Checking In on Chewy, Lululemon, and BlackBerry

In this episode of Market Foolery, host Chris Hill and Motley Fool analyst Emily Flippen talk about Chewy (CHWY -0.12%) reporting a surprise fourth-quarter profit that sent shares higher. Also, lululemon athletica's (LULU 1.74%) digital sales in the fourth quarter were strong, but what management really wants to talk about is Mirror. Plus, the podcast crew has a look at BlackBerry's (BB 1.10%) latest results and the company's attempts to turn itself around.

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This video was recorded on March 31, 2021.

Chris Hill: It's Wednesday, March 31st. Welcome to MarketFoolery. I'm Chris Hill. With me today, the one and only, Emily Flippen. Thanks for being here.

Emily Flippen: Thanks again for having me, Chris. 

Hill: Quick programming, we're off tomorrow. It is a short week for Market Foolery, because it's spring break and also, by the way, the market is closed on Friday, it's just a reminder. For all you day traders out there, the market is closed on Friday, you're going to have to find something else to do. We have a trio of fourth-quarter reports. Let's start with Chewy. The pet products company reported a surprise profit to wrap up the fiscal year. Shares of Chewy up more than 6% today. This was not one of those beat by a penny situations. Wall Street was expecting a solid loss and all things considered, this seems like it was a pretty strong beat.

Flippen: I'm going to take a victory lap on this one, Chris, because the surprise profitability from Chewy, its earnings of $0.05 per share was something that a lot of analysts said wasn't possible for this e-commerce pet business. A lot of people related it to Pets.com when it went public, but Chewy has a unique strategy, and part of that strategy has historically been spending a ton of money on customer acquisition at the expense of its bottom line. The surprise profitability is wonderful. But I will say, the best performance wasn't actually Chewy's financial performance. Earnings are great, revenue beat totally wonderful, but the best thing to me was how their new customer acquisition strategy was behaving in comparison to cohorts of the past. A lot of people made the implication that Chewy really only succeeded over the course of 2020 because of the pandemic and headed into 2021, they would have a challenging comp comparison as people went back to shopping in stores, but their new customer acquisition cohort actually accelerated relative to the prior quarter with customer reactivations increasing 40% and customer retention improving by nearly 2.5%. These new cohorts are actually spending more money than previous cohorts as well. For me, that was the best thing to come out of this earnings report.

Hill: We've talked before about how Amazon opened the door for a lot of businesses last year. When Amazon struggled with shipping and fulfillment, they rigged the ship but it really did open the door for large mainstream retailers like Walmart and Target to amp up their delivery and their curbside pickup, and that thing, but then also, for businesses like Chewy. Everything I heard and read about people who were trying Chewy for the first time, it sounds like they really crushed it. They made the most of their opportunity and it probably helps them that this is the business they are in to start with, whereas a lot of other retailers, yes, they had an online component, but they really had to ramp it up in 2020. Kudos to Chewy and their management team for making the most of the opportunity that Amazon gave them because you look at the stock today and these are the results.

Flippen: You're right that there are a lot of industry trends that have supported Chewy. The number of pet households Chewy estimates, just in the United States increased nearly 6% in 2020 alone. Clearly, there's a big opportunity there, supporting a lot of players. But one thing I will add to that, that I think Chewy has done particularly well in comparison to the Amazons of the world are their private-label brands. Amazon and other businesses have really dropped the ball on private label, and Chewy has actually picked up steam in their private-label sales, which are higher-margin sales for them. We saw that this quarter both with their gross margins expanding, as well as that surprise profitability.

Hill: Shares of Lululemon fell a bit today, despite the fact that fourth-quarter profits and revenue came in higher than expected, and yes, of course, the physical stores were down, but digital sales nearly doubled.

Flippen: I was extremely impressed by Lululemon's quarter. They did beat on both the top and the bottom lines, but the highlights for me were as expected, and as you mentioned, their digital sales. E-commerce grew 92% year over year, and that's on top of a 42% growth over the year-ago quarter last year, women's grew, but also the story here is really international growth. International growth was up 47% in the quarter. This is really critical because if you get into Lululemon's strategy, while they are mixing up their merchandising in the United States, they are really spending a lot of money and effort growing store count outside of North America, especially, in areas like Asia and China. They are actually gaining market share both within the United States and critically internationally as well.

Hill: How were the Mirror sales? Because I've said for a while now that I'm curious to see Lululemon's fourth-quarter report in particular, the Mirror sales because I remember how heavily they were advertising Mirror over the holidays. Everything I saw, whether it was on television or on YouTube, all of those video ads were about Mirror.

Flippen: Perhaps the biggest shocker for me this quarter was how much time management spent talking about Mirror in this report. In my opinion, the real story here is the fact that Lululemon wants to double their men's category, once they launch their own footwear brand, once they quadruple its international business by 2023. These are huge numbers. When you look at those big, lofty goals, Mirror is only a small part of that. Mirror generated $170 million of revenue for the business in 2020, so it's really not moving their top-line at all. But let's go back to what management said. Management focused on it a lot and part of that is because they are actually projecting 50%-65% growth in Mirror sales for 2021, that's getting north of $260 million. Picking up speed in a year that maybe investors were expecting to be tough for at-home fitness businesses, but they are doing this by adding studios, adding trainers, improving their interface to be more engaging, and expanding the shop and stop strategy for Mirror to over 200 stores in the United States. Lululemon is spending a lot of time, a lot of effort, and a lot of money helping build out the Mirror brand and presumably, helping Lululemon become more than just a place where you buy yoga pants, becoming a brand that you associate with a lifestyle.

Hill: That's interesting. There are a lot of numbers to pore over, but the fact that they are looking to put Mirror in 200 locations because I believe when they made the acquisition, the initial number around the holidays was, I want to say, less than 20.

Flippen: They did a lot of pricing comparisons during the holiday season that included a lot of really aggressive advertising like you've mentioned, but it also included a lot of really aggressive discounts that let Lululemon find out, this is the critical selling range for Mirror products. They found a couple of really important things. First of all, people love to be able to experience the Mirror interface in person. It was critical for them to expand the number of Lululemon stores where people could walk in and experience Mirror, but these same people also like to purchase online and they like to have free shipping. They are finding the sweet spot in pricing, somewhere between $1,200-$1,500 with free shipping for Mirrors. They're actually thinking that at that price range, with their stop and shop store expansion, they have a pretty large addressable market.

Hill: It will be really interesting to see not just how Mirror sales go, but as you said, when you think about the comparison of management's focus on this relative to the other parts of the business, I wonder if, at least, part of that is driven by the pandemic, the reopening that's going on. I don't want to say the window is closing because obviously, they made this acquisition, they feel like there's a future there and they are not going to stop promoting it and stop selling at once the pandemic is over. But it does seem like the desire for home fitness might be dropping in the near term, over the next maybe two years or so. So they said, "Look, if we're going to grow this thing, we've got to focus on this now because we don't want to take a slow approach with this." Whereas they can afford to take a slower approach with things like international growth and the men's line.

Flippen: There's been a lot of money pushed into at-home fitness over the past year. That comes as no surprise to anyone, right? Peloton, NordicTrack, the iFit programs, even SoulCycle. All of these businesses are making substantial investments into serving an at-home market that nobody really knows what it's going to look like in just a couple of years from today. But one thing I will say, the reason why I think Lululemon is focusing on Mirror so much is because Mirror shows a level of optionality to their business that I don't think a lot of people experience with retailers. It's almost the inverse of Peloton, which went from an at-home fitness company to a lifestyle company getting into the apparel industry, Lululemon is in the apparel industry trying to get more into the at-home fitness market. I think there's room for both of these businesses to succeed, but they both very clearly have a lifestyle attached to them. As somebody who does love NordicTrack and has been using it religiously over the past half-year or so, I will say it will be really interesting to see how many of these customers really stick. I think it probably ends up being a less risky proposition for Lululemon than it does for the Pelotons of the world.

Hill: BlackBerry is no longer a mobile phone company. It is in the business of communication software, and we can talk about BlackBerry's fourth quarter, but shares are falling nearly 10% because their forecast pointed to slowing demand.

Flippen: Investors are starting to lose patients with BlackBerry a bit. If you rewind back to say the beginning of 2018, BlackBerry was in the process of reworking its business, as you mentioned, no longer focused on phones, but becoming a leader in enterprise mobility software. In particular, the software that connects mobile devices and other endpoints like cars and automated vehicles. There's a lot of excitement that went into this proposition. It was a turnaround story. But the problem is, BlackBerry has never really managed to pick it up in terms of its revenue growth. After years of falling revenue, they turned to net positive revenue growth in 2020. That again, is slowing down into 2021. Again, investors are losing patience. I think for this quarter, a lot of the skepticism comes down to BlackBerry's QNX software. This was software that they acquired when they were going in their turnaround phase. It's aimed at automotive operating systems, so electric vehicles, autonomous vehicles. 

While they've had a decent amount of success in rolling that out to a large number of players in the space, they really haven't done a great job of monetizing it. If you rewind to this period last year, BlackBerry CEO, John Chen, said similar things about QNX saying, "We saw light demand last year, but things will turn around this year." Very similar words, right? The pandemic caused people to not invest in their electric vehicles the same way we saw in the past. But maybe at some point, post-2021, we'll see a turnaround and investors aren't buying it this time.

Hill: I can see the temptation with this business. For those who forgot, at one point in this century, this was the dominant player in the mobile phone space. You look at the stock that a year ago was at $3 a share, like I said, it's falling today. Over the past year, it's basically doubled. So I see the temptation when you say, look, the business that they are in, that's something that's going to grow over time. That's an industry that's going to grow. This is a company that has a market cap of still just under $5 billion. So I see the temptation. But to your point, I don't know. They really haven't gotten consistent winning. It reminds me of what Twitter was on a business level for a number of years, where it was just like they would put up a good quarter and you would think, they just need to do three of these in a row and then they can really get rolling. I feel like BlackBerry is in that same category.

Flippen: It's funny that you bring up Twitter as a potential comparison there because that might be even more topical than a lot of listeners are aware. Because Twitter right now is also going through its own turnaround, right? We're phasing the way that it does things like monetization and advertising. I can see a more realistic world in which that works out for Twitter than I can for BlackBerry in this case, just because the software that BlackBerry has gotten into, both software services for things like automotive operating system secured communications, and a lot of investments put into security software. This is an extremely competitive and expensive place to operate in. BlackBerry's had to take significant writedowns last year on impairments of businesses that they've acquired trying to get into the software space. 

In my opinion, it seems a little bit like BlackBerry is flailing around. I won't say that this is exactly catching a falling knife, if you are an investor in BlackBerry, but what I will say is, if you do choose to invest in BlackBerry, presumably, you are a believer in the turnaround strategy that management has been trying to execute on. Regardless of where you fall on that value proposition, there's no denying that last year was challenging and it looks like this year is going to be challenging as well.

Hill: Emily Flippen, always great talking to you. Thanks for being here.

Flippen: 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 the edition of Market Foolery. This show was mixed by Dan Boyd. I'm Chris Hill, thanks for listening. Remember the markets closed on Friday. We'll see you on Monday.