The Intel CEO Switch

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool Asset Management's Bill Barker to discuss investors' reaction to the leadership change at Intel (INTC 0.93%). They also talk about results from KB Home (KBH -2.59%), Target (TGT -0.77%), and Urban Outfitters (URBN -1.12%).

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This video was recorded on January 13, 2021.

Chris Hill: It's Wednesday, January 13th. Welcome to MarketFoolery. I'm Chris Hill, with me today is Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: We've got holiday retail numbers starting to come out. We've got some housing news. We're going to start with some surprising news from Intel. CEO Bob Swan is stepping down in mid-February. In June of 2018, he was appointed interim CEO of Intel. In late January of 2019, the interim tag was removed, but suffice to say, Swan has faced a number of challenges over the ensuing two years, and he is on his way out. Moving into the corner office is Pat Gelsinger, who is currently the CEO of VMware. For anyone wondering what the investing world thinks of all of these moves, shares of VMware are down 6% this morning, and shares of Intel up 8%.

Barker: Yeah, so you've got Gelsinger who previously had been at Intel as the Chief Technology Officer and, of course, Swan came up and was promoted to interim and then permanent CEO having been the CFO. I think one of the takeaways that one can take here is that this is perceived to be a technology issue, and the solution comes from technology, not from financial expertise. I don't think there's any accusations that Swan wasn't getting the job done. From the number's point, it's that they are falling behind on the technology and it's time to make a change.

Hill: Yeah. You think about everything that's happened with them over the last couple of years. We've talked on this show about AMD continuing to eat into Intel's market share. Apple, the long-term partnership that Intel had with Apple, ended after 15 years. I understand why shares of Intel would be up on Bob Swan leaving. That said, when you take these two together, when you take the, let's just call it 15% difference between the rise in Intel and the drop in VMware, do you think it's a little overstated? The reason I ask that is because Gelsinger was CEO of VMware for eight plus years, the stock up about 30% over the entire, let's call it eight and a quarter, span of his tenure as CEO. It's not like VMware shares were setting the world on fire under the tenure of Pat Gelsinger.

Barker: Yeah, I don't know if the world is looking at VMware and saying how will they ever replicate what they've been able to accomplish with anybody else in that role. But it may be, look, he's a valued commodity, valued enough that Intel, which despite not going nowhere as a stock for 20 years but going down and then most of the way back up, but that's what you're talking about, 20 years of long term buy-and-hold nothingness, if you got in at the top back in 2000, and I think that the fair question to ask is to whether VMware is losing nearly as much as Intel is hopefully gaining here. I think that the changes being made at all is going to be maybe the lion's share of the stock movement today on Intel, if I had to just wildly guess through the market's actions. You've got Third Point having been pushing for changes from Intel. Intel says it's got nothing to do with that, nothing to do with the pressure we've been getting from Third Point, this is all independent of that pressure. I don't think that's the case, and I think that any change is going to explain a bump in Intel at this point.

Hill: All right. Let's move on to housing. KB Home's fourth-quarter profits were solidly higher than expected, and shares of KB Home rose about 7% this morning. I'm assuming part of the rise that we're seeing is not just the end of the fiscal year on a positive note, but also their outlook for 2021 was pretty positive as well.

Barker: Yeah. If you go back a year, the stock was $35 and change, it was $35 and change today moving up with today's news. From a stock perspective treading water, but the future does look a little brighter than the past. But as good as the fourth-quarter numbers were in comparison to what expectations were, they're still down from a year-ago, unsurprisingly. Things are still moving slower than a year ago when there was no pandemic to deal with. But orders are up and when you've got orders at the highest level as KB Homes just announced, since 2005, and throw a red flag on that year if you're thinking about a home builder, but hey, that's good. This is the highest fourth-quarter orders, that's not translating into sales yet, but that is the best indicator of where the business is going.

Hill: When you look at housing and all of the different ways to invest in housing, where do the home builders rank on that list? In terms of attractiveness for you.

Barker: I think the home builders rank as the most cyclical element of it. If you feel that you are somebody that can time cycles well, you can make a lot of money on home builders by buying at the bottom and selling at the top, of which there will continue to be tops and bottoms. For a long term buy-and-hold investor, I would put home builders as pretty far down in my interest pool. But if you like the market action of cyclical companies and think that you've got insight on when the cycles turn, this is something that either is going to make you some money or cost you some money, depending on whether you're right or wrong.

Hill: I mentioned on yesterday's show, this is the time of year where we start to get, almost on a daily basis, clues as to how the holiday retail season went, and we got some of that this morning. Target said that same-store sales for the holiday were up 17% compared to the previous year. Definitely not the same story for Urban Outfitters. Shares of Urban Outfitters falling as their holiday comps were down nearly 10%.

Barker: Yeah. Are you going to take a shot at my beloved hometown there?

Hill: No. I really enjoy Philadelphia. No. I'm not going to attack Philly with the fact that that's where Urban Outfitters is based. I think of Philly much more highly than that.

Barker: Well, thank you. Thank you for that.

Hill: Because I don't think highly of Urban Outfitters. [laughs]

Barker: What about Free People? What do you think about Free People?

Hill: I always forget that Free People is a thing.

Barker: Okay. Well now is your day to remember that Free People's thing because it's the CEO of the Free People brands, so Urban Outfitters, the holding company has got Urban Outfitters, it's got Anthropologie, and it's got Free People. Free People is doing the best right now of those three, and there's always a challenge in the fashion world of being on the right trends, and Free People of the three is the one getting the job done the best. Comps were up 1%, and so that, not that this is a one-quarter thing, but the CEO of Free People is going to keep doing that and is now the head of Urban Outfitters. The Urban Outfitters brand itself was down 8% and Anthropologie down 12% over the same time period. You can see where that would give a good interview for the job moment for the Free People CEO and maybe, hey, just getting the fashion rate is a huge part of this job, and they are starting with somebody who is getting their fashion right at the moment.

Hill: That's great, but keeping in mind that all things being equal, I think new CEOs should get a couple of years before they start to get judged too harshly. I don't think all things are equal in the case of a business like Urban Outfitters. I think this new CEO has about 12 months to figure out a direction and either prove, yeah, the magic I've been working at Free People, I can make that work throughout the other brands or they need to start pulling some other financial levers, including and maybe especially selling off some of the other brands.

Barker: Yeah, possibly. I mean, between the challenges that some of these brands are going to have, given what percentage of their traffic comes from malls, how they are doing on the online sales. Look, their quarter was not good, and that is not the case for everybody out in retail. Of course, they have online sales, but that wasn't enough to make up for all the sales that were lost in the malls and in stores outside of malls over the fourth quarter. I don't know that anybody is going to lose their job over getting this last quarter wrong given the challenges, but retail is always challenging, probably never been more challenging than it is at this moment, and I don't know that Urban Outfitters deserves a whole lot of leeway, given what it has been mostly failing to do over the last better part of a decade.

Hill: Well, let's go back to Target, because Target's earnings report is about six weeks away from being public. For anyone wondering,why isn't the stock moving, I mean, holiday same-store sales up 17%, that's fantastic. I'll just remind those people that while the stock is basically flat today, over the last 12 months, it's up 60%. It wasn't like this was a beaten down stock by any sense, but I don't know. You look at those numbers and if they can crank out another six weeks like the last six weeks, that earnings report in early March is going to be something to see.

Barker: Yeah. Well, so, for November-December, the comparable sales were up 17%. That was 4% in comp stores and then 102% in digital sales. You've got two stories going on here and the mix of them is good, but it's obviously mostly a digital sales growth story. To the extent that the market may not be throwing enough celebration on today's news, I think it's a reflection of the challenges of keeping up numbers that good when the digital sales isn't growing as fast as it has been. And that was a slowdown, even though 102%. There was a little slowdown from the quarter before. It's a great story, the stock is reflecting all-time highs and it's all good. They've got to keep producing pretty good numbers to justify where the stock is right now.

Hill: Let me ask you a question, and this is a serious question. What's more impressive, the fact that their e-commerce sales doubled compared to a year prior for the holiday section, the time that we're talking about, or the fact that during a pandemic in-store same-store sales were up 4%?

Barker: I'm going to take the obvious answer instead of treating this like a trick question. The more impressive one is the 102% growth part. That's more impressive than the 4% growth part. That's my answer.

Hill: During a pandemic?

Barker: Yeah. I'm going to keep defending. 102% growth is more impressive than 4% growth and you can keep pushing back on that, but I'm going to win.

Hill: I'll just point out that anyone who owns shares of Urban Outfitters now has their face enhanced, pressed up against the glass, staring longingly at the in-store comps being up 4%, because they would love to be talking about [laughs] that today instead of their comps being down nearly 10% across-the-board.

Barker: Well, Free People is up 1%. They're both impressive and of course, Target is one of the stores which is not going to be hit as hard when people are afraid of going to a store because they can go to Target, one stop, get some of their groceries, get some of their necessities and close whatever they can do a lot in one store, and they can also just order online and pick up at the store. The deliveries are up, the buy online pick up in store is way up and they've had the chance to be in the right place at this time by having made the investments into those businesses over the previous years. Target, Walmart, they are both celebrating that success these days and Urban Outfitters is in a much weaker position because it's largely things fashion retail where the customer is looking for more of an in-store experience. I don't know that the Target in-store experience is the reason that Target is so successful.

Hill: Bill Barker, thanks for being here.

Barker: Thanks 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.