Shares of Papa John's (PZZA 4.66%) and Domino's (DPZ 1.80%) fall despite double-digit comps growth. Best Buy (BBY +1.21%) lowers expectations for 2021. Teladoc Health's (TDOC +4.61%) fourth-quarter loss was bigger than expected. In this episode of MarketFoolery, host Chris Hill is joined by Bill Barker to analyze those stories and explain how Bath & Body Works (and its candles) is the engine driving results for parent company L Brands (LB +1.35%).
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This video was recorded on February 24, 2021.
Chris Hill: It's Thursday, February 25th, welcome to MarketFoolery. I'm Chris Hill and backed by popular demand, it's Bill Barker, thanks for being here.
Bill Barker: Seems unlikely, but I'll let you have that. [laughs]
Hill: If only so we can proceed. We've got a couple of retailers with earnings. We're going to talk telemedicine, but we're going to start with pizza. Domino's and Papa John's both out with fourth quarter reports and similar stories, profits for both were lower than expected. Same store sales for both were up double digits in the range of 10-15% and yet shares of both Domino's and Papa John's falling this morning. Domino's down 8%, Papa John's down 13%.
Barker: Like a lot of companies that have had pretty good years or very good years during COVID and these are two which fall into that category, as they look forward they don't see growth so much as a lot of work to hold on to what they've achieved this year so that the guidance for comp sales is relatively flat, or maybe not even that. Just to hold onto 10, 12, 13% comp growth, which is what they've basically enjoyed over the year, it's not even assured they'll be able to sell as much in the year ahead as they've sold in the year behind, and that's the thing that this market sees other growth opportunities out there and is therefore looking elsewhere today.
Hill: But for as great as Domino's has been as a stock over the past decade, over the past year it actually hasn't been. It was flat going into today, and the 8% drop that we're seeing today is basically what we're seeing over the past year. I guess that's the one that surprises me a little bit. Papa John's for all of the troubles it's had over the last let's call it five years, 2020 was a good year for the business and for the stock. I can see them giving back some of those gains. I'm a little surprised that Domino's is now down 8%, 9% over the past year.
Barker: Again, this has got something to do with the growth story which between 2014 and 2017, every year Domino's was growing 10-12% a year, and it grew 23% in 2018, slowed down to 5% 2019. The days of double digit growth seem to have been behind it and then this year came around and it got back to that 13% level total growth, but it seems like a one off, and it seems like given the two to three year forward guidance that they've given, which is 6-10% global retail sales growth, 6-8% net unit growth. They're basically saying, we're going to grow the total units, 6-7% something like that, and we're really not going to grow comps at all maybe. They can buy back some shares. They can still grow earnings per share in the low double digit category if they continue to buy back shares at the rate they've been growing, but as we say, there are just other growth opportunities out there and Domino's as a stock that looks like something that can compound through unit and comp growth at double digits, has got challenges ahead of itself that it is seeing that are going to last at least two, three years.
Hill: Based on what you can see from Papa John's, does it look like a business that has turned around?
Barker: I think that events have buried the things that come to mind as being a problem for Papa John's which were the CEOs comments. The CEO himself, and he is gone and the founder has gone, and I think they've managed to extract themselves from some of the legal battles over that and put a different face on the company and survive post Papa John, how are we going to brand this thing world? Events washed all those concerns away like just send me some pizza. It is the situation that people have been in more than how many years back does that trouble go along with the company? How many years did people say, I'm never going to buy from Papa John's again, end up holding true? I think that we've seen that they've grown a little bit faster than Domino's, they've both basically had similar growth over the last year, and Papa John's is growing a little bit faster internationally. They are a much smaller entity than Domino's and have more growth that they can achieve, and they're doing OK with it.
Hill: Mixed fourth quarter results for Best Buy, profits were a little bit higher than expected, revenue was a little bit lower. Sales growth for Best Buy is falling and that's what is sending the stock down today. Although I will point out that it's a little bit like Domino's, Rich Allison, the CEO of Domino's on the call was asked a question about their same store sales and he said, "Hey, look, I will take 11. I would love to come on the conference call every quarter and talk about how our comps are only up 11%." I'm paraphrasing, but that's basically what he said. In the case of Best Buy, same store sales were up 12.5% and yet that was still lower than expected.
Barker: Not only that, but again, it's going to be a year of digesting the excellent year that certain companies got to experience over the last year. The Domino's delivery companies, of course, grew through that. People bought more at Best Buy because they were stuck at home, and so invested in home electronics or they needed another laptop or multiple laptops, and this was the case, I think we discussed a couple of days ago with Home Depot, we just discussed it with Domino's. Best Buy's explicit, they are giving negative 2% to plus 1% comp sales growth guidance for the year ahead. Call it flat. If they achieved a little bit better than flat, they'll be exceeding guidance. Well, that sounds on its face pretty bad when they're just lapping 12% growth across most categories. It isn't bad, it's a two-year story, a year from now, people are going to be able to see better how the growth looks going forward. Right now it looks like Best Buy, like many others has got to focus more on selling the same amount of stuff in the year ahead and doing it more profitably. There are ways to do that because a lot of expenses have been taken on during this crisis in terms of employee health and safety, so there are ways to improve the margins, but it looks like that's how companies are going to have to increase their earnings per share.
Hill: The stock is even with the drop today, shares at Best Buy are up around 30% over the past year. On the surface, it doesn't look like an expensive stock, but it sounds like you're saying don't expect much out of them. At least in 2021.
Barker: Well, I'm talking about don't expect much in terms of top line growth. I think there's plenty to do just to hold onto this elevated level of sales. The challenges are, where are the tailwinds going to come from and people are going to be choosing. I think we're all thinking about like what are the experiences that we've missed out on the last 12 months that we're going to spend money on, and not, at this point, "How much bigger of a TV set could I afford to buy?" It seems like getting away from the TV set is taking up more metal space, although still in most of our cases, we're spending too much time in front of the TV. But we're thinking about, "Hey! I'm going to save up my money so that I can go somewhere and do something rather than watch better TV."
Hill: There are things to like in Teladoc Health's fourth quarter report, organic revenue is growing nearly 80%. The trajectory of overall revenue is up into the right, but Teladoc's loss in the fourth-quarter was bigger than Wall Street was expecting. Unlike the stocks we've talked about to this point, this is a stock that's doubled over the past year, and so I'm assuming that's a decent part of why shares are down 6-7% this morning.
Barker: Yeah, they basically hit their guidance they pre-announced. They basically came in where they pre-announced the results we're going to be. There are a lot of one-time costs associated with the merger with Livongo in terms mostly of stock compensation that are factoring into the reported earnings here. They are still going to grow, I think revenues because of that merger at around nearly 100% for the coming year, more or less doubled in size by their acquisition. They're not pointing toward really that much organic growth, I would say, that sets the bar place which they might be able to surpass, but also points to, they've got all this merger work to have operate smoothly. They're already serving about a quarter of the US population. Between the paid membership and the fee membership, they are talking about somewhere around 52 to 54 million for the coming year, mostly that's domestic. It's around a quarter of the U.S. population gets access to Teladoc right now, and they're really only pointing to the low, single-digit, mid-single-digit customer growth.
Hill: You mentioned the one-time charges. From time-to-time we will see companies, whether it's because they've got an acquisition, they're closing, or it just ends up being a bad quarter, companies pull different levers to essentially step back and say, OK, look, this quarter were about to report, it's not going to be great. Things that we're not going to be great maybe in the next quarter, let's see if we can record those now. Does it look like there's some of that going on when you look at the one-time charges or is this just like now, this is part of the closing of the Lavango deal.
Barker: These appear to be true one-time charges a lot of Lavango stock-based compensation which accelerated due to the merger, just the legal fees of actually executing a merger of this size. No, this is all one-time stuff. But it does wave away from, let's not look at the bottom line line too much because it's not real. There are all these non-cash charges that have to be reporting GAAP earnings. Let's all look at the expanding the top-line. The top-line is expanding, and that is the story. That is what investors are most going to be concerned with, is how big is telemedicine going to get? It's gone a long way this year toward getting to where it's ultimately going to be. But I think they'd be more excited today, if Teladoc was saying, we still see 10% to 20% customer growth over the next year then pretty much smaller than that.
Hill: One programming note, our guest on Motley Fool Money this weekend, Dan Ariely. It's been a couple of years since we had Dan on the show. I got the chance to record an interview with him yesterday. Always great talking to him, so checkout Motley Fool Money this weekend. It's not all stocks that are falling today, because shares of L Brands are hitting a three-year high. Strong fourth quarter results for the parent company of Victoria's Secret and Bath & Body Works, including overall same-store sales up 10%. They didn't give guidance for the full fiscal year, but they did indicate that the current quarter is looking good.
Barker: Yeah. Well, it's been good times to sell candles to people. People are buying three-wick candles, and lighting them and burning through them, and then buying another one. Bath & Body Works, they sell other things that make you or your home smell good. That's where they're getting their sales. Bath & Body Works is the lion's share of the good story here. Victoria's Secret continues to struggle. I mean, there are some bright spots maybe beginning to peak out a little bit underneath all the bad news for Victoria's Secret, but not enough to get excited by.
Hill: Well, for anyone who's a longtime listener and is thinking to themselves, "Oh, God. Are they going to make jokes about candles?" Yeah, of course, we are at some point, but don't let that take away from the fact that within the L Brands business, you've got two companies and one of them is crushing it. It's the candle business. Bath & Body Works. I mentioned their overall same-store sales were up 10%. When you break it up by business line, Victoria's Secret had negative 3% same-store sales. By the way, that's an improvement. That's a year-over-year improvement of 7%. I do think that things are genuinely getting better for Victoria's Secret. They're not overwhelmingly great, or even all of that positive at this point, but they're definitely trending the way you would want them to go. Same-store sales for Bath & Body Works in the fourth-quarter, 22%. I mean, that's serious growth. The question that I've asked you before remains, not that we need to speculate on this, but the longer we see this dichotomy, the longer we see, "Wow, one of these businesses is dramatically outperforming the other", I think there will continue to be the question of, does this need to be spun off? Does L Brands need to look for a buyer for the Victoria's Secret business and just double down on Bath & Body Works?
Barker: Yeah. Maybe. I'm sure they kicked that idea around. That seems hard to believe if you're looking at their story from four or five years ago that it would have come to this. But Bath & Body Works has more sales and they're improving. For the full-year comp sales, stores, and direct was up 45% in 2020 for Bath & Body Works. Really expanded online sales, the company has done a much better job making those sales. Victoria's Secret, for the full-year, stores were off 15% for Victoria's Secret, but stores and online up 1%. So, online is saving that. Victoria's Secret has closed 200 stores in the last year. They have 703 stores opened as of the end of January. That's down from 909 a year ago. They took a big write-off hit last year as part of their earnings report non-cash charge on the brand value and money they'd already spent opening up a lot of stores that they ended up closing. Bath & Body Works has now got more than twice as many stores as Victoria's Secret.
Hill: Even though it's late February, no mas growing under the candle section of Bath & Body Works, because they've got their summer candles ready-to-go, prominently featured in the candle section online at bathandbodyworks.com. I got to say, I'm tempted. These are fun. You talk about people wanting to travel, people wanting to get out of the house. Where can I go? That sort of thing. Then thinking about the summer, "Oh, can we go somewhere?" I'm looking at these three-wick candles and thinking, if we end up getting a beach house somewhere, I might have to buy one of these and just take it with me.
Barker: Yeah, I think that normally when we've checked in on their candles and certainly this is the point where people that like to stop listening because we're heavily into the tangent section of the show, might exercise that choice. If you look at their candles right now, they're bright colors, they shout out, "Hey, you can't go to these places yet, but you can get the smells of Hawaii or some beach." Many of these smells make more sense than the ones that we pick on in the winter where it's like Mahogany sweaters, and ideas, crisp morning. Now we're getting actual gardenias. Do you want to go after the suntan one?
Hill: I will in a second but again...
Barker: There is no smell to a suntan by the way.
Hill: But they got like you said, bright colors, fun designs, and candle names like orange, pineapple punch, passion fruit and banana flower, coconut sandalwood. Those are great and then just challenge your candle suntan. I don't know what that's supposed to smell like, clearly whoever came up with the winter candle scent of sweater weather, that person is like I got something. Is it an actual scent? Like no, it's suntan.
Barker: The packaging helps you out, because there's a prominent octopus design on the suntan candle. I assume that in the eyes of the good people at Bath & Body Works a suntan smells like octopus. Therefore you should buy a candle to help you out with that smell.
Hill: It's not great. I mean, it really does stick out as one of the few misses in what is otherwise a great-looking lineup of fun summer candles.
Barker: They've got like a whole Easter section of candles in case that's how you celebrate Easter.
Hill: With a marshmallow fluff scented candle. Sure?
Barker: Sure. They've got one called the perfect spring. Again here we're giving them a lot of free advertisement, because they are doing something over there that is working and it amuses us and some kind listeners over the years have sent in candles that we have mocked or celebrated. I can't remember which. We've got to experience a few of the weird or titled candles out there, but they all smell great.
Hill: They do. It's a quality product. Again, this is why same-store sales for Bath & Body Works up 45% for an entire year, it's tremendous.
Barker: Yeah. They are celebrating Victoria's Secret, to go back a little bit of business, they have suffered for the last number of years as the competitors have done a better job of marketing what consumers actually want to buy rather than a fantasy, which is, I think what Victoria's Secret very much modeled itself on. Over the last few years, they've just lost a lot of sales to companies that see an opportunity to sell reality rather than fantasy.
Hill: Again, shares at a three-year high. Well done, L brands. Bill Barker, appreciate you doing double duty this week. Thanks for being here.
Barker: Thanks for having me!
Hill: As always, people on the program may have interest in the stocks they've talked 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 on Monday.
