Shares of Lululemon Athletica (LULU +0.21%) hit an all-time high after huge second-quarter results. Boston Beer (SAM 0.85%) pulls its earnings guidance and the stock falls 8%. In this episode of MarketFoolery, Bill Mann analyzes those stories, discusses the lack of communication from GameStop (GME +2.18%) executives, and calls for congressional hearings to investigate "holiday drift."
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This video was recorded on Sept. 9, 2021.
Chris Hill: It's Thursday, Sept. 9th. Welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only, Bill Mann. Good to see you.
Bill Mann: Thanks for having me on, Chris. It's nice to see you, buddy.
Hill: Good to see you as well my friend. We've got beer, we've got games.
Mann: I mean, not really.
Hill: Not really. We're going to talk about beer and games. That'd be bad. That would just be a bad start of the show.
Mann: This show is going to be awesome.
Hill: We're going to start with the stock of the day. Shares of Lululemon Athletica rose 13% this morning, hitting an all-time high after a monster second-quarter report. I know the default thinking for a lot of people, myself included, when they hear Lululemon, they think, well this is women's apparel, this is a women's brand. But a big part of the story today, and really over the last couple of years has been the way Lululemon has grown their men's business.
Mann: Yes. By the way, Lululemon for men is fantastic. It's absolutely fantastic stuff. They came out and they said, sales were up strongly in the women's and men's categories, which makes you wonder what other categories they have. I don't recall there being Lululemon for pets.
Hill: Just you wait.
Mann: That's right. It's pretty much the categories. They did great, up 61%. This is even so about a third of Lululemon's supply chain, their manufacturing is in Vietnam, which has suffered all sorts of shutdowns due to COVID. They had supply chain issues and yet they have still absolutely crushed it. They don't see this as being a COVID phenomenon. Obviously, who among us isn't sitting around here in more comfortable clothes than usual? But they see this as being a long-lived trend because their guidance was very strong.
Hill: Part of that guidance was hinting at updating guidance that they gave in 2019 around the men's line, which was, we're going to double our men's line by 2023. The language we got today was almost certainly going to be sooner than that. Basically, they said check back with us after the holidays. We'll update you then, but all signs point to them being early on doubling their men's business.
Mann: Yeah. Again, this is not a segment that's like, hey, it's now a couple of guys, and in 2023 it's going to be a couple more guys. These are meaningful amounts of revenues for Lululemon. The other thing. It's really interesting to me, Lululemon has been one of really, the select few apparel retailers that's absolutely thrived during the pandemic, so much so that they bought Mirror, and they are also now talking about how they're going to integrate that into more of the lifestyle part of what Lululemon is. It's absolutely an aspirational brand, and more and more people seem to be aspiring to Lululemon because their guidance on every level was fantastic on top of really great results.
Hill: It will be interesting to see over the next few months, I just think back to the holiday season last year, and so much of Lululemon's marketing was built around Mirror and built around that. Obviously, there was a recent acquisition for them. They were really pushing it, trying to dovetail on what Peloton's (PTON +4.01%) been doing. I'll be curious to see if they repeat that this year because it's not to say that Mirror hasn't worked for them, but it's obviously more nascent than their established business lines.
Mann: It is. We have seen a number of companies that have attempted to integrate technology into their existing line of goods, Under Armour (UA 1.87%) (UAA 1.74%) and Nike (NKE +1.12%) probably at the top of the list. One was much more successful than the other at doing so. This is still a complex bet for them, but because Lululemon's stores are still getting great foot traffic, what they've been doing is putting stores within a store. They've got 500 stores now. By the end of this year, by Christmas, 40% of them will have Mirror store within the stores. They're really doubling down on the technology component of what this business can be.
Hill: Last thing before we move on, how expensive is this stock? On a valuation basis, obviously, it's a good day for Lululemon shareholders when the stock is hitting an all-time high. Do you look at it and think it's particularly expensive?
Mann: Man, how do I really put this? I think that fashion has such a trend of boom and bust that Lululemon is a company that has been serially underappreciated and undervalued over a period of time. Their returns now over a 15-year period are sensational, absolutely sensational. They're moving internationally in a much bigger way than they have been in the past. Yeah, the stock is pretty expensive based on current earnings and there is that fashion risk that should always be in the back of your mind for any company like this. But Lululemon is a monster and they have been executing, and they've been shifting to meet fashion trends and driving fashion trends now for the better part of a decade, which is really a rarity.
Hill: GameStop's second-quarter loss was wider than expected, they're growing sales, but shares of GameStop falling 8% this morning. The fact that their executives aren't taking questions on the conference call and they're not talking about their plans for turning the business around, that is not helping, absolutely not helping matters.
Mann: It's so great for us to be able to talk about actual results from GameStop under any circumstances because GameStop, ultimately it's been a fad, it's been a meme, it's been a cause for a certain type of investors. It is somewhat rare. I actually went to jump onto the call yesterday, which was supposed to start at 4:30 Eastern Time. I hopped on to the call at like 4:41, which is usually the time by which the company in a call has done all of their disclosures and the call was over. It was totally over. It was like they were on for nine minutes. No questions, no nothing. Now, I guess in some ways because management is aware that GameStop's stock has not really had much to do with operations, maybe they're just playing true to type. But this was in fact a money-losing company in 2019. It was a massive money-losing company in 2020, which is understandable. It's still a money-losing company. Every once in a while, every 13 weeks, management has to actually come on and remind people that that's true. Yeah, they got off as quick as they could.
Hill: I know that when Steve Easterbrook left McDonald's (MCD +0.33%), he left under a cloud. But when he became the CEO of McDonald's, he came in and was very clear to everyone, including and especially the Wall Street community. I am going to spend the next few months talking to our franchisees, talking to our employees, and I'm going to come back in a few months, and then I'm going to lay out my plan for turning this business around. He did just that. The reason I mentioned this is because the people who are running GameStop, they didn't just get there yesterday. They've been there for a while. I know there are times when Wall Street analysts can come off in a negative way. This is not one of those situations. It is perfectly reasonable to, at this point, with this management team to expect that they're going to answer questions or at the very least, lay out their plan.
Mann: Ryan Cohen, who has become a billionaire, thanks to his founding of Chewy (CHWY +0.07%), and now coming in and taking over, and buying a huge piece of GameStop, has been fantastic. But he's been there for eight months now, nine months.
Hill: Yeah. A little less than a year.
Mann: A little less than a year. They have a new CEO. But yeah, they've done a great job taking advantage of the fact that their stock is very, very highly priced in eliminating their debt. GameStop has plenty of time from a corporate standpoint to figure itself out. Their high price of stock has given them that luxury. But they are taking every bit of that luxury. What they ultimately want to do, and I think that they have a chance of succeeding at this, is not so much being still a bricks-and-mortar retailer as a much more reliable place where they can be an online platform for games. I think they've got a good shot at it. I still think that this company, the share price, it bears repeating, has absolutely nothing to do with its current operations right now.
Hill: They should take a page out of the playbook of the people who are running AMC (AMC 5.09%) theaters, who came out earlier this year and said just that, hey, we just want to remind everyone, our stock price and our business are two completely different things. They're 100% divorced from one another.
Mann: The best one that I have seen so far was last year when Hertz was in bankruptcy and the meme-stock people, WallStreetBets, got a hold of its stock and they're like, all right, we're going to do a secondary. In the secondary, it basically said, our company is in bankruptcy, you should expect no value. They sold several $100 million worth of stock of a company that was in bankruptcy. The craziest thing about Hertz as you look back, it's coming out of bankruptcy and there's actually value for the shareholders. Those people were right, they were right.
Hill: Nice work if you can get it.
Mann: That's right.
Hill: The hits keep on coming for shareholders of Boston Beer Company. Unfortunately, it's not a good kind of hit. Shares are falling 8% after the parent company of Samuel Adams beer pulled its earnings guidance. In the last six months, this stock has been cut in half. Where do you want to start with this? At some point, I want to talk about the hard seltzer. But right now, you look at the stock being cut in half. Are we going to look back on this and say, that was the time to buy Sam Adams? Or are we going to look back and say, no, that was completely reflective of significant underlying problems at the business?
Mann: I love shifting time frames a little bit. The stock currently is about $520 a share. Last March, on March 1st, really before the big drop everywhere, it was at $340 a share. Do the math. That's about $160-$170, so it's essentially gone up 50% in a year and a half. Is that an OK return? To me, that's great. If you push the goalposts out a little bit farther and you push your perspective out a little bit farther, Boston Beer stock has done fine. But it is also the case that $516 is way less than $1,350, which is where it was in the interim. They came out about a month ago in July, who could tell what it is anymore, and said that sales of hard seltzer were softer than expected, that they'd really dropped off a cliff. That was really one of their big bets. Hard seltzer sales have continued to drop in such a way that the Boston Beer company does not feel like they can predict what it's going to look like. That's scary, that is unnerving. But it's also, I think, probably temporary. I think it's probably, you've gone through the time in which hard seltzer was the hot thing. It's going to be a model citizen within this portfolio. Boston Beer company has done a great job shifting into ciders and shifting into hard seltzers, and now the hard work will come.
Hill: Do you think it's partly due to expectations, getting away from everyone in terms of hard seltzer sales? We were talking about this a little bit before we started recording. I'm not someone who drinks hard seltzer. I look at the people who do, and they are typically a lot younger than I am.
Mann: And healthier.
Hill: A lot of people are healthier than me. But I do wonder if hard seltzer is one of those alcoholic beverages that is, for lack of a better word, a phase that people go through. That they look at hard seltzer and it's something they drink when they're in college, or maybe in their 20s, or something like that. Then they move on to other things. Although our producer, Dan Boyd, was making the case that, look, hard seltzer is generally something that is lower in calories. Some are better than others, so if you like the taste and you're looking for fewer calories, then yeah, it is something that you can drink over an extended period of your life.
Mann: I've been thinking about it. It was wonderful to hear Dan talk about his impressions. I think a lot of people, when they think of hard seltzer, have wine coolers and Zima in the back of their minds. Something that was white hot for a while and then disappeared. I think probably what's happening now is that people are worried that that fad is coming to an end. I really for the exact reasons that Dan was saying, I don't think that's the case. It is a lower-calorie way to get your drink on a little bit.
Hill: Do you think there is a seasonality to it? Therefore, people looking at a company like Boston Beer should expect sales of hard seltzer are going to do better in the warmer months than they are in the colder months?
Mann: It's funny, I think that that's very true. But also, I always compared beer and wine to cigarettes. People who smoked, always had a brand. Very few people have a beer brand or they have a wine brand, they want to try things. But in hard seltzer, that's not really the case. Hard seltzer is a little bit more like Coca-Cola's. You're a Coke person, you're a Pepsi person, you are a Truly person, you are a White Claw person. I think that the barriers to entry, based on the branding, are much stronger in hard seltzer than they are in beer and wine categories.
Hill: That's a great point. Let me tell you one other little thing that's not helping Boston Beer company. I know this anecdotally through family members in the Boston area. It doesn't help them when in the month of August, they stop selling their summer beers and they start promoting their Oktoberfest beers when it's 90 degrees in August. It's not helping Boston Beer. It's not helping.
Mann: It's really not. We talk a lot about the real shame in this country of how they push forward holidays too much. People are already getting set up for Christmas. We are well into the Halloween season here at the beginning of just entering the middle of September. Yes, folks, it's no longer Mad magazine where you put things out six months before they're actually supposed to be out. Let's hold off until it's actually got a snap of cold in the air before we're saying, hey, here's all of our fall stuff. I 100% agree with that, and I think that there should be congressional hearings about holiday drift. Here are the issues we're here for, Chris.
Hill: Yeah, exactly. Come for the stock analysis, stay for the out-of-the-box thinking on what we need congressional hearings on. By the way, you're right.
Mann: Thank you.
Hill: Bill Mann, great talking to you. Thanks 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 is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.
