What China Investors Need to Know About the SEC's Comments on Transparency

Dick's Sporting Goods (DKS -0.62%) soars to a new all-time high, while Nordstrom (JWN -1.35%) plummets on sales that are lower than pre-pandemic levels. In this episode of MarketFoolery, Bill Mann analyzes the retail landscape and weighs in on SEC Chairman Gary Gensler's declaration that the SEC is going to demand more transparency from Chinese companies.

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This video was recorded on August 25, 2021.

Chris Hill: It's Wednesday, August 25th. Welcome to MarketFoolery, I'm Chris Hill. With me today, the one and only, Bill Mann. Thanks for being here.

Bill Mann: Hey Chris, how are you?

Hill: I am good, because we have two radically different retail stocks. But we're going to start with the big macro. SEC Chairman Gary Gensler said the SEC is going to demand that Chinese companies trading in U.S. markets do a better job of telling investors about political and regulatory risks. Gensler said he envisions this starting early next year in companies' annual reports. I have a couple of questions. My first is, do you envision this starting next year?

Mann: I actually do. There have obviously been a lot of disagreements between U.S. regulators and the Chinese government, the Communist Party, about what type of information Chinese companies should have to share. Oddly, in this case, the Chinese have agreed and are at least saying they're going to be supportive. This all fell out when DiDi went public in the U.S. and then almost immediately the Chinese government put really heavy sanctions on DiDi. I think this is one of the few areas where you're going to see some cooperation between the two countries.

Hill: So, I shouldn't read anything into the fact that shares of large Chinese companies like Alibaba and Baidu and Tencent are down a bit today, a day in which the S&P 500 is hitting yet another all-time high?

Mann: You shouldn't, and at least partially because yesterday, probably on the news of Cathie Wood buying certain Chinese companies, all of the big Chinese companies had tremendous days; Jd.com was up 14%, Alibaba was up huge. All of these companies were up huge yesterday, so I don't really think that this is particularly because the Chinese government has said that this is something that they are interested in cooperating on. I don't think that this is a huge news, it's not a nothing burger. I actually think that this is a sign to a path for more cooperation in other areas as it pertains to Chinese companies, both being currently listed in new listings in the U.S. because there's still a lot that has to be agreed upon before Chinese companies are allowed to IPO in the U.S. anymore. This doesn't have quite as much to do with that, but this is an area of agreement and I, as an optimist, I'm looking for some momentum from this to solve other issues.

Hill: It does seem like the sort of thing that, look, it's not a cure-all. But I think that if this goes through, this is a step in the direction, not just for more transparency, but also for easing the concerns of some percentage of U.S. investors who look at businesses in China and say, "Yeah, I'm interested, it's a compelling business, but I'm not getting the transparency that I'm getting with U.S. companies therefore they're on my watch list, but they remain on my watch list." Something like this goes through, I could see it providing more people with opportunities to click the buy button.

Mann: Maybe. Even as our resident internationalist, I have long said that you would be just fine as an American investor never owning a Chinese stock. If you do want to own Chinese companies, my best advice is just to play the hits, find the companies that are most deeply aligned and ingrained with the government of China, which may feel distasteful, but there's a reason why you want to be investing with China and not in China. This is an area of potential cooperation. Chinese companies have been treated as they are special by American regulators and the exchanges. The status quo right now is not going to be in place five years from now. Either the Chinese companies will have been removed from the market, which I don't think benefits anybody, or they're going to stand down, go to DEFCON 3 and come to some agreement between them on how to operate going forward.

Hill: Let's move onto the stock of the day, which is Dick's Sporting Goods. Second quarter sales were up 21%. They raised guidance for the full fiscal year and shares of Dick's Sporting Goods were up more than 15%, hitting a new all-time high. I don't know if a little bit of what we're seeing is short interest running for the exit signs, but holy cow, this was a great report.

Mann: It's such a great report. This is a company that a friend of mine mentioned to me last April when it was about $25 a share. So just to let you know, we accidentally let fat pitches slide by from time to time to time as well. I think, Chris, I'm going to point to something that they seem a little bit weird, but I think is really illustrative. It's this; their e-commerce sales were down 28% from the second quarter of 2020, which sounds terrible. But then you realize that in the second quarter of 2020, most of the Dick's stores, the physical stores, were closed. If you did business with Dick's, you were doing it through an e-commerce channel. So the fact a year later that it's only down by 28%, which means they have literally opened up a brand new channel and it sticks, it's astounding to me. It's up more than double from the same quarter in 2019. But I thought that was absolutely fascinating. They also announced a special dividend, $5.50. They're raising their statutory dividend. It couldn't get much better for them, it really couldn't. 

Hill: It really couldn't. This is a business that for a few years before the pandemic was investing in their stores, was investing in technology. It's the sort of thing that may not get Wall Street excited until you see that those investments pay off in their ability to dramatically ramp up e-commerce and also the curbside pickup program, which they basically created in, I think, three days. It was some ridiculous amount of time for a program which did not exist at all. But they rolled it out in two or three days and all credit to CEO Lauren Hobart.

Mann: Chris, if you think about what that takes, like three days. Okay. Yeah, great. They are bringing my fisherman friend to the car, but they are basically converting their stores into drop site warehouses in no time. It's really incredible and it goes to show both how important great CEOs, visionary leadership, and a great corporate culture is because that doesn't happen that successfully at a company that's ramping up from nearly absolute zero. Unless they have contingency plans in place and they're all kind of pushing in the same direction. It really is amazing what they have done. Unfortunately for me, Dick's Sporting Goods is a company that I have underestimated for 20 years now. We had colleagues in 2001 saying, "Man, Dick's is a pretty good company." I can't really claim too much brilliance behind my own, ignoring Dick's for too long of a period of time, but this is about as good as it gets for a retailer and just sensational results.

Hill: I said this yesterday when Asit Sharma and I were talking about Best Buy. Not that Dick's Sporting Goods was on the ropes a decade ago like Best Buy was, but they have had periods where they have struggled as a business and the stock has as well. But it's businesses like Best Buy and Dick's Sporting Goods, along with the Targets and the Walmarts of the world, that basically provide no excuses for other retailers. It's like, no, there is a way to succeed. If you're not named Amazon, there is a way to succeed in rewarding shareholders and you just got to make the investments.

Mann: So, Lauren Hobart is the CEO of Dick's Sporting Goods and she's sensational. Best Buy, I would've thought, if you were to have listed, let's call it 2014 -- if you were to have listed the 10 retailers that were most at risk of being Amazoned -- we're going to verb Amazon now -- Dick's and Best Buy were definitely on the list.

Hill: Best Buy would've been higher on the list.

Mann: Best Buy would have been higher on the list, but just fantastic shifting to a competitive threat that for a lot of companies has turned out to be terminal and these companies are now thriving.

Hill: Unless anyone thinks this whole show is going to be sunshine and rainbows, we have one more story to get to.

Mann: We've got to talk Nordstrom, don't we?

Hill: We do. Too quick programming notes. One, this is a short week for us. We're off tomorrow, we'll be back on Monday. Second, our email address is [email protected]. From Ben Karnes, Ben Karnes with a question that several people have written in over the past couple of months; Ben wrote, "Did Bill Barker leave The Fool, he's been missed on the podcasts?" I appreciate that, Ben. I've missed having Bill Barker on the podcast. I know that not everyone has missed having Bill Barker, I have. The reason I say that I know that is because I read all the email. But no, Bill has not left The Fool, without pulling back the curtain too much, Bill, as I think a lot of people know works on the regulated side of the Motley Fool's business and conversations are happening regarding the regulated part of the business and the publishing part of the business and all the parts therein. Hopefully, before not too long, Bill Barker will make his return to MarketFoolery.

Mann: I mean, for some of us, hopefully.

Hill: Hopefully yes. For others, you've just been warned.

Mann: For others, this is a more roses and positive story. Bill has incredible insights. He's the quickest mind I know. Like, full stop. You're pretty quick, Chris, but --

Hill: I appreciate that. As you mentioned, we got to talk about Nordstrom because Nordstrom is like the opposite of Dick's Sporting Goods today. Shares are down more than 16%. You can forget about the second quarter profits coming in higher than expected, which they did. They raised guidance for the full fiscal year. Nobody cares because Nordstrom second quarter sales were lower than they were two years ago. We didn't talk about this with Dick's, but I mean, part of what was so great about Dick's Sporting Goods is their second quarter sales. I believe I had this number right. They were up 45% compared to two years ago. Nordstrom, whatever expectations people have going into the quarter, they are still putting up numbers lower than before the pandemic.

Mann: It's unbelievable to me because if you think in a period of time in which, I mean, obviously early 2020 was an anomaly. But a lot of people in Nordstrom's target market are feeling wealthy now. How are they not winning? How is Nordstrom not winning? It truly makes me sad, because they are a company that's all about customer service. This really should be the best of environments for a company like Nordstrom. I mean, compared to Dick's, Nordstrom is not a company that I would have thought would have been disrupted because it's clothing, it's a lot of things that are tactile, that are easier to buy in person. But Nordstrom is down 6%. The only big retailer with lower sales growth or faster sales decline is Victoria's Secret. [...] Ross Stores, Home Depot, Target, up much higher over 2019.

Hill: When I try to be optimistic about Nordstrom, I think in terms of like, well, what levers can they pull? How can they turn this business around? It's not like this is a business that has radically overexpanded its store count.

Mann: It's not Sears either though, Chris. Like, it's not a company that you'd look at and you walk and you're, like, this has the smell of death; this looks like irrelevance.

Hill: This is essentially a family run business still. I mean, the Nordstrom family is so heavily involved in the leadership and the running of this business. There have been times, particularly over the last five years, where they have talked openly about wanting to sell the business. They may not get the price they want, but I'm left to know another conclusion: if this business is going to be fixed, it's going to be someone other than the Nordstrom families to do it.

Mann: It's time, isn't it? Some of the things that they talked about in the conference call were some of the very classic Nordstrom levers that they would pull. They were focusing on execution, focusing on the customer experience, focusing on their most dedicated customers. But you're just talking about a degree. There is no innovation in those levers that they're pulling and unfortunately for J. W. Nordstrom, they either need those levers pulled or this company needs to go private in some way so it continues to be a trust of the Nordstrom family because at the moment, it is a mismanaged publicly traded company. It's sad to say, I said that a minute ago, because Nordstrom is a special retailer I think.

Hill: They are and it's not one of those businesses that you would walk in and as you said about Sears, you would not walk into a Nordstrom and automatically think this place is in trouble. 

Mann: It's a trade, it feels good there. There's just --

Hill: We'll see maybe by the end of the year Santa can bring them something like being taken private. 

Mann: Like venture capitalists. What do you want for Christmas? "Oh, I'd like a venture capitalist."

Hill: I want capital under the tree.

Mann: Yeah, makes me sad to say, but I think that that is the most likely positive move for Nordstrom as a company to make from here.

Hill: Bill Mann, great talking to you. Thanks so much for being here.

Mann: Thanks, Chris.

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's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you next time.