Montana Bans TikTok. What's Next?

In this podcast, Motley Fool senior analyst Bill Mann discusses:

• How Snap, Meta Platforms, and Alphabet are watching the latest act in the TikTok drama.
• Shares of Bath & Body Works popping 10% on its latest earnings report.
• Names for scented candles.

Motley Fool contributor Rachel Warren talks with Anjee Solanki, director of retail services at Colliers, about one retail category that's holding its own.

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.

This video was recorded on May 18, 2023.

Chris Hill: We've got TikTok and the latest on specialty retail. Motley Fool Money starts now. I'm Chris Hill. Joining me in studio today, Motley Fool Senior Analyst, Bill Mann. Thanks for being here.

Bill Mann: How are you doing, Chris? It's good to see you.

Chris Hill: I'm doing all right. A little bit of silliness before we start. Let's start with TikTok. We talked earlier in the year about this influential private company, the ripple effects for businesses like Alphabet and Meta Platforms, and the latest twist is that Montana has become the first state to ban TikTok. The enforcement appears to be a bit fuzzy. It's going to take effect on June 1. I'm guessing there will be at least one other state or possibly more who will follow suit. But we talked about this earlier today. I'm not sure where this is going. I'm not sure how effective this is going to be and there will be an appeal at some point. But tell me where this story is going, because this [laughs] is an important story. Well, important in the sense that some of the biggest tech companies in America that are publicly traded are paying very close attention to this, and they stand to benefit if in fact for some reason or some set of circumstances, TikTok just went away.

Bill Mann: You get the feeling that the State of Montana is feeling that its profile is dropping in the authoritarian country following the Hunt for Red October, it being a byline story there. So Governor Greg Gianforte has announced that they will be banning TikTok. To me, this is virtue signaling at its worst. I don't know how it is that they're going to do it. Now, they have said a couple of things. The first of which is that the Communist party is using TikTok to spy on Americans, which may be happening. I'm not quite sure how the governor of Montana got to be the lead sled dog on that particular piece of information. But really more importantly, we've had hearings about TikTok and some of the big American social media companies, Snap, for example, were saying, hey, we provide a service that's similar to TikTok. We don't need them and by the way, we are banned in China. So why should we allow them to be banned here? Now, I don't know, but I get the feeling that Montana isn't going to be the big event that we might be making it out to be. There's three TikTokers in Montana roughly.

Chris Hill: I totally understand why, as we talked about previously, if a state government wanted to say, hey, we're not going to let state employees with their state government-issued laptops, etc, to have that. Also, it's like, hey, TikTok is for fun. We want you working. So even putting aside the safety concerns or the cybersecurity concerns, I understand that. But this one?

Bill Mann: Employers, yes. On state facilities, absolutely. In schools, absolutely. But a blanket ban of something? Think about this again, pointing to the fact that China bans a bunch of our companies there.

Chris Hill: To be clear, Google tried to make a go of it and pulled up stakes and said we're leaving.

Bill Mann: We're leaving. But as the country with a lot of the largest social media and web companies in the world, do we really want to go down the path of being the country that follows China and begins banning companies from operating on our shores? Because if we do that, if that is something that we are willing to do, why wouldn't India do that to Facebook? Why wouldn't Indonesia do that to Snapchat? Why would in any host of countries, including the European Union in a way to protect their home companies, why would that not be a tool that they would pull out because the Americans have done it?

Chris Hill: One of the things we've seen over the last few years, and it's not new. States in America compete with one another all the time to bring business, to incentivize businesses to come to our state. They'll get tax breaks, all that sort of thing. Do you think there are some states that are looking at what Montana did and saying, hey, this is an opportunity to further incentivize businesses to move here? I can see this being a thing where other states and their business development organizations are going to be using this.

Bill Mann: Maybe. Quite frankly, there's going to be a constitutional challenge of this, to start with. But maybe more importantly, keep in mind that this has come from the governor of Montana so every other governor or person in competent jurisdiction is licking their finger and sticking it in the air to see where the wind blows. Because if there is a sufficient amount of blowback, like what is it that you think you are doing here? I don't know that too many other politicians are going to wade into that same argument. But to me, yes, it's absolutely possible, and you have seen over and over, jurisdictions and politicians competing with each other to try and get benefits for their states. I don't know what the next step after this is. Unless it is a stalking horse toward banning TikTok throughout the United States.

Chris Hill: We're going to move to retail. We'll hit Walmart on the show tomorrow, but specialty retail is getting it done today. Shares of Bath and Body Works up 11%. First-quarter profits in revenue were higher than expected. They raised guidance. CEO Gina Boswell highlighted the loyalty program that Bath and Body Works rolled out last August. This is a loyalty program they've had in place for less than a year. They have 37 million members in it. She said it accounts for roughly two-thirds of sales in the US. This is a loyalty program that other retailers should be studying because it's everything. Apparently, you want a lot of people in it and those that are in it are spending more and more frequently.

Bill Mann: Sure. But at the same time their overall earnings dropped. So when you say their now two thirds of the revenues are coming from this loyalty program, either they are supplanting sales that they already had, which is fine. That is an OK thing for a loyalty program to do because you could either self-supplant or you can see them go other places, right? So I don't really have a problem with that. I view this more as Bath and Body Works. Oh my gosh. About the eighth straight time I've almost said Bed Bath and Beyond. Just because that's been a big news story, maybe we should just call it Bed Bath and Beyond Body Works. It's not fair to Bath and Body Works.

Chris Hill: I don't think the lawyers would like that.

Bill Mann: No. They were they are 100% less in bankruptcy than the other guys. So let's wind that back. So in the case of Bath and Body Works, I think really the headline because their stock is up double-digits at the time of the recording, it's almost like they said, OK, look, things are terrible. Our numbers are down, top line, bottom line, remember we told you before that things were really terrible? They're not really terrible, they're just terrible. So there's that. Also, AI.

Chris Hill: Did they hit?

Bill Mann: Why wouldn't you at this point?

Chris Hill: Look, we've talked historically on this show and on Market Foolery about the candles. That's right. The $30 three-wick candles with the creative names, and if you go to the Bath and Body Works website, they are right there front and center.

Bill Mann: Oh, my gosh. Some of those names are incredible. I could make some up. Some are like bigger pie, like whatever 

Chris Hill: I haven't looked that deeply for that, but there's a lot of beach-themed ones, firecracker pop. They also have a candle, I swear this is true, the name of the candle is Love always wins. I think that was probably green-lit by someone who's never actually had an experience with love.

Bill Mann: It smells of loneliness.

Chris Hill: Possibly. Sounds like you're not a fan.

Bill Mann: It's not that I'm not a fan.

Chris Hill: No-no. In all seriousness, and we've seen this with other companies this turning season. This is like, OK, this is better than expected, but the expectations were low.

Bill Mann: Yeah. Exactly. Thank you for not collapsing. It was not a great quarter. It was a fine quarter and sometimes a fine quarter is good enough. I did love that they called out that one of the things that has helped were men's grooming products, like a renewed interest. Like you've met men, right? Like [laughs] it's hard to believe that we suddenly have gotten super-excited about new scents, including what was it? Beach loneliness, what was the scent you were?

Chris Hill: Love always wins? Firecracker pop. I give them credit for the different names. Now it will be interesting to see where it goes because there's a market there. Again, to me, it's a loyalty program thing. This is something we've talked about on the podcast programming team as we talk about different segment ideas. Something we've talked about recently is things looking into loyalty programs, because anytime a business rolls out a loyalty program, the prime directive right out of the gate, is getting people in it.

Bill Mann: Yes.

Chris Hill: So whatever other weakness is going on at Bath and Body Works, they got 37 million people in this loyalty program. Now they just need to figure out like, OK, we got these people here. It's a captive audience. We've got this data on them. How do we get them spending even more?

Bill Mann: Thirty-seven million and we glossed over that number a little bit. That is massive. Do you suppose that you have to roll up your window when you drive past a Bath and Body Works for want of getting hit by a membership? I mean, 37 million, I'm making a little bit of fun, it is impressive. Full stop.

Chris Hill: Absolutely.

Bill Mann: Full stop. They do actually have some opportunity as some of their larger competitors who are more under distress are now pulling back they're in bankruptcy. I think that there really is an opportunity for Bath and Body Works.

Chris Hill: Before I let you go, this is not my last show, this is not your last show, this is however, our last show together and selfishly our friendship extends well beyond the walls of this studio. But before I cede the floor, I just wanted to say thank you for more than a decade of coming in this room, sharing your expertise, analysis, commentary, and attempts at humor.

Bill Mann: My base attempts. Well, thank you Chris and it has hit me like a ton of bricks. The fact that you are leaving and it now really starts to feel real, every day I've come here I like, he's going to change his mind. But I go back to a story and this is a story that is within the lower of The Motley Fool, it was the day that I went on CNBC and I froze. You were the person who was my media guide at that point. I froze so badly because I forgot the word reserves that three days later, Liz Claman left the network.  I'm not saying that through two things are related but I think she was done dealing with jokers like me. So your job at the time was just with us getting used to being on TV to coach us up and you will relentlessly positive but there was very little to be positive about after that time, and you said something that I will never forget. It was this, could have done better, could have been better. That was the essence of you. Obviously, it didn't go well, I am not here to stick the boot in right now and tell you how badly that went in front of millions of people. But I appreciated it so much and I've appreciated your friendship and working with you, you are a dear friend of mine and I can't wait to see what your next city venture is like.

Chris Hill: Bill Mann, always great talking to you, thanks for being here.

Bill Mann: Thank you, Chris. 

Chris Hill: As retail continues to evolve one category is looking good. Motley Fool contributor Rachel Warren caught up with Anjee Solanki, Director of Retail Services at Colliers to talk about how post-pandemic shopping habits are shaking out. 

Rachel Warren: I know that Colliers recently released its 2023 spring retail report, and the report highlighted retail spending across a range of categories including storefronts, restaurants, grocery stores. Based on the findings of this report, what are the categories that seems to be really winning in the current environment and posed for greater resilience over the long term?

Anjee Solanki: Definitely we're calling 2023 the year of the store again, as we look at this year the number of closings is far, far less than net new openings. When we look at the year of the store or the categories within that, that are doing very well of course is going to be grocery. We stop again and we look at the impacts due to inflation which is also softening as we know. There's still very important critical attributes we need to keep in mind. No. 1, we have these three categories of income earners. Of course, we have high-income, middle-income, and lower-income. Of course, each group is going to shop and behave slightly differently. We stop and focus, all three groups nonetheless, really do still require to eat. Whether they eat at home grocery spend will continue to increase, eat out may be less so again, grocery sales continue to increase. Where we see a category winner is definitely in that grocery segment. What we're really tracking at this point is we know that's a category that we'll continue to see growth as they have been. But I'm now curious or we're all curious at Collier's as it relates to how is that going to impact the consumer behavior? Will the high-income earner shop value as well as call it the more premium grocery stores or will we start to see different shifts? We do know at this time the average person typically will shop to grocers. So knowing that how will that start to shape the type of stores or the different brands of grocers that are out there? That to me is going to be really interesting I think you may have read in the report dollar general has seen a 30% increase in their sales, and it makes sense when we start to see this shift where people are much more conscientious about how much they're spending, how much they need to save, etc.

Rachel Warren: Conversely to that, are there any particular categories that you feel are showing more vulnerabilities in the current environment? It makes sense that there would be a certain level of that given the inflation we're still seeing even though that is slowly tamping down, but do you see this as being durable headwinds or do you think these are categories that can also recover?

Anjee Solanki: Definitely, so the categories definitely I see a softening of course, is going to be in your furniture, large home goods. There was that what we were calling revenge spend occurring a couple of years back as it relates to fixturing, remodeling, refurbishing, etc, both the inside of your home, the exterior of your home. People spent quite a bit. Electronics is another, is that going to go away? No look at technology plays a significant role in electronics. When you think about electronics and you think about the next way, the next generation there is that FOMO that people still have where I want the best and the newest and latest technology and that translates into electronics both small and large. Well, they may or maybe not say, I need a TV in every room maybe I just need that one TV and we'll compromise and keep the other two or three which I'm not a big TV person so excuse me for that, but maybe we're not going to buy three new TVs we might buy one. I think you're going to see a shift where there will be a compromise in how people are spending, but those are segments or categories that will start to see a consumer's rethinking. Is that going to completely change? No. As we start to see the purchases of homes coming back at a stronger level, there's still this demand for homes, and as we know in the US we have a low supply in that sector in housing there's going to still be a need for that. Whether it's as I said, it's might be slightly tampered at this point.

Rachel Warren: Another industry as well that I think bears a bit of discussion is the beauty space. The beauty industry was mentioned in this report as well but it has proven over the years to be pretty resilient, including in periods of economic difficulty. There's of course, the famous lipstick index is a bellwether of consumer confidence. But the report noted that consumers are seeing beauty biases affordable luxury, but brands like Else Beauty, Glossier that are benefiting of course, that brings to mind some of those bigger names like the Ulta Beauty of the world. That idea of the beauty industry being really Brazilian, does that thesis seem to be bearing out in the current market environment?

Anjee Solanki: It is even though we were on virtual platforms having meetings and conversations, people still want a little something to add. Whether it's hair products, skin products, or makeup products I think there's still continued growth. The latest we're seeing Sephora against Soft 32% increase in terms of traffic, Alta has seen the same. It's not a big spend because you can buy something that makes you feel good or you're looking at, I want a product that's a clean product that is cruelty-free, etc because there's a lot of mind awareness around that. I was actually chatting with someone who shared with me, she had gone to a conference specifically around the entire beauty arena and what she came back to me and she said, Anjee is fascinating and it's really about today. Beauty is focused on the clean environment and the different ingredients that it goes into the product has become much more important to the consumer. I don't want see this going away because you have different segments of the population. Don't forget we have all the TikTok videos that are out there and influencing people as well. So beauty will continue to be resilient in this space because it's been influenced by employment. 

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 yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening, we'll see you tomorrow.