Boeing continues to have issues with its manufacturing of the 787 Dreamliner and that could hold back the stock for a while. But a comeback wouldn't be unheard of.
In this episode of "The 5," Motley Fool contributors Travis Hoium, Jason Hall, and Demitri Kalogeropoulos discuss three companies that have come back from publicly damaging problems only to reach record highs for investors. This segment was recorded on Oct. 14, 2021.
Jason Hall: Poor Boeing. Guys, back in the news. I wonder at this point if it's just not piling on. Any little thing with Boeing and that's going to show up on the headlines. But the latest is they have, of course, a defect with one of their important aircraft, in this case, it's 787 Dreamliner. I guess there are some titanium parts that are weaker than they should be, and these are planes that have been manufactured in the past three years. I would say, I feel sorry for these guys. A lot of corporate culture issues there that led to a lot of the problems that companies have, I've talked about that a lot over the past year and a half. Instead, let's talk about maybe some companies that we like, maybe some companies we followed over the years. The companies that have struggled with some product issue or quality issue in the past causing major problems with their business, but the company managed not just to recover, Demitri, but to thrive.
Demitri Kalogeropoulos: Yeah, absolutely. What popped in my head was Lululemon (LULU 0.26%). I'm a writer, I don't say that word out loud too much, [laughs] but whichever one.
Jason Hall: Lululemon.
Demitri Kalogeropoulos: Lululemon? Okay.
Jason Hall: My wife says it.
Demitri Kalogeropoulos: Yeah, that's what I think, but I've heard it both ways. That popped into my mind. Definitely, the stakes are nowhere near as high for a Lululemon quality issue than with Boeing, but they had a massive quality control situation a few years ago. Do you remember that's around 2015 when they started recovering there?
Jason Hall: Well, I remember too. One of the things I want to point out, correct me if I'm wrong, but I'm pretty sure that, I think it was their founder, I'm not sure if he was still the CEO but he was the chairman at the time, he didn't exactly make it any better when he made some comments about people of a certain size wearing.
Demitri Kalogeropoulos: Right.
Jason Hall: Right? It was horrible. There was a problem with the product and then the CEO basically said, "Well, you're fat." Come on. It doesn't get much worse. It was a major blow to the company.
Demitri Kalogeropoulos: It was, and to the brand, and there had to be a huge turnover in management, and they had to revamp a lot of their sourcing. We're talking about this company is athleisure, they are basically focused on yoga apparel. At the time, that was basically their only category. But they have pivoted really well.
Like I said, they completely revamped their entire sourcing process, supplier process. Thankfully, their PR hasn't repeated that situation either. Just a super growth story. Last quarter, sales were up 61 percent. This is, obviously, compared to a lull a year ago in the pandemic. But sales are significantly higher than 2019, so they're setting new records. Management just raised its outlook for the third straight time this year. They're doing really great things in their digital world. Lululemon is one of those companies that when they first started with the online business, they were actually making higher-margins than in their stores. They have run with that gap and expanded that too, which is exciting to see. Their margins are going up into that 60 percent category which is just, you don't really see, it's way higher than a company-
Jason Hall: That boggles the mind, it absolutely boggles the mind.
Demitri Kalogeropoulos: Management is still saying, we have room to keep raising that, which is great. Mainly because they're just releasing these great innovative products that their customers love, and that's allowing them to push into other areas like outerwear and menswear and kids wear and things like that. They're getting bigger, but it all depends on that brand. Now, they seem to have that piece settled. Well, that's given them a platform to extend a lot further.
Jason Hall: They seem to have pricing power, they really do. That's pretty rare in this space but they do. Demitri, what about Mirror? I think that's a really interesting product too that they're expanding and talking about expanding your margins. You started offering a services-based platform. That could be an order of magnitude larger.
Demitri Kalogeropoulos: Absolutely. Apple is pushing into their Fitness+ thing and to get into their services in that way for that reason because, I think I was looking at the margins on obviously a very different industry, but Apple's services are somewhere in that 70 plus percent range within their margins versus tech products in the 30 percent range. Absolutely makes sense, particularly because it's clear that Lululemon's customers are very highly engaged with the brand and they're just looking for ways to deepen that engagement, and that makes a lot of sense.
Travis Hoium: This really goes to show how quickly people will forgive major mistakes too from a brand. You can go back through things that have happened with Target, the data breaches there. That's a retailer that's done incredibly well. Brand after brand makes mistakes like this, and as long as you handle it well, we're seeing this with Peloton right now in that same space, where tragic outcomes from some of their products, but if they handle it over time, people will forgive and forget, if you will. But it can take years. Lululemon is a great example of that.
Jason Hall: You've got another good example of that too, Travis.
Travis Hoium: Yeah, Chipotle (CMG 0.12%) is the one that, I think you actually, keyed me into this and I will run with that. One of the things when I was looking up their E. coli outbreak, that was in 2015. That seems like it didn't happen a long ago, but that was quite a while ago. But they really turned that around.
Again, here's a brand where I haven't thought about that in years and I'm a regular Chipotle consumer. As long as you can handle that and get over it. They obviously improved their processes, we haven't seen that outbreak again.
I was looking at their performance here since the beginning of 2017. Revenue is now up 75 percent for Chipotle. Net income is up 2,500 percent that's coming off of a low after their outbreak in a down year in 2016. But the stock is up almost 400 percent.
Consumers are forgiving them, are forgetting about that outbreak in those issues, and investors absolutely have as well. Just goes to show that the memories are pretty short as long as long as these things don't recur over and over again. I think the problem with Boeing is we're seeing this happened over and over again, and this Dreamliner is just a product they can't seem to get it right.
Jason Hall: Demitri, you talked about in the last hour with Domino's as being a tech stock. I think you can say the same thing with Chipotle. Brian Niccol was brought in, people thought he was the product guy, and he was the process guy, he was the technology guy. They immediately put huge focus on digital ordering, putting technology in the restaurants to take advantage of that second make line to improve their throughput. It's really just a tech story and an operating leverage story, right? Let's see here.
Travis Hoium: Yeah, absolutely right.
Jason Hall: Yeah, go ahead.
Travis Hoium: Always impressed I remember the challenge with Chipotle before that E.coli hit situation that was always how can we do more than 1,200 lunches in the given hour for lunch hour that was an actual challenge. I guess they would turn AI to that now, but their volume was always so high and leading the entire industry that I'm sure, an exciting challenge to see how can we do nine more meals in this amazing lunch hour? That is where we are backed in the line outside the door.
Jason Hall: They figured it out [laughs] Have they ever? Let me ask you a question here. Do you know who Ron Kaplan is? Ron Kaplan. Never heard of Ron Kaplan?
Travis Hoium: The name rings a bell.
Jason Hall: Rule Breakers long-term term members might remember. He helped this happen. Trex Company (NYSE: TREX) stock. David Gardner recommended Trex. I think Rick Munarriz actually brought it to David, first recommended Trex in Rule Breakers a number of years ago.
Ron Kaplan was named CEO of the company effective January 7th, 2020 took over. Here's the thing. He did an interview just a few years ago and not that long ago and he said that on the 7th, he showed up for work and on the 8th, he got a call from lenders and was told that by the 15th, he had to find two million dollars or something or the company was going to go bankrupt. It was like he found out the next day on the job that the company was about to go out of business and he knew it was a troubled company.
This is a company that makes alternative decking. They make decking out of recycled plastic and recycled wood scraps. They take these waste products and they make decking that's beautiful and it lasts like 25 years and you don't have to stain it, you don't have to water treat it, you don't have to do regular maintenance to it.
Here's the thing, guys. Back in 2008, 2007, their product was crap. It had mildew problems. It was ugly, it was a problem. Kaplan came in, they put a ton of money and focus on R&D, developed great products and now with synonymous. People say Trex and maybe they end up with another product of Trex is not available to them, but by far has the largest market share. They have more than half the market in this category, and it's still a growth category. Alternative wood decking makes up maybe 10 or 11 percent of all decking sales. The vast majority is still wood. It's still a market that is open to a ton of growth so Trex is a story that's really, really interesting. I'll have to find that interview and share it in the Slido with everybody it's pretty cool it's a pretty cool story.
Travis Hoium: They are still having some issues with manufacturing because I can't get products for my patio.
Jason Hall: It's another issue. [laughs]
Travis Hoium: The demand must be through the roof.
Jason Hall: Here's a crazy thing. Let me tell you crazy stat Travis. David and I actually interviewed their current CEO. They are on their third CEO since Kaplan and it's all been good succession planning. Kaplan retired and then they got a replacement retired, so we interviewed him earlier this year and I asked him. Because they had a manufacturing facility. They had three, I think one in Louisiana and they have one in Winchester, Virginia, and they have one in Nevada. They closed the one in Louisiana or Mississippi. They closed it like five or six years ago. They manufacture three times as much decking with two factories versus three. It's incredible. Their throughput has gone through the roofs. It's really amazing company. I'm just a huge fan.
