In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Jason Moser to discuss the record results that Cerence (CRNC -2.34%) posted in the first quarter. Hasbro (HAS -0.77%) wraps up the fiscal year with a mixed fourth quarter. Also, Target's (TGT -3.04%) new in-house apparel brand hits $1 billion in sales. Plus, they discuss Super Bowl ads and companies that advertised in the Super Bowl in 2002.

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This video was recorded on February 8, 2021.

Chris Hill: It's Monday, February 8th. Welcome to MarketFoolery. I'm Chris Hill, with me today is Jason Moser. It's a Moser Monday once again,[laughs] good to see you.

Jason Moser: How is it going?

Hill: It's going alright. We've got some retail news. We've got some toy earnings. We're going to start today with Cerence, the automotive AI developer, came out with record results in the first quarter, and yet, shares of Cerence are down 8% today. Is this a valuation thing? Is this people in the market saying, "Look, it's up 400% in the past year. We're taking some profits."

Moser: [laughs] I think that's a reasonable assumption. There are some things in the call that could lead you to believe that maybe in the near term there might be some challenges. But there's no doubt it's a business, it's not profitable yet, and so that is one of those things that's the biggest risk to a stock like this today, is typically going to be valuation given how far it's run in such a short time. It's been a tremendous performer for us in our services. It's really turning into a fun little company to follow. It shows the value, I think, that spin offs can offer. Because if you remember, Cerence, it used to be a part of Nuance Communications, and it spun off from Nuance to become its own little company. But for folks who don't know Cerence does, this is a company that focuses on conversational envision, artificial intelligence based products for the automobile. It's essentially getting in your car and being able to operate things primarily with your voice, but they also have neat visual components there. They're working with partnerships to develop augmented reality windshields, so all sorts of neat things that they're developing as the car becomes this next frontier.

The neat thing about this business, I think, is when you actually go through what they do. The primary focus today is on the automobile. But they also like to tap the market expansion potential in adjacent markets, including, get this Chris, cruise ships, two-wheeled vehicles, and the elevators. [laughs] So, modes of transportation of all sorts. They're really looking to get into all sorts of different modes of transportation, and really the car is the primary frontier for this business. But to your point, it was a great quarter, revenue grew by 23%. They had called incidentally for 10%-16% previously. So they really surpassed guidance there. So $95 million for the quarter versus a year ago, setting a new quarterly record. They have continued growth in billings per car and interestingly too, they won back a major European OEM deal for the quarter. So generating some new infotainment designs for a major European OEM, and that production will start in 2023.

There's a lot of cool stuff on the horizon. I mentioned there were some signs, and there may be some near term challenges and primarily that was noted in supply chain constraints and semiconductors. I think management is being pretty up front with that. We've seen that mentioned before in other calls. A company I referred to on Motley Fool Money this past week, Synaptics. They noted the same thing. They're just some supply chain constraints in the semiconductor industry right now that are putting some businesses in a little bit of a pinch. That's a near term thing. That's not a business specific thing. For me, when I look at what this business is doing, regardless of the selling off today, I think they're delivering what they said they're going to deliver and I'm really encouraged.

Hill: You've said before that if Cerence got acquired, that would not surprise you.

Moser: No.

Hill: My question is not about you're surprised, my question is about, for lack of a better term, your level of anger. [laughs] There have been companies in the past that you have owned shares of, you've been big fans of them and then they get acquired and you're a little salty about the fact that [laughs] you wanted to see this thing run on its own. Is Cerence in that category or is it a situation where if six months from now, someone pays a big premium, you'd think, "All right, if someone's going to pay that price, I'll take that as a shareholder."

Moser: I would much rather see this company go about it on its own. I would be a little bit salty, that would hearken back to the days of PayPal acquiring Zoom. I think that's ultimately what you were getting at, Chris.

Hill: I wasn't going to say it, but that's absolutely the example I was thinking of.

Moser: [laughs] It wouldn't shock me if a bigger competitor in this space thought, "Hey, this would be a nice little business to roll in." Something like a Qualcomm for example, that really is making inroads, in the automobile, no pun intended. But I don't think that's going to happen. It wouldn't surprise me but when you look at what this company is doing, they had this presentation several weeks back, and it was called Cerence In Motion. They introduced all of these new really cool ideas that they've been developing. Ultimately this is just about making the car more of the ultimate smart device given how much time we spend in our automobiles these days. They rolled out this new operating system Cerence 2.0. They actually got their first major bookings for Cerence Pay, believe it or not, basically bringing payment functionality into your automobile. Listen, War on Cash much, this is another play in potentially the war on cash right there. But they've also got things like Cerence Extend, which offers a seamless way for you to essentially bring the power of your phone apps into the head unit of your vehicle. Cerence Connect, which ultimately lets you connect your smart home to your car. Then Cerence Tour Guide, where it's just essentially a virtual tour guide. If you're driving around anywhere, this Cerence Tour Guide thing can give you all sorts of information about places and facts and things wherever you may be. So, you see the innovation. They don't stop, they keep spinning that wheel and innovating, and a lot of it seems to be very practical and very useful stuff. For me, I would much rather see them go about it on their own. Oftentimes, those things are out of our control, so we'll just take it as it goes. But all things considered, I'm very encouraged with where this business is headed and I think the future looks very bright.

Hill: Shares of Hasbro are down 5% this morning. Despite the fact that fourth quarter profits and revenue came in higher than expected, the board game segment did well for Hasbro. I'm assuming at least part of what we're seeing here is a ripple effect from movie theaters being closed because their entertainment division took a not surprising hit.

Moser: Yeah. I think that's definitely part of it. Definitely they noted on the call that there was a comparison with last year due to Frozen that made things far more difficult this year for them. Anytime you're talking about frozen, you know that's going to be a nice catalyst. That's going to be a nice tailwind. Then when you have a year where you're not relying on one of those big hits, it's going to make the year more challenging. For me, I look at Hasbro today, my enthusiasm for Hasbro isn't quite what it used to be. I still like the business, don't get me wrong. I feel like it's the Super Bowl commercial of earnings though. It's like "It's OK, I guess", but I feel like it needs something more and there's no question that the market's enthusiasm is a little bit less than perhaps it was years ago as well. If you look at the performance over the last five years, the market has more than doubled Hasbro's returns. Then, over the last three years with Hasbro, essentially flat. The market's up about 45%.

I understand the concerns there as toys continue to be redefined as kids move more toward the digital frontier. If you look at the numbers, they weren't bad. Net sales were up 4% for the quarter. There was a little bit of a currency boost there, but not much. Adjusted earnings is $1.27. They do continue to benefit from the rollout of Disney+ (DIS -2.68%), believe it or not. They noted in the call that the Star Wars product revenue for Hasbro grew nearly 70% last year, despite it being the first year without a theatrical release since 2014. That growth was really driven by The Mandalorian on Disney+.

So you can see here as they deal with this shifting media landscape, at least they have those good partnerships they can fall back on. Even if there's a tough comp, they don't have Frozen for example, but they had The Mandalorian and that definitely helped. A very broad portfolio of offerings with their franchise brands like Nerve and Plato, Transformers, etc., that perform well. They made a big acquisition last year, a company called eOne, and that's content production distribution. They had brands, like Peppa Pig. That's going to be a part of the business. I think they need to get those financials in order to make it a little bit more clear as to how that will contribute to the growth of the company. That was a big acquisition, about four-and-a-half billion dollars they spent there. But they benefited from a robust U.S. and Canada market and gaming continues to perform well. TV and film and entertainment, all things considered, did well, up 20%. So it's some good, some bad. All in all though, it's a difficult environment for these guys, a difficult landscape.

Hill: In early 2020, Target launched its own line of workout apparel and exercise equipment under the brand name, All in Motion. Today, Target disclosed the All in Motion line has reached $1 billion in sales. I get that this is happening during a pandemic, but even if you want to discount this to some degree, to me, it is another sign of what a good job Target has done investing in in-house brands and in particular apparel brands.

Moser: Yeah, there was an interesting point that was made, I saw from a retail consultant, regarding this and essentially, Target's been looking at all of these different private label opportunities, whether it's in apparel, or food and beverage, or whatever it may be. They essentially just looked to their competitors, they looked to the other players in the space. They tried to figure out who's doing things really well and who's doing things really poorly. Those that are doing things really well, they're like, "Let's just go out there and do what they're doing, let's just replicate that." Then, those that are not doing things very well, they're like, "That's an interesting opportunity, let's figure out how we can do it better."

So, what that has resulted in over the last five years, Target has launched more than 30 private label brands in markets like clothing, and home goods, and furnishings and whatnot. I think a data point I saw was that four of those brands, $2 billion or more in sales last year, kids apparel was one of them. If you remember, not all that long ago, I was a really big proponent of Gymboree. Gymboree was one of those companies that when I had two little baby girls, listen, I'm a guy, trying to figure out how to clothe my little baby girl, I'm just a dummy when it comes to that stuff. But there's this opportunity in kids apparel and we've seen companies do so well with it. Gymboree ultimately was acquired at a premium because it's just such an interesting and niche market, and Target has seen that opportunity and continues to make those investments in apparel and it's paying off. But you're seeing other big players in the space do that too. Amazon's doing it, Walmart's doing it, even Dick's Sporting Goods is doing it. I don't know if you feel this way and you can tell me. It feels to me at least that today, value is arguably more important than ever and it feels like we're entering a time where a brand carries less weight than ever before, I don't know. How do you feel about that?

Hill: No, I agree with that.

Moser: Yeah.

Hill: Again, I can imagine someone listening to the comment that you read and thinking, well, of course, that's obvious. Thank you, captain obvious. Who's doing it really well, let's emulate them. Who's doing a bad job of this, let's just try and do a better job. One of the reasons this is so tricky is because it's almost seductive how easy it looks on the surface, that basic strategy. It is so much harder in execution.

Moser: Yeah.

Hill: I think what Target has done for a while now, to me, the news about the All In Motion brand is merely the latest version of this. But I think they've done a really great job of providing value in their, I would say in house brands in general, but particularly with apparel, where they just say, "You know what? We just want to make good clothing. It is going to be a good value. We're not going to be Lululemon, but we're gonna provide workout apparel that we think provides a decent value relative to Lululemon." Because let's face it, we've seen plenty of examples over the years in all industries, but definitely in apparel retail, where people try and overthink it, where they said, "No, it's going to be our own version of this." It's just like, "No, just make good stuff."

Moser: [laughs] Yeah. To your point there, I'm going to be interested to see Under Armour report later this week. That's a business that obviously has been struggling to find its way after some strategic missteps and for a brand that has focused historically on being that premium brand, and then they tried to move away into more of a value offering and into growing that market opportunity, that overall audience, and that didn't really work out so well. Again, it makes you wonder how important is brand for the masses? I'm not saying brand doesn't matter. You look at companies like Lululemon, for example, I think you can put Nike in this as well. There are folks out there who love those brands, they'll preach that from the mountain top and that's great. But making good stuff, and you and I have talked about this before, making good stuff is great, but that's not all. You gotta take it to the next level, you got to be able to deliver the goods. Just making good stuff doesn't cut it anymore.

Hill: That's where I think Target has the advantage over a business like Under Armour, because they basically looked at the Under Armours, the Lululemons of the world and said, "How do we make stuff at a decent value? Because we can do all the other parts of this, we can do inventory, we can do shipping, we can do fulfillment. We know we can do all these other things, if we can figure out a way to make some decent product and then that will help move the needle."

Real quick before we wrap up, since we're going to talk about the Super Bowl ads, [laughs] just for a second. I don't know about you. When I was watching the game, I was thinking back to the conversation I had on Motley Fool Money a couple of weeks ago with Jeanine Poggi from Ad Age, and when I asked her, "What's the better strategy for advertisers? Is it to go for branding or is it to go for a call to action?" She landed squarely on the side of branding. I think the ones that were successful last night were the ones that stuck to their knitting, so to speak, and didn't try and get too creative. There was a lot of nostalgia aimed right at you and me [laughs] and people our age. It was one of those things where I just looked at and I thought, some of the humor landed, some of it didn't, but at the end of the day, I'm not ordering from Uber Eats and I'm not buying a Cadillac just because there was an Edward Scissorhands thing going on there. [laughs] I did, however, and one of the things Jeanine mentioned when I talked to her, [laughs] she reminded me of the fact that on last year's Super Bowl, Quibi came out with an ad.

Moser: Yeah.

Hill: I did think that Paramount+ did a really good job with their ads. They ran a few different ads and I thought they did a great job of just saying, these are the shows. March 4th is when this thing launches. Download the app. It was just very direct. To me, it was the opposite of the Fiverr ad and God bless Fiverr and the work they do. I'm not saying anything about the business and I'm not saying anything about the stock, because that's been a great performer. But it was one of those things where I was like, I think I know more about Fiverr than the average person watching this game and I'm confused right now.

Moser: More than likely. Yeah. I feel like the Super Bowl commercials, I feel like they've jumped the [...]. I felt this way for the past several years. They're just not as creative maybe as they used to be. It feels like they try more to rely on star power and celebrity, and thinking that's enough. Like an apparel, just make good stuff and that'll take care of it, and these commercials, they're like, "Well, we'll just get celebrities in there and that'll take care of it." I just don't feel that way. There were some commercials that stuck out to me. I felt like the Chipotle commercial, to me, I liked it because it felt they were not on their high horse as in previous years. We've seen those commercials that they put out on the internet or whatever. Really, it's like they put themselves up on such a pedestal. That was a much more relatable, down to earth type of commercial and that one stuck with me.

I think the one honestly that made me laugh actually was the Tide Jason Alexander [laughs] commercial, and that was just because of all of the different scenarios with the different facial expressions. It was a little bit of nostalgia there going back to the Seinfeld days, and that was obviously a show that you and I grew up watching. You can't ever forget George Costanza, and so that commercial had me chuckling a little bit there. But yet generally speaking, I find the commercials, it feels like it's just not doing what it used to do and relying on celebrity certainly doesn't cut it for me. You got to be something more.

Hill: I think what was particularly effective about the Tide commercial was, it wasn't just, "Let's get Jason Alexander and we'll make some Seinfeld references and it'll be funny," it was about, "Hey, you're more of a slob than you think you are. Wash your clothes." [laughs]

Moser: Yeah, to your point about the Paramount one, no, I probably won't be subscribing to Paramount+, but I did like how the ad really focused on showing that wide swath of content that they had. Everything from Beavis and Butt-Head to professional golf, and Star Trek, and everything in between. They're just showing you in a very simple fashion, the stuff that they have and if you're interested in it, that's cool. It made a lot of sense to me, at least the approach. The one that stood out to me also, and I don't know if you saw this because it was, I think up for just a split couple of seconds maybe, was the Reddit commercial.

Hill: Yeah.

Moser: Did you see that?

Hill: Yes.

Moser: Basically, all I really saw was, if you're seeing this, it means our bet paid off and that was all I could actually read before it went off the TV. I wasn't really sure. I didn't really look up to see beyond that what they were trying to say because I could ascertain it. But it was just interesting to me that they felt compelled to actually get that up there on the TV.

Hill: One more trip down memory lane before we wrap up, someone tweeted last night because this was Tom Brady's 10th Super Bowl, and someone tracked down some of the advertisers from his first Super Bowl, which was in 2002. Here are some of the companies that advertised. AOL, Blockbuster Video, RadioShack, Circuit City, CompUSA, Hot Jobs.

Moser: Holy cow.

Hill: And Gateway Computers.

Moser: Man.

Hill: AOL is still around in some form, I think the rest of them, someone's trying to revive RadioShack as an online only store. But that was a nice reminder that not everything lasts.

Moser: It's an investing lesson.

Hill: Except apparently Tom Brady.

Moser: Yeah, exactly. [laughs]

Hill: Jason Moser, great talking to you. Thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks that 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 was mixed by Dan Boyd, I'm Chris Hill. Thanks for listening and see you tomorrow.