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2 Stocks for the Great Outdoors

By Asit Sharma – Dec 20, 2021 at 2:57PM

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Thor Industries, the dominant RV maker in North America, starts its fiscal year with a bang.

Weber Grill's (WEBR) fourth-quarter loss comes in smaller than Wall Street was expecting. Joining host Chris Hill, Motley Fool analyst Asit Sharma analyzes market stories as well as CEO Elizabeth Spaulding's "multi-quarter transformation" plans for Stitch Fix (SFIX 5.09%).

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This video was recorded on Dec. 8, 2021.

Chris Hill: It's Wednesday, December 8. Welcome to Market Foolery, I'm Chris Hill. With me today, Asit Sharma. Thanks for being here.

Asit Sharma: Chris, thank you for having me, as always.

Chris Hill: Just because the holidays are getting closer does not mean that earning season stops. We've got a couple of businesses for the great outdoors, but we're going to start with the stock of the day and unfortunately, it's not for good reason. Shares of Stitch Fix falling 27 percent this morning. First-quarter results were better than expected, but guidance for the current quarter points to slowing growth and Stitch Fix is a growth company and we don't like when our growth companies have slowing growth. I want to get to some of the comments from Elizabeth Spaulding, the CEO, but just in terms of the results, did anything standout to you to the point where you look at this move, look, this is a pretty big move. Do you look at this and say, yeah, this makes sense or do you think it's an overreaction?

Asit Sharma: Well, you know Stitch Fix, Chris is in a fix because they're simultaneously trying to be a fashion direct-to-consumer retailer. At the same time, they have this great technology base that uses very high-level algorithms, and a great data stack as well or a stack to analyze their data, I should say. They're trying to do two things at once, both of which are really hard. It's very difficult to analyze data correctly and have your technology be predictive to increase your yield on sales. It's difficult to be a direct-to-consumer retailer in the fashion world. Their argument has been, for a long time, that they can combine both of these business strategies and grow faster than the rest of the retail market. They keep coming to the cost of that performance and drawing backs and this quarter is a great example. Sales were solid, top-line was up 19 percent year-over-year to 581 million. Active customers grew, revenue per client rose 12 percent, but then they give the outlook for next quarter, which is just projected to be up three percent versus last year, and it's coming back to square one for investors. I think there's some fatigue here. I think that there is some sense in the investment community that this is just a harder business model to generate it's momentum than maybe investors first envisioned. I don't second-guess Elizabeth Spaulding, I think she is doing a really credible job after Katrina Lake step-down. This is more the business model taking time to really hit its stride.

Chris Hill: Give credit to Elizabeth Spaulding for her comments around this quarter and where they're going and what they're trying to do. She said straight out that Stitch Fix is in the middle of what she referred to as a multi-quarter transformation. She is trying to change the way this business works and there's a version of the future where it pays off. I think at least part of the drop that we're seeing today is some investors saying, I'm not interested in waiting around for this to play out. Again, to her credit, she's only been CEO for four months, so she's not sitting still. But she was also very clear to say, right now it's too early to tell how this is going. I think if you're going to take her at her word, I totally understand the people who just look at this and say, I've got other options for investing my money.

Asit Sharma: This is fair enough. I believe for investors, you always want to examine the opportunity cost of sticking with a company that's taking some time to generate it's true momentum space. For a new CEO, clarity is good, being realistic is good, putting it out there on the table at the front end will help later on for those investors who stick around and those who are frankly on the sidelines. I think that this isn't the end of Stitch Fix's story, but for a certain beleaguered investor who's been there since the start it probably is time for many of those investors to look elsewhere. Who knows, they may reach [inaudible 00:04:26] in the future. This is something to me that's still a grand experiment that is responsible for pushing a lot of innovation in the tech field and the retail field because they made the idea subscription even more commonplace than it was before. I agree with you, Chris, we shouldn't stop watching Stitch Fix those of us who, like myself, are on the sidelines. Keep looking at those earnings, look for some momentum. They just need a bit more consistency and traction, but with this shift to direct selling model versus only having the fixed or their monthly and quarterly presentation of those. I think that's going to pay off, it's taking some time.

Chris Hill: Thor Industries is starting off the fiscal year with a bang. First-quarter profits for the RV maker were well above expectations, so was their revenue. Shares of Thor Industries only up about one or two percent. This is the dominant company in the RV space when you're thinking about market share, particularly in North America. I know people are probably more familiar with the Winnebago brand, but Thor Industry, they've got the biggest market share.

Asit Sharma: They do, and they balked up their global offering with their European acquisition a couple of years ago. This is a global business with a manufacturing footprint in Europe, poised to grow more like Winnebago. I think the company is extremely well-run. Just their brands may not be quite as well-known as Winnebago, which is always figured as a romantic brand in the popular imagination. But Thor obviously is benefiting from this continued move to lifestyle experiences. I have been a bit surprised that the demand continues. One of the things that caught my eye, something I watch with Thor every quarter is that backlog. Their global order backlog now stands at 18 billion, which is more than a year's worth of sales. In the past, I've been a bit skeptical when the RV manufacturers start building these huge backlogs because inevitably consumers back off, then they have to whittle both their inventory down and then make this backlog more realistic and take some orders off the books. But we see no sign of that happening and I think that's great. It's a lifestyle change that we're seeing across the globe. We're also seeing younger consumers come into this industry. The average purchaser of an RV looks a lot different than they did, say, 20 years ago. 

They are younger, the demographic is more diverse. It's become a rejuvenated recreation area in the market, and I like this. I also want to point out that they are taking advantage of these sales. That demand sales increased 56 percent year-over-year. But the company was also able to make some money off of that. They had a profit of 242 million bucks. That's more than double the $114 million in earnings that they were able to put on the books this quarter last year. The thing that impresses me most about Thor in any environment is their ability to work with their own production capabilities. They are very quick to put plants on four-day work weeks if they need to, to adjust to demand in really bad times and they know how to go full steam ahead when demand is there and the consumer is buying. It's a nice report. I've been writing about Thor for many years and I think I've always pointed out what a great company this is from manufacturing perspective. A little volatile because of the industry, but I still think this is a solid play for those people who might be a little tired to call this volatility in the tech sector and are looking for a few good names to balance out that growth bend with some solid manufacturing that is profitable and has a nice tailwind behind it.

Chris Hill: Just a programming note, it's going to be a short week for us here on Market Foolery. We will be back on Monday, but obviously checkout Motley Fool Money this weekend. We've got some financial planning tips for the end of the year. Still time in the remaining weeks of 2021 for investors to make a couple of moves. Let's close with one of my favorite outdoor activities, and that's a grilling. Weber Grill's loss in the 4th quarter was smaller-than-expected. Shares are basically flat this morning. I'm rooting for this business, I'm a customer of this business, but the short public life of Weber Grill has not been amazing, the stock is still trading below where it closed on its opening day in August.

Asit Sharma: Yes, this as an investment theme, Chris, has surprised me in how unpopular it's been with investors. We also had Traeger Grills, which went public under the December cook, C-O-O-K, and that stock has followed a similar trajectory. I didn't think these were going to turn the market upside down, but I didn't expect both companies to have fallen out of favor so quickly with investors. But there's still some reason for that here. In this quarter, we actually had a net sales decrease of about 5 percent to 350 million. All those sales for the whole fiscal year were up, 30 percent year-over-year. This is a category that does have a lot of potential because gradually both Weber and Traeger and other competitors are incorporating a lot of fun tech into their grills.

They're more app-driven today. Now, short story, here, I had a [inaudible 00:10:19] Weber for my parents that lasted for ever, it must have lasted 15 years. I replaced it with another brand, not the same quality. That grill only lasted three years. I went back a few weeks ago and bought a Weber grill, but I went for the charcoal grill. Having always been a propane guy, one of my friends is a chef and told me that I would love the charcoal experience. I bought the grill and some accessories, so I think not extrapolate my own experience, but many out there, I think listening today will have the same experience. The brand is very strong, the quality is high. I think Weber has some potential in the future. For them, it's an issue though, of reaching a new customer base. They already are dominant in this market, and fending off some of the competition from the likes of Traeger, which utilized a different approach and are more in the, I guess, more millennial friendly aspects of the grilling world, wood grilling, smoking. 

As Weber extends into these newer areas for it, I think their manufacturing prowess that they've developed is going to serve them well. It's just really a question of how do they market this brand? Again, like Thor, to a younger base of customers and start getting some momentum that's going to extend a little bit beyond this post-pandemic world which we saw. Actually, Thor is doing [laughs] really well in. I'll keep watching this. Just curious, Chris, you've looked at this sector for so long, and have seen so many consumer brands. What is it about Weber as both the customer and a very wise investor that you think might give it some advantages in the next couple of years.

Chris Hill: Well, first, I'll just say my experience is similar to yours, and I think a lot of people who have bought these grills, they make high-quality products that last for a long time. Maybe that is to their detriment as a business because this is not in terms of their biggest ticket item, which is thinking of those large propane grills. This is not a repeat purchase business. The grill I bought has lasted 16 years and I've replaced some of the parts and Weber does a good job of making that available. But that's not the same as going out and buying a new grill. I think that what they're trying to do with the apps might have potential. I don't want to say that this is something that keeps the balance and makes the business amazing and therefore makes the stock one that people need to run out and buy. But I do think there is potential for some subscription to the extent that they can get enough content on their apps, that makes people, worth saying sure, I'll spend call it what you will, five bucks a month or maybe it's an annual subscription, something like that. I could see that being something that lures people in. Because again, I don't need to go out and buy another one of these grills. As long as they're making their parts available, I can continue to do that. At some point, I probably will. I would, however, at least kick the tires on some subscription service that Weber offers. Because my limited experience with their app has been a positive one. I'm not a chef, but I am interested in trying new recipes, that thing. Maybe there's something there on the content side. I like that they are trying that, and there are other businesses like this where they really like the product and service. At the moment, I'm not interested in the stock.

Asit Sharma: I want to say you nailed the price point there. We'll start with 25 bucks, for intensive learning language app, we'll drop down to 10-20 bucks for a premium music app, maybe 20 to higher-end range if you have a family. Then below that for stuff that you use frequently, but not all the time, five bucks sounds about right, and that would be a very nice revenue stream for them. Again, those of you out there who are Weber fans or fans of grilling in general, I know many of you will grill sometimes in December. I have myself once or twice grilled with snow falling. [laughs]

Chris Hill: Absolutely.

Asit Sharma: This is something you think about year around, five bucks a month subscription. Here we're seeing this and I probably should have refreshed from their S1 from a few months ago, Chris. I bet that's in there, but they've got the subscription and maybe it's priced right at five bucks. But if they're doing that, well, let's spot us a little bit of this, perhaps it's already there. That is where some margin can come from, and content is a wonderful idea for a company like this with such a great brand. Last thing I'll say is maybe while the ability to take the grill itself more upscale is limited because they already have quite expensive grills with different temperature ranges and different surface areas for grilling, I do think there's something in their push to accessories which is nice because I bought some Weber accessories and I was telling myself, "Asit, don't do this. Come on, man. You just go to Home Depot, pick up the knockoff brand. You're going to save15-20 percent." But you know that Weber brand pulled me. I bought the accessories and the grill itself, Chris, I don't think was more than 170 bucks? I'm trying to remember exactly what I paid, but the accessories, they were probably a quarter of that within a few minutes. But let me not take up your precious time bemoaning my on savviness as a consumer.

Chris Hill: Just the last thing I'll add. You talked about grilling when the snow is falling. Last night, I was planning out the Christmas Eve grilling that I'm going to be doing this year. If the snow is going to be falling on Christmas Eve, that would be nice. But whether it falls or not, I plan to be out at my Weber Grill on Christmas eve.

Asit Sharma: Probably, somewhere, several, 100 miles below you on the Atlantic seaboard will be doing something similar.

Chris Hill: Asit Sharma, great talking to you. Thanks for being here.

Asit Sharma: Same here, Chris, thanks so much.

Chris Hill: As always people on the program may have interest in the stocks they talk about, and the Market Fool may have full recommendations for or against so don't buy yourselves stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.

Asit Sharma has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns and recommends Stitch Fix. The Motley Fool has a disclosure policy.

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