In this podcast, Motley Fool analyst Maria Gallagher discusses:
- TJX (TJX -0.10%) defying the recent trend of retailers struggling.
- How TJX can potentially smooth out its results in good economic times.
- Why she thinks beauty companies are the best examples of "lipstick effect" stocks.
Plus we take a call from Brian in Kansas City and talk about how to evaluate which stocks in your portfolio might be good candidates to add to.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on May 19, 2022.
Chris Hill: [MUSIC] Deciding which stocks in your portfolio you should add to is a common dilemma. We got a couple of ideas to help. Motley Fool Money starts now. [MUSIC] I'm Chris Hill joining me today from the financial capital of the United States of America, Maria Gallagher, thanks for being here.
Maria Gallagher: Thanks for having me.
Chris Hill: The last two days on this show, we've talked about retail. To a large extent, the way retail appears to be melting down. It's one thing for unprofitable software company stocks to get hit, it's another thing to see established large retailers like Target and Walmart get hit the way they got hit. You and I were talking earlier today and I think I made a comment like, "Yeah, it looks like all of retailers is just melting down." You said, "Well, actually there's TJX," which is a company we rarely talked about on this show, but TJX, is it thriving? Is it an overstatement to say that TJX is thriving right now?
Maria Gallagher: It's doing well. Their net sales last quarter were 11.4 billion up 13 percent. Their Marmaxx comp store sales, so Marmaxx is a combination of TJ Maxx, Marshalls, and Sierra were up three percent over 12 percent in sales increases last year. HomeGoods comps were down about seven percent. In total, the US comp store sales were flat over a 17 percent increase last year. That's really quite impressive to maintain those elevated numbers. They ended the quarter with 4.3 billion in cash. We're seeing a lot of inventory freight and delivery pressure on a lot of these other retailers. But TJX didn't really talk about it that much, it didn't seem to be hitting them quite as hard. Their incremental freight pressure hurt their margins by about two percent, wage pressure hurt their margins by a little less than one percent. That pressure, I think was less and Wall Street responded pretty positively to that. I also think that TJX is classified as something called an inferior good, which I don't like the name.
Chris Hill: Wait a minute, I'm sorry, that's the category for TJX.
Maria Gallagher: No, if you're talking about economics, you talk about the different classifications of goods, so I think TJX would be called something called an inferior good. I don't think it is, but that's the economic term, which is just a good that demand drops for it when the economy is doing well and demand increases when the economy isn't doing as well. You have things like bargain stores or places where you go, when you're making more money, you probably won't go there, but when you're making less money, you will. I think that's also a positive indicator of people are saying inflation is going to continue to be high, we're going to continue to see recessionary patterns in spending. I think TJX and some of these other bargain brand places will be a place consumers will continue to go. I think both of those things combined helped it better received by Wall Street.
Chris Hill: It certainly seems like this could be a contributing factor to what we heard earlier this week from Target because part of Target's success over the last few years has been their apparel. They've done a good job investing in their own lines of apparel, and part of the pothole that they just hit had to do with really stumbling in their apparel division. I'm wondering if this is an ongoing concern. I don't want to just single out Target, you could pick other publicly traded apparel companies out there and say they're at risk as well. But I'd never really thought of TJX as being that level of competitor against Target and Gap, American Eagle, all those others, but that's probably incorrect thinking on my part.
Maria Gallagher: I think the thing that's really interesting about a store like TJX is that when people go in, they're going in to browse a lot, so they're not going in for such specific things. I think that that really helps them in terms of people are going in, they know that they're going to get a good deal, they know that they have lots of different options. When you're thinking about things like inventory, shipping times, I don't think that that qualifies as much for TJX as it might for some of these other stores where you're looking for Gap specific brand. When I go into TJX, I'll say whatever the brand is, I just need a new pair of pants or I just need a new shirt that looks like this and they have lots of options. They did see that consolidated inventories on a per-store basis is up 35 percent. They do have a lot of inventory and so I think it will be interesting to follow the next year or two to see how that inventory how people are responding and going into TJX and comparing to places like Target.
Chris Hill: I'm not suggesting that TJX needs to dramatically change its business plan, but this conversation is making me wonder, look, we're in something of an economic downturn right now. Whether we're in a recession or not at the moment remains to be seen or if we are in one later this year or in 2023. But at some point, we will come out of this downturn and if you're TJX, if history is any guide, that seems to indicate you're in for a rough patch. When you look at their business, do you think there are things they can do to smooth that out so that when the economy turns for the better, TJX is not looking around saying where did all of our customers go?
Maria Gallagher: Yeah, I think that's a great point. I think that they work hard on creating a good brand name. I know everyone knows what Maxxinista are. I think that they create a good amount of loyalty, I think, pushing that to meet consumers keep them top-of-mind is pretty important. I think with a lot of these brands, you want to be top-of-mind for multiple things. The fact that they have TJ Maxx and HomeGoods, they want you to think of them, whether it's shopping something for your new apartment or shopping for new outfits. I think having all of those things in one place, it's very rare that you see at TJ Maxx not very close to HomeGoods. Having that all top-of-mind for customers, I think, will continue to increase that loyalty.
Chris Hill: I'm going to show my age and cultural ignorance. I did not know what a Maxxinista, is that what you said?
Maria Gallagher: Yeah, TJ Maxxinista like a fashionista, but you like deals.
Chris Hill: When you and I were talking earlier today, one of the things that came up in the conversation was the lipstick effect. For those unfamiliar, this is a term that refers to when there's an economic downturn, consumers are still going to splurge, they're still going to spend money on a little indulgence here or there. It's really an economic downturn so they're not indulging in big ticket luxury items, but a little splurge, such as nice lipstick, hence the name. But it also applies to consumer-facing companies that tend to be resilient during an economic downturn. Where do you think this applies? I mentioned this to the college student in my house this morning and she immediately said, "Oh, candy." I looked shares of Hershey up 13 percent year-to-date, while the overall market is down 17 percent which among other things, means I should probably go to my kid for more stock ideas. But what do you think?
Maria Gallagher: I think Candy is a great one. I also almost immediately went to Trader Joe's getting a nice little fancy snack from Trader Joe's. But I will also do some literal interpretations and talk about the beauty markets so 71 percent of US respondents from a recent survey are planning to spend as much or more on beauty and enhancement products in 2022 as they did before the start of the pandemic. The beauty industry generates over 100 billion in revenue worldwide. Makeup sales were down 22 percent during the pandemic, but women reported spending more money on skin care. Skin care is worth, is the dominant segment of this beauty industry with about 42 percent of the market share. Hair care is about 22 percent, makeup is about 18 percent. Health and beauty e-commerce sales are projected to grow at 77 percent between 2021 and 2026. I think it's a growing industry, it's a resilient industry. It's changing the way it does marketing with e-commerce. But so you have companies, like I will tell you, have Sephora, whose a part of LVMH, Estee Lauder, but you also have companies like Procter & Gamble who own Secret, Ole, Gillette, Old Spice, Unilever owns Dove, Seventh Generation, and Axe. There are a lot of different ways to invest in the beauty market through a lot of different companies.
Chris Hill: In terms of the e-commerce piece, because this is an important piece for any retailer. How do beauty companies get over that challenge? Because I'm not buying makeup, but I imagine it's the thin that you want to try it on in the store or see how it looks in a certain lag, that sort of thing and I don't know, is there just a trust barrier that consumers need to get over? Because we were talking earlier about TJX. There's some impulse buying that goes on when you go there. It's hard for me to imagine impulse buying of beauty products online.
Maria Gallagher: That's, I think why skincare is so important in that factor, because skincare isn't the same type of thing with I don't know how about lipsticks going to look on me or I don't know if that shade is right for me. But it's going to say, I love this brands so I'm going to get there face-mask or something like that. I think beauty, skincare as a really important component of that. But a huge thing is a third of beauty product buyers interact with brands on social media. YouTube is a top source for beauty-related content. The watch time for makeup transformation videos on YouTube almost doubles each year.
Kylie Cosmetics, Kylie's brand, Kylie Jenner's brand, is the most followed beauty brand on Instagram of 25 million followers and so I think with the rise of the influencer culture, with that type of marketing, people will become loyal to a brand or loyal to an influencer who maybe has a similar skin shade to them and says, it looks really good on them or their friends. Maybe it'll look good on me to get over that barrier of trust as you end up trusting the person and I think a lot of beauty brands have been really strategically smart and investing in marketing within influencers. I think that's going to continue to grow and then also you have places like Sephora where you go in there so many different brands you can try things on and they give you gift. Sometimes they give you gifts on your birth day. They have all of these different things to show you new brands and get you excited about new things and continue to have those explore purchases.
Chris Hill: I remember a few years ago on one of the podcasts. We were talking about Ulta and I want to say it was Ron Gross. But one of the people was talking about their loyalty program and whatever the number was, it was much larger than I would've imagined. When you talk about that type of touch points for consumers, it seems like that's just a great strategy for those types of businesses.
Maria Gallagher: They have a lot of these places have so many different offerings. You can go in and you can get your hair care, and you can have your skincare, and you can get your makeup. They have all of those things in one place, whether that's online or in-store and I think that also increases loyalty because it becomes a one-stop shop and when something has a one-stop shop, I think you're more likely to just continue to go back instead of saying, I have to go to a different place for each of these needs.
Chris Hill: Before I let you go, this is and it has been for months now. This has been a stock market where depending on your situation, depending on your experience level as an investor, how close you are to retirement, there are a lot of people out there who are looking at some stocks being hit and seeing opportunities there. We've got a great question at The Motley Fool Money hotline. Dan, can you play that voice mail we got?
Brian: Hey, it's Brian from Kansas City. I own 20 stocks and started buying at the beginning of 2020. At the peak I was up 75 percent. I'm currently five percent down. I'm sitting on some cash and I want to use it to add to my existing positions. Here's my conundrum. Should I add to the stocks that are already up at this crazy time? Increase my position on stocks that are down, but I believe in their long-term potential? Or pick some of both, the ones that I think will be the strongest over time? What are your thoughts, what things I consider before deciding? Thanks.
Chris Hill: Thank you, producer Dan Boyd and thank you Brian for a great question and whether he meant to or not. Brian asked a question that I've been asking myself for a while now, which is I've got some cash. I'm looking at the stocks that I own. Some of them have been hit really hard. Some of them either they're treading water or they're up. Where should I be adding? What do you think? Obviously we can't give personal advice for Brian. I shouldn't put it that way. Like Brian is the only person we can't give personal advice to anyone. I'm not singling you out Brian. But how do you approach this question? Because I feel like he is asking a pretty universal question for investors who have a decent sized portfolio in terms of the number of holdings?
Maria Gallagher: Yes, it's a great question, the million-dollar question is, what's my best strategic move? My short answer would be option c that he gave, both. But here's some things that I would think about. I would start by just thinking, how are you feeling right now? You seem based on this to be handling this quite rationally really well. I think that that shows that you're able to handle volatility well or are you currently at the right amount of volatility for you? I always start with thinking about your risk tolerance and your risk. Think about things from a risk standpoint. Then thinking about the individual companies, I would think through what are their long term prospects of these businesses? What do those prospects rely on for every thesis I have for a company? I also like to write down the Achilles' heel of that company. What could go wrong for this company, for this company to go-to-zero. Think about their financials, think about market sentiment. How likely are those things to happen? How likely are those things to change and really think through that thesis.
Then think through what's happened with each of these companies during their last earnings calls. What are they reporting? What are they forecasting? How long could that decline lasts for if it's a decline, and then do they have a proven track record for withstanding downturns. Do they have enough cash to withstand a couple of earnings, of downturns, things like that. I would go through this exercise for your companies and then turn that into a top-tier list of your favorite and highest conviction and then see where that falls into performance so I wouldn't start with performance and then decide for allocation. I would start with what companies do I have the highest conviction in and then say, OK, we'll have these performed of my list of my top 10 companies. Then we'll get that and then try and allocate based on your concentration risk, how much you want to think through your diversification within your portfolio and diversification through sectors. But so I would start thinking company-wise, thinking through risk-wise, and then go back and decide if you're going to allocate to winners and losers based on the answers to those questions.
Chris Hill: I hadn't even thought of that but that's such a great idea to essentially remove the stock-price altogether and just look instead of things like cash, because that's, I think and by the way, I am sure I consume more financial media than the average person. Just take it from me. There is so much more fear in the commentary going on. I'm not saying it's completely unwarranted. There are a lot of x factors in terms of inflation, in terms of events outside the United States over which the Federal Reserve has no control, like can't control what is happening in Ukraine, can't control what is happening in China. But it really does seem like some of the people who are going on CNBC and Bloomberg are trying to outdo each other in terms of how much fear they want to project. But to your point, Maria, that is one of the lenses I look at in my own portfolio is the cash reserve that a company has and also just thinking in terms of the next couple of years. Hey, if the next couple of years are maybe not as bad as the last six months, but they don't dramatically improve if the market just treads water or is slightly down, who is going to make it? That's just a binary question that I am putting all of my holdings drilled like. In three years, are you going to be here? In the case of a company like Apple and Microsoft? Yeah, you're going to be here in three years. Couple of the stocks I own? I don't know that's why I'm not adding shares.
Maria Gallagher: Yes, absolutely and I think for me, I also like to think about their relationships with who their customers are and how mission-critical they are, so if a company, if it's providing a service to another company and the company is slashing its budget, are they still going to pay for that or they still going to pay for their cybersecurity offerings? Are they still going to pay for this type of advertising? How is that going to work? Where do you think that those customers will be in the next 3-5 years as well. Where are they going to be in terms of can they withstand downturns and also if there is a downturn will their customers leave them?
Chris Hill: Maria Gallagher, always great talking to you. Thanks so much for being here.
Maria Gallagher: Thank you so much for having me.
Chris Hill: If like Brian in Kansas city you want to leave a message on The Motley Fool Money hotline just call 7032541445, that's 7032541145.
As always, people on the program may have interest in the stocks they talked 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. I'm Chris Hill, thanks for listening. We'll see you tomorrow. [MUSIC]