Delta Reports a Better-Than-Expected Quarter

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Maria Gallagher to discuss how things have been going for Delta Air Lines (DAL 0.90%). Nordstrom (JWN 4.02%) struggles as holiday same-store sales fall more than 20%. Maria analyzes those stories and delves into how and why GameStop (GME 1.10%) stock doubled in just one week.

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This video was recorded on January 5, 2021.

Chris Hill: It's Thursday, January 14th. 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.

Hill: We have got another piece of the holiday retail puzzle. We're going to get to that. We're going to get to a stock that has doubled in the past week. But we're going to start with airlines, specifically Delta, wrapping up the worst fiscal year in the company's history, fourth-quarter revenue was 65% lower than a year ago. I suppose if you're looking for a silver lining, it's the fact that Delta is not burning as much cash as they had been previously. Certainly, there is a little bit of optimism because shares of Delta are up above 4% this morning.

Gallagher: Delta actually, while it was a terrible year, this quarter was better than expected. So the total revenue was $3.97 billion versus an expected $3.6 billion, and like you said, that's down about 65%. Their cash burn averaged $12 million a day, whereas in quarter three, it averaged about $24 million today. So they cut that cash burn in half. They also laid out our expectations for March and for 2021. For March, their total revenue is going to be down around 60%-65%. They're anticipating an average daily cash burn in the $10-$15 million range. But they did talk in a really optimistic tone about 2021, they say they see three distinct phases. The early part of the year is that choppy demand recovery, and then they're seeing an inflection point in 2021, as more people start to travel, get the vaccine. So I think they're banking on that pent-up demand to recover in the second half of the year, probably around, and then that sustained demand recovery for the rest of 2021 to get them back to more positive revenue and earnings in the next year. While the quarter and 2020 was really tough for Delta, it had somewhat of an optimistic note at the end of this report.

Hill: I'm assuming they didn't go into the, I was going to say the level of detail, but it's not even the level of detail. I suppose they weren't as blunt as I'm about to be. But I think, if you are looking at the airline stocks, if they are on your watch list and you're thinking, maybe I'm going to invest into this, one of the things that has to go in the plus column is the fact that, at some point in 2021, if things go as we all hope they're going to go, Delta and other airlines are 100% going to jack up prices. When we talk about companies that have pricing power, we're typically looking at businesses like Apple or even a business like Costco or Netflix, which provides a service that overtime they're methodically able to jack up prices just a little bit, a couple of bucks here and there. In the case of the airlines, don't you think that Delta and all these other airlines, once people start flying again, we're going to see airline ticket prices rise dramatically?

Gallagher: Yeah. I would expect that, especially as some of the budget airlines aren't going to do as well in the next year. You already saw WOW went bankrupt in the past couple of years. I don't know what Ryanair is going to look like in the next couple of years. If you have less choices and if safety is more of a priority, if in the past you would say, "I'll fly anything," but now you say, "Now I really want that middle seat to be empty and I really want all of these accommodations for me moving forward," that's going to mean that you'll pay up for that if you're able to travel in the next year. I think that's a fair assessment, and I was actually surprised because the Transportation Security Administration actually screened 324 million travelers last year, which was down from 824 million in 2019. But it's still higher than I would think of the amount of people that traveled in 2020.

Hill: Yeah, and again, you have to assume that number is going up this year. It will be interesting to see. I guess from a stock perspective, it's not going to surprise me if at some point in, let's just call it somewhere between the spring and early summer, one of the lead stories in the business world is airline stocks across the board up anywhere from 3%-10% because of ticket hikes. We'll see.

Shares of GameStop, meanwhile, are up 14% this morning. They have doubled in the past week. GameStop. We're talking about GameStop doubling in the past week. What are they doing? Is GameStop working on a COVID-19 vaccine? Did they partner with Peloton, and they're coming out with a line of high-end fitness furniture that you can sit on? What is GameStop doing that has the stock doubling in a week?

Gallagher: There were two reasonably good things that came out of GameStop in the past week. Their holiday sales, their net sales, were down only about 3%. They still have $1.7 billion. Their e-commerce sales were up 309%. It's now roughly a third of sales and they surpassed their $1 billion objective for e-commerce sales. Then also Ryan Cohen, who people might be familiar with from Chewy.com, is now an activist investor and he and two other men are being added to the board immediately. Now the board of GameStop is five of the nine board members are activists from either this year or last year. I think that that gives people confidence of what's going to happen in the future. Ryan Cohen owns about 13% of the company. He's really trying to streamline e-commerce. He's really trying to make GameStop a turnaround. Those are the two moderately good news items that came out of GameStop. Then what happened is, because it was sold short so much, we saw something called the short squeeze, which means people were trying to pay to cover their shorts and then it popped up, and then Jim Gillies, who covers the stock more closely than I do, and I talked about this on Slack earlier, he refers to it as the market equivalent of musical chairs. A bunch of folks who were short panicked, tried to close their positions, and then as they did, other people noticed, and people who weren't short started buying to drive the price up and then panicked the shorts even more. He calls that musical chairs. I said he should call it musical shares. [laughs] But that was something you saw two reasonable results, and then a lot of people who sold short panicked.

Hill: The reasonable results; I've put plenty of fund at GameStop as a business over the years, the two bits of good news that you mentioned, certainly the first one makes sense to me, just because for over a year now, we've been hearing about not just the video game makers, but the console makers talking about holiday 2020 as being a big year for console. It makes sense that there would be this ripple effect for a business like GameStop. I wasn't aware of the activist investors. I can see how that would scare anyone who has sold this stock short. It'll be interesting to see where GameStop goes from here, because at the end of the day, it's still GameStop. I'm not betting against the video game industry. I think it's an incredible industry to be invested in and has a long runway ahead of it. It remains to be seen if GameStop is part of that runway in the future.

Gallagher: I think it's interesting that this is what Ryan Cohen is doing after chewy.com. I think his history shows that he can really dominate in the e-commerce market with something that is traditionally known to be a retail play, such as pet food. So I'm really interested to see what he is going to do in the next couple of years with the company and what his plan is moving forward. I think that having him on the board is going to be really fascinating moving forward for this company.

Hill: Yesterday on the show we talked about Urban Outfitters' holiday comps being nearly 10% lower than a year ago. Nordstrom wishes that their holiday same-store sales looked that good. Instead, Nordstrom holiday comps were down 22% compared to a year ago, and shares of Nordstrom fell about 4% this morning. You tell me, how tough a spot is Nordstrom in as a retailer?

Gallagher: I think that Nordstrom exists in this unprofitable gray area in between the big warehouse retailers that people love to go to, like a TJ Maxx [TJX Companies Inc], a Target, and a Marshalls. Then the more high-end boutique stores that people would go to, or high-end boutique that you'll get online. I think that Nordstrom isn't quite cheap enough to be off-brand or isn't quite expensive enough to be boutique. Nordstrom Rack is their alternative. They really exist now in a completely different retail environment than when it was founded in 1901 as a shoe store, so they haven't been able, I think, to adapt their brand in the way they would need to survive. They've shifted a little bit to e-commerce. Their digital sales were up 23% and they were 54% of total sales. I just don't think that Nordstrom is going to have a turnaround story where it has to pick a lane, it's either high-end or it's like cheaper knockoffs, and it's just not picked either lane and so it just sits in the middle. I don't see how that's going to change in the next couple of years.

Hill: Not helping matters. This is a family run business and the family has made it pretty clear over the last, let's call it five years, that they're not necessarily in this for the long haul. At various points, we've seen the Nordstrom family come out and say, "Yeah, we're interested in selling this, we're exploring strategic alternatives." Sometimes the stock bounces back up and the asking price gets higher, and then maybe some of the family members are more interested in it. Again, that complicates things. Five years from now, what do you think Nordstrom is? Do you think it is still a stand-alone public company? If so, is it one that you think people are going to want to own?

Gallagher: I wouldn't be surprised if it gets bought by a private equity firm. They have 358 stores, which is actually lower than I would have thought, 100 are pure Nordstrom stores, 249 are Nordstrom Rack stores, two are clearance, and seven of those are Nordstrom local. I think a lot of those Nordstrom-branded stores are in malls. So I think that I wouldn't be surprised if they got bought by a private equity and shifted more, leaned more into Nordstrom Rack more than they already have, and tried to become a more profitable e-commerce play. I'm not quite sure what it would look like, but I wouldn't be surprised.

Hill: Because it does seem like there is actual brand equity there in terms of the clothing. As you said, it's not necessarily at the boutique level. But just from a business standpoint, some of the things you're saying about Nordstrom, you may as well be saying the exact same things about Macy's, which I think is in that gray area where they're built for a different age. I think between the two, if either one of them is going to make a viable leap to being a stand-alone business with a much more robust e-commerce presence, it seems like it would be Nordstrom for a number of reasons, one of which is, they're much more focused in terms of what they sell.

Gallagher: Yeah, I would agree with that, and I do think that Nordstrom Rack as a viable alternative. I don't know many people, I don't think I know anyone who's ever shopped at Nordstrom than the way that I don't know very many people who have shopped at Macy's, but I've shopped at Nordstrom Rack. I know a lot of people who have shopped at Nordstrom Rack for fancier occasions. If you want to get a nice dress, I think I got my prom dress at Nordstrom Rack. I think that that's a viable option of the business and I would think that they're going to lean more into that. I don't know that Macy's has that. I guess Macy's has Bluemercury, but that's makeup, so I don't know what Macy's could do.

Hill: One more question I have for you before that quick programming reminder for folks that the market is closed on Monday. That means we'll see you on Tuesday with the next episode of MarketFoolery. You mentioned Jim Gillies, something he and I talked about the other day had to do with guidance. I'm curious, where do you think guidance is going regardless of industry, because for the past 10 months or so, most companies have either suspended guidance, done away with it all together. I'm curious to see, particularly in this earnings season, but especially in the earnings season coming in the spring, where companies decide to go with their guidance, because my hunch is a lot of them are going to start offering it again. I think for businesses that decide for whatever reason, however valid their reasons, that they're just not ready to do that yet, I feel like they're going to get punished. Just given everything that's going on with the market, including the market hitting new highs every week or so, where do you see guidance going over the next six months or so?

Gallagher: I would agree with you. I do think a lot of companies are going to try and come back to some semblance of guidance. I don't know that it will be as specific as we were maybe used to pre-pandemic, like Delta's guidance of, "This is how we see our revenues of the next year playing out, and this is what we're thinking." It's going to look like, I could see that in more of a macro sense, understanding that. But I do think that there are expectations baked into so many companies now that there's going to be a really and intense pressure on management in each earnings call to say, "This is what our expectations are, this is how we're going to reach the highs that you have already expected us with what our stock prices are right now." I think that if they don't at least give out a plan for what they're going to do to deserve those premiums, they're going to get danged.

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. Show is mixed by Dan Boyd, I am Chris Hill. Thanks for listening, we'll see you on Tuesday.