Carnival Sets Course for Debt Reduction

In this podcast, Motley Fool senior analyst Jason Moser and host Deidre Woollard discuss:

• The strong demand for cruises and travel.
• Carnival's plans to pay off its heavy debt load.
• The prospects for Oddity Tech, a new DTC-brand IPO.

Motley Fool host Ricky Mulvey and author Robert Glazer discuss why investors should look for businesses with a cultural advantage and how to spot one.

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 June 26, 2023.

Deidre Woollard: Carnival Cruises to a strong quarter as more people are ready for summer adventure, Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard. I'm here with Motley Fool analyst, Jason Moser. Jason, how are you today?

Jason Moser: Hey, doing great. Deidre, how are you?

Deidre Woollard: I'm doing well, and you know who else is doing well is Carnival Cruise Line. We had their earnings this morning. We've talked a bit on this show about the move from goods to services, the post-pandemic thing, everyone wanting to go travel, experience things. Travel has been booming. Cruising slow to catch up, but it seems like after the pandemic beat up cruising, the demand is back. Total customer deposits, Carnival reported all-time high of 7.2 billion at the end of May, 26% increase compared to the prior quarter. Company had record revenue 4.9 billion. Jason, what do we make the cruise boom?

Jason Moser: Well, I think it's just following the greater trend really. When you look at the tourism industry as a whole, this is a massive market opportunity. It's greater than $2 trillion all-in. We saw clearly over the last few years, everybody had to put everything on hold. I think that shift from goods to services has been a theme we've heard throughout earnings calls here over the last couple of quarters. We're just seeing travel companies left and right really benefiting from the pent-up demand. Airbnb another good example there. We're just seeing bookings continuing to accelerate, really rebounding from the lows over the last several years. People are just ready to get out and experience things, and cruises are a nice way to do that.

Deidre Woollard: Yeah, absolutely. We've got Airbnb, air travel. All of the airlines have been relatively optimistic. Hotels are also doing well. Thinking about cruising though, it is expensive. There's a lot of energy costs there, there's a lot of shipbuilding cause. Big issue for Carnival. They reported a GAP net loss of 407 million. Cash from operations is up into the positive zone, so that's good. The company's really struggling to pay off a lot of debt. They've paid down about 1.8 billion during the quarter, which is super impressive. Most of their debt, fixed debt also good, so it's not subject to crazy interest rates. But with a company like this and with companies that carry heavy debt, how should we think about this? Is it part of the business that we need to factor in?

Jason Moser: It is a new normal. I think you got to get used to it at least for the next several years. It wasn't always that way. Carnival and Cruise Liners in general, they do have to manage that balance sheet to an extent, but it's gotten a little bit more troublesome for companies like Carnival here recently. Frankly, we were having this conversation over the last several years wondering if these companies would even make it through. So it's good to see that they've been able to make it through, but they do have to have to deal with some of that debt here over the next several years. When you look at them, total debt $36.5 billion, a lot of that is pretty expensive. You're right, it is fixed. They know what's coming, but they are paying a lot for that debt, and that's something that they're going to have to service for the next several years. When we look at companies that manage heavy debt loads, we want to look at something called a coverage ratio to get a better idea at least is can this company service this debt? You've looked at the coverage ratio, which is basically just taking a look at their operating income versus the net interest expense. The money that they're bringing in versus the money they have to pay out for that debt. When you go back to 2018 for Carnival, the coverage ratio is close to 20. Higher is better. That means if they're making a lot of money, they can service that debt they have on their balance sheet. You look at it today, and they technically don't even have a coverage ratio, because as you mentioned, the operating income is in the negative, and they're paying a lot more to service that debt than they were just five years ago. Now, that doesn't mean it's always going to be this way. It means they have to climb out of this hole that they dug themselves into, and it's not fully of their own doing. They were just subject to the global pandemic. Every company had to deal with it, and so Carnival again made it through. That's great to see. But they are going to have to figure out how to service this debt going forward, and much of that is going to rely on demand. If we can assume that the demand will remain steady, if we don't run into another global crisis, then I think in time, that balance sheet should continue to look better. Let's be fair too, they do have $5.5 billion in cash in short-term investments on the balance sheet because they have liquidity, and they have a business. It's just the priority right now is to make sure that they are focused on that expense control and service that debt, get themselves in a little bit of a better position with the balance sheet, and that's just going to take time.

Deidre Woollard: It's going to take time, and it's going to have to be increased demand going forward. As you've said, we never really know. They've got a turnaround program. It seems like every company gives their turnaround program a cute little name. Carnival, they've got SEA Change. They're setting some pretty ambitious goal for 2026, one of which is they're going to more than double the return on invested capital between now and 2026. It'd be the highest level in two decades for the company. A lot has to go right. At the same time, they're trying to cut back debt, but they still have to build new ships, build new amenities, keep attracting customers. The market didn't love the earnings. Is this healthy skepticism about the plan or is it something else?

Jason Moser: I think is probably healthy skepticism. We're seeing a rebound. I think the question is, will that rebound sustain? Is this sustainable demand or is this going to be something that normalizes here over the coming years? I think it's probably healthy skepticism, which makes lot of sense to me. Management's job in any company is to tell you how awesome they are. You want them to be honest, but they're always going to really try to give you the most glass half-full view. I think that that's what they're doing here, setting goals, especially seemingly, unachievable goals sometimes. It can be a good thing. You want to set that bar high so even if you don't hit it, you're still hitting some pretty lofty goals, and you think Elon Musk is one that comes to mind where he sets a lot of crazy goals. People say you'll never achieve that. That's not necessarily the goal. He's like maybe I'm not trying to achieve that goal, but I want to get somewhere close to it, because if you get somewhere close to it, those are still pretty darn good results. I think in this case, maybe it's healthy skepticism on the markets part, but I absolutely do not fault management for setting those lofty goals because again, part of their job is to really paint that picture as nicely as they can.

Deidre Woollard: It's a shoot for the stars and maybe land on the moon scenario?

Jason Moser: There you go, perfect.

Deidre Woollard: [laughs] Well, let's talk about cruises are back. IPOs, are they back? I'm not so sure, but we've got another one that was announced. This stuff, it's Israel's Oddity tech. Nobody has probably heard of this, but they probably may have seen the Il Makiage makeup ads in their feed because man, they're in my feed so much. [laughs] They're everywhere. This company is interesting. It's been around since 2013. It had brought 325 million in net revenue in 2022. Is it time for IPO direct-to-consumer businesses now? Are we back?

Jason Moser: Well, I think it's a great time if the recent Cava IPO is any indicator. That was really well-received. I do think the market is ready for some real businesses. No funky corporate structures, just some good consumer-driven businesses that just understandable, no SPACs or anything like that. I think the market is really excited for these types of businesses. Cava probably has gotten off to a little bit of a hotter start than most anyone would have assumed, and I would imagine that we will see that pull back in time. But it just goes to show the optimism that's out there for strong brands of consumer-driven businesses, and it sounds certainly like this could be another one in Oddity Tech, which I'm not very familiar with the business itself, but I am somewhat familiar with the market. Beauty and wellness is a tremendous market opportunity, and so to even capture just a little bit of it could be very meaningful.

Deidre Woollard: They're pretty strong because they've got around 40 million users, but then they've got about four million active customers buying at least one thing a year. There's a lot to like about it, but I worry about some of the direct-to-consumer companies that IPOed in the last couple of years. Results not so great. Allbirds, the sneaker company, they're down around 95%. Warby Parker eyeglasses, down around 79%. BarkBox, down 88%. Did these companies just go public too early or is there something about direct-to-consumer that is a little tricky as an investment?

Jason Moser: It's possibly went public too early. But I think you have to look at it from two different perspectives. For investors, it's maybe not the greatest situation right now and you're seeing that stock price taken such a hit. But the company was able to raise obviously a lot of money going public, which is a good thing, assuming that they're doing good things with that capital. I feel like again, you get back to that state of the market today, it's been a real low over the last couple of years. I think a lot of investors are ready for a lot of these companies to get out there and show us what they're made of. Even if it's a little bit early, as an investor, you keep an eye on that. It doesn't mean they're uninvestable, but oftentimes when it comes to IPOs, you want to sit back and watch the story play out a little bit, let that enthusiasm wane to then understand, is this a business that really has staying power? That remains to be seen in regard to Odyssey Tech for sure.

Deidre Woollard: Well, I think what's interesting about Oddity is that they're building a platform versus just building brands. They've got Il Makiage, they've got a second brand, SpoiledChild. They're building that one out. Probably they've done a couple of acquisitions. They're trying to build out other brands. I think one of the things that's interesting with this one is that maybe it's not just reliant on the trend for one thing, hopefully.

Jason Moser: Well, that's it. Oddity is the umbrella and you have a number of brands that fall under that umbrella. Very tech-driven, very data-driven and that obviously is a good thing. Going through their S1, they did not fail to mention artificial intelligence more than once.

Deidre Woollard: They did, indeed.

Jason Moser: That'll probably play in their favor as well. I think about this and I think about other companies that are data-driven, so to speak. I think it's something like a Stitch Fix where on paper, I get it, I understand what they're trying to do, but at the end of the day, are you really a data company? You're trying to serve consumers, so let's not lose sight of that. I think it just remains to be seen exactly their position in this market. Again, it's such a big market opportunity. I think they quoted in their S1, they are talking about a $600 billion market opportunity in the S1 and that's clearly not their total addressable market or serviceable addressable market. But again, to capture even just a little piece of that can be very meaningful.

Deidre Woollard: One of the things that I really like about the beauty space is they just keep adding more products to your routine. It used to be you just wash your face, maybe there'd be a moisturizer and now there's a serum. There's all these different things. It's a good business to be invested in because you can just keep adding more things and customers will buy them.

Jason Moser: They will. I will tell. I have wife and two daughters and they've seen my fair share of beauty and wellness products in our house. It's very reliable, it's steady market.

Deidre Woollard: Well, a lot of times when we have an IPO, we're saying like x is the next y. You mentioned Cava, everyone was saying, is that the next Chipotle. With Oddity, the question I'm asking is if they're the next Elf beauty. Elf is E-L-F. They're moderately priced, they're in CVS and things like that. Their stock has done incredibly well. Up about 328% since it launched in 2016. Oddity is not in stores yet. One of the things we've seen with direct-to-consumer, I've talked about Warby Parker earlier, they had to go into stores. Is that part of the direct-to-consumer thing? Did some of those companies may be go into stores too fast? What do you think about that as a part of the playbook?

Jason Moser: Well, I think eventually you need to go into stores. I think this boils down to that word we've used before in the retail space, omnichannel. It's ultimately you want to be everywhere your consumer wants you to be. There's plenty of research out there that supports the idea that for companies to be able to take that leap and it becoming a billion dollar plus revenue business, they really do need that physical presence. It's a cost-effective way to acquire new customers. You can only go so far really as an online business in many cases, I'm not saying it's that way always. But generally speaking, having that physical presence is an advantage. One that comes to mind is Harry's, the razor company. I actually subscribed to Harry's believe it or not back in the Market Foolery days when we were running ads for Harry's.

I got the Market Foolery offer and I still have Harry's mailed to me every quarter, and it's just a great way to get my razors and shaving cream. But even now, you find Harry's products in Target, for example, in stores, everywhere. I think being able to make that leap, to becoming really a billion-dollar plus business, it requires that physical presence. The company that comes to mind for me is Ulta, a very strong online presence, but also a very strong physical presence. I could just speak from experience. I see my wife and my daughters love to purchase it both ways. They love to go to the stores, but they also will purchase stuff online. You see something like Ulta where they acquired some technology along the way to incorporate augmented reality into their app, so you can actually try stuff on via just your phone and you don't necessarily have to go to the store, but there's also no substitute for reality, I think as we've all come to learn. Ultimately, I think really it does all boil down to that omnichannel concept. I would imagine for Oddity to make that leap to really take this business to the next level, it will have to rely on a physical presence to some degree.

Deidre Woollard: Thanks so much for your time today. Always good to chat with you.

Jason Moser: Thank you.

Deidre Woollard: As companies still figure out the remote, hybrid and in-office dynamic, one business is creating a long-term cultural edge, brick-and-mortar. We caught up with Robert Glazer, author and founder of acceleration partners, to discuss why investors should look for business with a cultural advantage and how to spot one.

Ricky Mulvey: Bob, you're a big culture guy. But you think many investors who've made a mistake and not focusing on culture and CEO leadership is a proxy for performance. Maybe they were just looking at revenue growth, especially during those low-interest times in the pandemic.

Robert Glazer: Yeah, look, Peter Drucker, one of the fathers of leadership always said, culture eats its strategy for lunch, and I think we're coming off a very strange period that I think for those who've only lived in it, it feels like it's been that way all the time. For those of us before, it feels more abnormal and you could cover a lot of mistakes with free money in the last 5 or 10 years. But I think as we think about and we look at companies that have had sustained out-performance, there tends to be great leadership and great culture behind that and there's a lot of numbers and some studies that have been done with public companies to back that up.

Ricky Mulvey: What have you learned from those studies?

Robert Glazer: I read one. One Glassdoor looked at 10 years of the highest performing companies that were public versus stock prices, another one Fortunate Great Places to work looked at it and it was consistently standard deviations higher over the long term with the companies that had better cultures and leadership and that really shouldn't be a surprise for those of us who have worked in these organizations. Usually talent leaves bad leadership and you look at companies where I think there's poor leadership or culture and you don't have good innovation and it's hard to exist these days if you can innovate you in our chat before looking at a company like Intel, they were just the shining star and Andy Grove and he wrote all the leadership books and you have a decade of just missing market, aftermarket and poor engagement. It just feels like it's a constant downhill at this point.

Ricky Mulvey: Yeah, a lot of missed opportunities starting. It's tough when Steve Jobs comes to you and says, "Hey, we're going to make an iPhone, would you like to make some chips for it?" Your responses that the numbers simply don't work for that.

Robert Glazer: Yeah, it's one of those greatest isn't worth decisions of all time books you'd like you'd like that one back.

Ricky Mulvey: You can blame a decade of cheap money, but is that the only culprit when you're talking about these organizations with, let's say focus on growth at all costs plus poor leadership?

Robert Glazer: Yeah. No, I don't think it's the culprit, I think covers it up. I can never remember whether it was Warren Buffett and Charlie Munger that said, when the tie goes out we see who's not wearing their bathing suit and I think that's been the case, and so think about all the series of corporate malfeasance shows that we've all watched over the last couple of years. As soon as the musical chair stopped, everyone saw what was going on there at, we work in Theranos and some of these companies where again, you had very autocratic an humble leadership. It looked really good on the outside, I think the suspension of disbelief but then when you actually see what's going on and that's the difference between putting together, I think what looks like a good year or two and putting together a five-year run or a decade of of outperformance.

Ricky Mulvey: Fairness was a straight-up fraud. I think that's a little bit more difficult, but there are examples of companies that have been high-growth, high turnover that have done fabulously well for shareholders like Amazon would be the exception to that rule, Tesla might be another exception to that rule where they're working people to the bone, but it works for their company.

Robert Glazer: Those are great points because look how a lot of people look at Michael Jordan or LeBron James or Tom Brady and they're like, well, I don't need to go to school I'm going to be that, but those are just the 1% of the 1% exception. Once-in-a-generation, we give companies a suspension of disbelief and Tesla and Amazon, both had incredibly product visionary leaders not known actually for great cultures, but known for just incredible product innovation and massive competitive advantages. That can hold you afloat for awhile but some people might argue is like you were saying, maybe that was built into the growth rate at Amazon for a while that was just part of the equation. But the last couple of years have been harder for everyone since the pandemic. Sometimes you can definitely get things working in your favor for awhile but Tesla is a tricky one. If you look at the numbers, if you look at the thing like it's a pretty rough place to work, it's pretty high turnover, but there's not that many Elon Musk out there.

Ricky Mulvey: You said, "We have a whole generation of leaders who don't know how to make money or grow companies in a way that doesn't break people." For people on the outside, what are the signs that a company is going through this? What's that look like an action?

Robert Glazer: We have a lot of leaders that have 10 years of not having to make money, and you can always get more and it was cheaper and part of the real downside of that is I think a lot of companies haven't figured out product market fit. Let's do a perfect example of this with some public companies like food delivery. Here's the thing where at a certain price that you're willing to charge, the customer is really interested, but you make no money or if you try to charge the price where you make money then the customer is not interested. The way to look at this is where you see tremendous revenue growth. Not that profit is everything but to me, profit is, do you have something sustainable? Do you have product market fit? Where the profit is not there, where there's a ton of turnover, where you don't see the company generating those next level of leaders, look for Steve Jobs, all a faulty had. He built and developed a lot of the leaders at Apple, including his successor Tim Cook. When you see a company that's getting the leadership, a lot of leaders are coming up from within their staying, it's not just this constant revolving door of talent and which no one seems like they're willing to stay very long.

Ricky Mulvey: I know you covering culture now the big shift is figuring out remote work. In my opinion, the only public company that I've seen managed this well is Airbnb essentially in different companies have different abilities. If you're making cars, you need people to show up. If you need security or headquarters, you need people to show up. With all those caveats out of the way, I think Airbnb figured it out. They basically said, hey, if you're working, you can go to an office, you can be at home but we're going to have these events pretty set throughout the year and you're expected to be there, you'll know about them months, years in advance. Is that the only way to do it at this point?

Robert Glazer: The way to do it is to pick a strategy that makes sense to the team and the people and then support this strategy, which is exactly what Airbnb did. A lot of these companies were doing it for the wrong reasons. During the great resignation, we got to get people so let's tell them they can work from wherever they want and then they move and do whatever they want me to tell them, they got to come back to the office or you've got companies that had been operating really well during the pandemic, but they got some real long-term leases in New York City, and so they declare you are going to have to come back to work. Not with a business reason or not like Airbnb said, hey, it's important to our culture that people get together and they do these things but with an authoritarian mindset. The opposite Airbnb I think is Goldman Sachs and David Zalman in January 2022, when Goldman is coming off the best quarterly profit in the history of the company and revenue with everyone working from home. He says, "We're going to force people back in the office on this date, and remote work is an aberration that we're going to fix."

But wow, that to me sounds like a huge slap in the face. Guys who just worked through a pandemic, recorded the best quarter in the history of the company, and you're telling that that's something you need to fix as fast as possible because an aberration. Fast forward a year, everyone is back in the office because they're required. Goldman has the worst quarter that they have in 10 years now. That is not because they were working from home or not working from home in those cases but clearly, there's a lot of factors at play and it is not that black and white. If I'm someone at Goldman Sachs, I'm saying, look, we've got a $50 million IPO pitch tomorrow, you better be in the office we're not doing this on Zoom because we're about relationships and in-person and we're going to lose if we do it on Zoom and by the way, then there's no bonus for you, so you have to understand. But if you're crunching a spreadsheet and the deals closing tomorrow for 16 hours a day, I don't need you to come into the office to lock yourself in the office for 16 hours. Let's focus a little bit on the why we're doing it and the type of company in the type of culture that we want to build and understand that we can't be everything to everyone and I think that's one of the biggest mistakes that leaders are making today, and it's going into marketing and all stuff just trying to be everything to everyone and not having a message and a focus that resonates with a core group of employees and customers.

Ricky Mulvey: Well, let's stick on that example for a little bit, because cyclicality hit Airbnb and Goldman Sachs a little bit differently. It might not just be the in-person culture Airbnb still has people traveling that want to use their services post-pandemic than a lot of those are maybe higher income folks that haven't been hit by the recessionary wins that many others have faced in the case of Goldman Sachs, well, maybe they're Airbnb travelers, but they've also experienced a complete dearth of IPOs after the pandemic and deal flow is completely dried up no matter where they are.

Robert Glazer: That's what I'm saying it's not. One, it's not absolute from either way, 100%.

Deidre Woollard: 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 Deidre Woollard. Thanks for listening, we'll see you tomorrow.