Disney Proxy Fight Gets Brewing

In this podcast, Motley Fool senior analyst Emily Flippen discusses:

• Nelson Peltz and Trian Fund Management pushing for a seat on Disney's board.
• Why Peltz is "a day late and a dollar short."
• Salesforce partnering up with Walmart.

Motley Fool producer Ricky Mulvey talks with Jamie Harris, CFO of freight-booking company RXO, about what his business saw during the holidays and how RXO is disrupting a surprising industry.

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This video was recorded on Jan. 12, 2023.

Chris Hill: We've got an activist fight brewing in the entertainment industry. Get the popcorn, Motley Fool Money starts now. I'm Chris Hill, joining me is Motley Fool Senior Analyst Emily Flippen. Good to see you.

Emily Flippen: Hey, good to be here, Chris. It's been a while.

Chris Hill: It has been a while. Let's start with a good old fashion fight, shall we? I'm referring to the fight brewing between Disney and Trian Fund Management, which is the activist firm run by Nelson Peltz. In short, Nelson Peltz wants a seat on the Disney board. Trian as a small stake in Disney stock. Disney is not interested in Nelson Peltz joining the board. They are, however, or I should say they were, however, happy on Wednesday night to announce that Nike chairman, Mark Parker, is going to become the new chairman of Disney's board. Where do you want to start with this?

Emily Flippen: Well, let's start with Peltz because Peltz here is a day late and a dollar short to this conversation. Disney has been struggling for a number of years since their former CEO, now reemerged CEO, I should say, Iger has returned to the company. This was Disney recognizing that when they brought in Bob Chapek, that the strategy the business had taken had not yet been showing off. In fact, if you compare their operating income from 2019 to where it is today, it's cut nearly in half. You can understand why this is a conversation that investors are very interested in, why there's activism interest in Disney, because the financial picture for the company has taken a turn, so has the stock price itself.

But it seems like the company is attempting to rectify some of the errors that they have made over the past couple of years by changing out their CEO, bringing in Mark Parker, which, as you mentioned, he's a Nike executive, but he has experience helping Nike with their own CEO transition. This is Disney bringing in somebody to the board who they think is going to help with their own transition after Iger's two-year turn comes to an end. But then we have Peltz coming into the show. Now, to be clear, this activist in particular has been having conversations with Disney for an extended period of time, so this isn't entirely new.

But they're looking to "turn around" the business by getting information about essentially where the money has been going. Executive compensation being a big conversation, but also just efficiencies. Why have they lost so much money pursuing stuff like Disney Plus, their streaming services? Whereas other companies, I mean, Netflix has shown a certain level of scale in this industry that Disney has yet to achieve. Lots of question marks happening right now, but ultimately I think Peltz is fighting an uphill battle with this desire to get some type of transparency and representation on the board.

Chris Hill: Let me take one tiny part of this piece and just put it aside for the second, and that is Nike. I'll just say, as a Nike shareholder, I'm not exactly thrilled about the fact that the chairman of the board of Nike now has an additional job. That being said, I totally get why Disney would make this move. As you said, Parker has that experience, and let's face it. For all of the wins in Bob Iger's CV, CEO succession is not on the list. If he doesn't get a failing grade in CEO succession, he maybe gets a D.

I'm torn on this because, other than my Nike's stake, I don't really have a stake in this fight. I can see both sides of this. On the one hand, Peltz doesn't appear to be agitating for anything revolutionary. As you said, there are legitimate questions to be asked about executive compensation there. On the other hand, Trian has 0.5 percent of Disney stock. I totally understand anyone on Disney's board, including and especially Bob Iger who says, I'm sorry, this is small potatoes. If this was a fun that had a five percent stake or higher, I could see more of a battle here.

Emily Flippen: I will say, it's obvious to me that when you look at at Nelson Peltz and the push to have some type of representation on the board that if the situation had been different in the sense that Disney was ignoring the problems that existed, saying we don't have an issue, maybe there'd be some steam to be brought up there. Frustration from other investors who would support a prominent activist to be brought onto the board even given their relatively low stake in the company overall. But I think the moves that they've been making, again, bringing Mark Parker onto the board, alongside the changes in the CEO structure, all of these things are Disney acknowledging, hey, we know we have issues, we're going to work on fixing them. In fact, Peltz has even said that his firm really wants access to internal docs to see if there's room for improvement.

So they're open to being a board observer as opposed to actually sitting on the board. That may be the solution here. But it is interesting to see. I will say, to give s Chapek some credit here, Bob Iger was really the person who pushed forward two pivotal moments for Disney. One is their acquisition of Fox and the other one is their move into Disney Plus and streaming. He was all in on both of those initiatives, and then handed over the reins to Chapek shortly after making those decisions. Chapek was dealing with a stacked deck in the sense that he had to implement a strategy that was taken from his predecessor. For Iger to come in and then say, well, obviously we didn't handle a CEO transition well, Chapek didn't succeed, it's like, yeah, well, if he didn't succeed, it has less to do with his inabilities and more to do with how you set him up in terms of strategy.

I think what I'd want to see from Disney as a shareholder would be to ask the business, OK, let's acknowledge the mistakes that we've made in the past and let's push forward how are we going to change them. I want to see how they're going to make Disney Plus more profitable. That's a big question mark for investors. I like the changes they're bringing to theme parks and I want them to be more open, honest, and transparent with their strategies for monetization, moving toward in the future. If that's achieved through a activist, great. I don't expect it will be. I see Disney leadership that is recognizing the wrongs that they made and pushing for a change in the future. I'm not overly concerned with the business or its stock.

Chris Hill: We'll definitely keep watching because this fight is absolutely going a few more rounds. This morning, Walmart announced the technology deal with Salesforce. The twist is that Walmart is the one selling the tech. Walmart has two services that will now be offered through Salesforce and listed in its app store for businesses. One is called GoLocal, a delivery service that drops off purchases at the customer's door. The other is called Store Assist, which helps employees get orders ready for curbside pickup and delivery more quickly.

You and I were chatting about this before we started recording. I was surprised by this simply because, and I don't think I'm alone in this regard, even though Walmart is a massive company with lots of technology within the business, I don't think of it as a business that is looking to essentially sell their tech elsewhere. That was the surprising part to me. Although on a day when the market is up slightly, this is not doing anything for Walmart stock. I'm surprised. I'm not necessarily excited, and Wall Street and all investors everywhere share in that lack of excitement.

Emily Flippen: It's funny, I read this story and I thought to myself, this is a nothing burger for Walmart. Not because it's not exciting, or new, or innovative, but rather because this is a continuation of the strategy that Walmart has already expressed was their intention for a number of years. I think they first got interested in offering business' services when they had success with their e-commerce offerings, realizing that when people go to walmart.com, they don't have to just see stuff that they can buy from Walmart, but they can actually partner with other third-party retailers, becoming more Amazon-esque. It was never a big part of their strategy, but it was like, hey, we already invested this technology infrastructure to create the site, why not get all the value out of it as possible? The same thing happened in August of 2021, so number of years ago, when they launched GoLocal, which as you mentioned is their delivery-as-a-service business.

This has already been available for third parties to essentially use the fulfillment structure that Walmart has set up to reach especially suburban and rural areas, where they may not be able to use existing networks to reach those customers. It's a small part of their business. Again, I don't think they're so aggressively going after this market that it's fair to compare them to the Amazons and the Shopifys of the world. But they are certainly getting more interested and involved in leveraging their fulfillment network to the full extent possible. The announcement we have today is just saying, hey, these things that have already been offered by Walmart for the past year or so are now going to be more easily accessible to all the Salesforce customers that exist in the world, and there are a ton of enterprise customers.

It's not necessarily that Walmart is bringing in something new, but it's making it more accessible and I do appreciate that. I don't want to downplay how important this is because as anybody who works in technology or works with these apps know having a platform and then having a widget on that platform makes for a dramatically better experience than having to navigate to a site or a platform that is entirely separate than what you're organization is already using. It's great to see the partnership. I just ultimately don't think that this is going to be something that causes a material difference for either Walmart or Salesforce at the moment, but this is part of that larger transition that Walmart is having to saying, hey, we developed this technology internally, let's see where else we can get use from it.

Chris Hill: On Friday, we get the official start of earnings season with the big banks. Obviously, in the coming weeks, we're going to get a much clearer sense of how holiday retail went. I'm fascinated to hear about Walmart's holiday season, what their results were like, in part because Walmart of the major retailers really was the outlier in terms of seasonal hiring. Their seasonal hiring was so much smaller than it had been in previous years and so much smaller than their competitors. I just think it's going to be fascinating to watch.

Emily Flippen: Yeah. What we saw last quarter was Walmart having that heavy focus on non-discretionary goods. So I'm not overly surprised to see that they're a bit more tepid on the discretionary spending. I will say, though, just anecdotally speaking, people I've talked to and the numbers that I've seen so far in terms of sales, I think it might be better than investors are expecting, but I'll try to keep my expectations low as to not be disappointed.

Chris Hill: Emily Flippen, great talking to you. Thanks for being here.

Emily Flippen: Thanks for having me, Chris.

Chris Hill: You can always get a bird's eye view of the economy. But if you want to see things from a different angle, talk to some truckers. Jamie Harris is the Chief Financial Officer of RXO, a freight booking company. Ricky Mulvey caught up with Harris to talk about what his business saw during the holidays and how RXO is disrupting an industry that may surprise you.

Ricky Mulvey: I want to talk about the freight brokerage business, especially in RXO Connect, which is a more automated smart system. My understanding is that freight brokerage in the past had been a relationship-based business where agents know what's going on with the truckers' families, their likes and dislikes in terms of routes, and truckers want to make sure that if they're driving out from Colorado to the East Coast, that they're going to have a load that can take them back home. How have you been able to build trust with truckers on RXO Connect and have there been issues with conversion to that more automated platform?

Jamie Harris: This is still a very relationship-oriented business. You are totally correct. The history of the brokers business is largely relational. What we bring to the brokerage business on a technology basis is we have a strong relationship because we have customers who have complex problems. We combine that relationship that we have and the complexity of working through a tough situation with automation. As an example, on the carrier side, if a carrier goes out on a trip from, let's just say hypothetically from Charlotte to Dallas, Texas, our technology allows that carrier in Dallas to what we call find their way home much easier.

What they want to do, they want to run back home full because what a carrier has is the capital of the equipment and they have time. If they are running on the road empty, then they are not utilizing their equipment well, which means ultimately, for the carrier, less profitability. Most of our carriers are 1-5 trucks, over 50 percent of our carriers have five trucks or less. So we're able to help the carrier be more efficient, use their capacity better, which we believe helps them want to do business with us. I think the other item, our technology helps carriers be connected with a shipper that they might otherwise never have the opportunity to do business with. As an example, we do business with 58 out of the Fortune 100 companies. We do business with 200 out of the Fortune 500.

If you think about one of those 58 of the Fortune 100, how will they ever connect to a carrier who has five trucks or less for a certain route? By us being able to do that electronically, it gives that shipper ability to post load demand on our network and it allows us to help match that up with the carrier who's in that marketplace. We think it creates efficiency in the transportation market. First of all, we think it creates efficiency for the shipper to meet demand much more effectively and cost-effectively. We also think it helps the carrier be more efficient with what they have to sell and provide, which is time and asset utilization.

Ricky Mulvey: Speaking of your customers, many of them are in the industrial sector. Some of them are retailers including Costco, Dollar Tree, and Lowe's. Right now they have an inventory problem, trying to clear excess inventory bloated from the pandemic. How are you seeing this play out at a ground level in terms of freight bookings, and then what does this mean for your business?

Jamie Harris: We do have a strong industrial base. We also have a strong consumer retail e-commerce base. We have a nice book of business in automotive space, healthcare, food and beverage. We cover a lot of verticals, if you will. As we look at the economy today, been a lot of press about consumer, as many of the transportation peers have said we saw a muted peak season. We saw goods moving, but it was muted compared to some prior years. We have seen our verticals, all the verticals remain strong. Industrial continued to remain strong.

Automotive continued to remain strong. Healthcare. That being said, the economy in general, who knows what the economy is going to do over the next 3, 6, 9 months? We are constantly planning for different scenarios. We're listening to our customers. We do think and we do know that we have insights via our customers and via what we see on the load boards to see trends quickly. While we're watching it very closely, for us, I can't get into current events because we'll have earnings coming up shortly. But for us, we are continuing to see goods move, although at a muted pace compared to what we saw previously.

Ricky Mulvey: One question I want to ask us about your long-term relationships. You're dealing with a very fragmented industry. The Wall Street Journal tech columnist, Christopher Mims, has a wonderful book on logistics called Arriving Today about just-in-time delivery. He pointed out that there's 3.5 million truckers in the United States, while 10 million Americans have a commercial driver's license. There's a ton of cyclicality and there's not a lot of stickiness in terms of relationships in some businesses, but what are you doing at RXO to encourage those long-term relationships with truck drivers in this small trucking businesses on your platform?

Jamie Harris: Our economy as a whole, as primarily a consumer-based economy, is transportation, as you know, is the lifeblood of moving goods in our country. We believe our relationship management of our carriers clearly is paramount to our success because it gives us access to capacity that others just don't have. It gives us the ability to react quickly as we mentioned. We do several things that we believe create loyalty among our carriers to RXO. First of all, we mentioned a little bit earlier our platform, our access to the customer base we have allows the transportation business where there's a person with one truck or five trucks or a company that has 100 trucks. But for the especially small driver or that small company, it gives them access through our platform to a customer base of shippers that they likely can never get access to without somebody like us.

We believe it helps them just from a pure running their business and being more efficient. Again, the only thing they have to sell is asset utilization, customer service, and their time. If we can make their time more efficient, we can make their capacity utilization better, it actually helps them be a better customer service agent for their customers, which is also our customer. We think that's a big plus. The other thing is we have a rewards program, a loyalty program, if you will. We're able to go out and help. We actually negotiate cost on a scale basis for things like maintenance, tires, fuel. If you're one of our carriers, you're able to participate in our rewards program. By virtue of that, we actually help you run your business more cost-effectively. If you're a small carrier, say, you're a carrier with five trucks, you can't buy some of those repair services or some of those supplies with the same level of purchasing scale that we can provide as a whole.

We know that also is a big advantage for reasons for carriers to stay with us for a long period of time. We've had tremendous relationships with our carriers. Very large percentage of our carriers come back to us over and over for more business. That's one of the reasons why we see the brokerage trends continue to move in our favor on the secular basis because we're able to react to swings in the marketplace and demand much, much more quickly than a transportation provided it relies purely on assets because they have a limited amount of capacity. Our capacity, we've quoted before, we have over 100,000 carrier relationships, which is equivalent of about 1.5 million trailers that we can run. That's a lot of capacity for shippers who have big swings in demand from time to time.

Ricky Mulvey: Jamie Harris, he's the Chief Financial Officer of RXO. Thanks for joining us on Motley Fool Money.

Jamie Harris: Thank you, Ricky.

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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.