking to buy something, they got to make it work for people who are looking to sell.
Gallagher: Yeah, so actually that's kind of an interesting thing about consigned luxury. So, 40% of the consignors are new to consigning and 70% of buyers are new to preowned luxury. So, it's a lot of times the people's first interactions with this kind of reselling, especially with these types of goods. And so, reselling is kind of -- it's really annoying to go through the process, as both -- [laughs] I was trying to find a better way to say it, but just really annoying, because if you sell it...
Hill: ...by the way, that could be a part of their pitch.
Gallagher: [laughs] It is.
Hill: Like, I'm sure on some level, maybe they're not using those exact words, but that's probably part of the pitch they use when they're trying to [laughs] bring in more sellers, like, come on! This is kind of annoying, and we're going to make it less annoying.
Gallagher: Yeah, because you have to basically drop your stuff off at the consignment shop. They have to authenticate it, look through it, then they have to sell it and then months and months later you might get more information about it, it might sell, it might not sell. So, the way that TheRealReal works is, it's really interesting. And they do white glove service, so you can drop your stuff off at a location and they'll take it from you, they'll come pick up your stuff from a location. They have all of these different tiers of working with the sellers, so they make it as non-annoying as possible, [laughs] they make it a pretty seamless experience for both the sellers and the buyers. And it goes through a pretty rigorous consignment process, so that you believe that it's all authenticated, so you can trust them and that's a really big part of the value proposition, is that you can trust that those brands you're getting are not going to be knockoffs that you could find on the New York Street corner for, like, $5.
Hill: [laughs] Last week on Motley Fool Money we did our year in review, and one of the things that Ron Gross and Jason Moser and I talked about was, our respective picks for CEO of the year. Jason picked Eric Yuan from Zoom Video. Ron picked Marc Benioff from Salesforce.com. I talked about Kevin Johnson from Starbucks. Who gets your pick for CEO of the year?
Gallagher: So, I came in with two. So, my first pick -- well, because I think there are two different classifications, because you have a group of CEOs that have done well while their business has done well, and then I think there's a group of CEOs that were really poorly hurt by the COVID-19 pandemic and have still done well for their employees and for the world at large. So, I have two different classification systems.
Hill: Two categories; all right, go for it.
Gallagher: So, my first category is companies that have still done well. My pick is A. J. Banga, who is the CEO of Mastercard. And he did actually make the Fortune list of best CEOs of 2020. He's been at the helm of Mastercard for over a decade; and this is his last year. He'll be turning it over to Michael Miebach at the end of 2020. But a couple of things that he's done during COVID. Mastercard donated $250 million in financial, tech, and product support for small businesses. They had $10 million in emergency grants to support frontline workers. They've launched a global data responsibility imperative. So, they work with transparency, accountability, and innovation in their use of customer data. And they've also been committed for years, and it's continued to be propelled by COVID, is helping connect micro- and small businesses to the digital economy and working on the 1 billion unbanked people to help them get more access to financial institutions and financial freedom.
So, I think there's a lot to really respect about him and what he's done with Mastercard over the past decade, especially how he's handled COVID. And I think, hopefully, the company will be in good hands. I think he's really groomed Michael Miebach to do well after he's gone.
Hill: I hope so, because that's a pretty phenomenal track record over the past decade for Mastercard, and definitely big shoes to fill.
Gallagher: Yeah. And then my second choice is Randy Garutti of Shake Shack. And Shake Shack is another company that I follow that doesn't get a ton of love, but I think it's a really interesting company. They're known for offering good benefits and paying above minimum wage. And it's one of those companies that was very hard hit by COVID. They had to close all of their stores, they had to close all of their Shacks. And they really work in tourist destinations, they really pick their real estate to be in business centers, in tourist centers, a lot of them are based in New York, which is the hardest hit by the COVID pandemic. So, they did some pretty interesting things within their company, so they shifted to digital ordering, they've included drive-thrus or walk-thrus for future openings. They have a 28% average increase in check for these digital offerings, so they are not doing well, but they've done a little bit better than you might think.
They've been paying a 10% premium from April to August for all their employees, they're paying year-end bonuses. They got the Paycheck Protection Program, then they gave it back because they realized that they maybe didn't need it as much as some other people might. They're paying healthcare for furloughed employees. So, I think that they're really treating their stakeholders well, even while their company is really hurting, and I think that deserves a lot of respect.
Hill: Pretty amazing when you just look through the lens of 2020, everything you just said about Shake Shack, but also just in that industry at large and how hard it's been hit. The stock is still up more than 40% year-to-date, so that's pretty incredible.
Gallagher: Yeah, it's always been a stock that has, kind of, a very rich valuation, especially it's connected with Danny Meyer, and it kind of has a lot of hype to the name, people are more familiar with Shake Shack and actually there are only less than 150 open and operating Shacks. So, it's less than you would think for the name recognition it has.
Hill: Maria Gallagher, always good talking to you. Thanks for being here.
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 tomorrow.