What Delta and General Mills Reveal About the Economy

In this podcast, Motley Fool senior analyst Bill Barker and host Ricky Mulvey discuss:

• Delta's investor day and rosy profit guidance.
• General Mills hitting a pricing-power limit.
• How Costco is solving its free-rider problem.
• AutoZone's CEO, Bill Rhodes, stepping down and the retailer's "unappreciated" success story.

Plus Motley Fool senior analyst Jason Moser and contributor Matt Frankel check in on regional banks, and Apple's consumer finance play.

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 28, 2023.

Ricky Mulvey: Pricing power at the grocery store may finally be hitting a wall. You're listening to Motley Fool Money.

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Joining us now is Bill Barker. Bill, good to see you.

Bill Barker: Good to be here. Thanks for having me.

Ricky Mulvey: Let's start with Delta's investor day. Delta Airlines held that on Tuesday, where it bumped earnings by a smidge and free cash flow generation guidance by a billion dollars, from $2 billion to $3 billion. Bill, a lot of that margin revenue comes from the Delta SkyMiles card. When you look at these numbers, is this a travel rebound story, a consumer debt story, or maybe a little bit of both?

Bill Barker: I suppose a little bit of both. Although I think investors in Delta are going to want to focus on the travel rebound part of the story, which is pretty positive. I think that the industry association is now predicting that 2023 is going to come close, not quite match 2019's levels of travelers and revenue. We're not back to pre-pandemic levels.

There's good reason for that, with business travel still being, I would say, highly curtailed fighting against the pent-up vacation and individual travel stories. It's certainly much better levels than last year, and Delta's investor day put a spotlight on that, and the work isn't finished, but it's a lot closer to being back to where it was than it has been for a long time.

Ricky Mulvey: One of the surprising pieces, to me, was the rebound, especially for those premium seats on Delta flights. That's where they drive a lot of revenue and margin. The story was, is that that was supposed to stay down. In the hybrid work model, businesses continue to cut travel spending. But Delta says that's where it's driving a lot of growth again. What do you think is happening with that?

Bill Barker: Well, certainly, the business travel is growing from a very, very low base in the last year. Then you've got people that are willing to spend right now. They haven't taken those vacations. They haven't done the travel to see family that they had wanted to in the past couple of years.

It's easier to travel now. I know last year, I was flying back from Europe. May of last year. Still had to come up with a negative COVID test to fly back into the country. That's no longer the case. That hasn't been the case for awhile.

The people who are willing to spend for business class and first class and Economy Plus are there. They've got money left over from all the travel they didn't take in the previous couple of years.

But the airlines would love to see the actual business travel return to a significant fraction of where it was in 2019. I don't know how many years it's going to take for that to occur given how much business people are willing to do on Zoom still.

Ricky Mulvey: It seems like airlines are more cyclical than the average business. You've got to worry about fuel costs, global macroeconomic factors. Is this an area you look at for long-term investing or generally avoid?

Bill Barker: Well, in terms of long-term investing, investing through a number of cycles, I think it's a good question. I prefer to arrive when things look worst for airlines because the implication of cycles is that there'll be a good spot and a bad spot within this cycle.

Investing through the cycles, historically, airlines have not been good businesses. They've not done a great job of staying out of bankruptcy, so you've periodically been wiped out in a lot of cases. And then they come out of bankruptcy and with a better business plan.

Certainly, the seat capacity, seat utilization is infinitely better now than it was 20 years ago. They do have real algorithms that are putting the right number of people onto flights. Makes it unpleasant, often, for travelers, but a full airplane is what they need, and that's mostly what they get.

I'd say it's a vastly improved business to where it was 20 years ago. But still, as we are finding out, we're still working our way back to cycle highs. We're not there yet. It's been four years of a down cycle.

Ricky Mulvey: Let's move on to General Mills, which is telling a little bit of a different story about the economy. General Mills stock took a small hit this morning. The maker of Cheerios, Pillsbury, Fruit Roll-Ups announced a dividend raise, total sales increase on the year. But it looks like the pricing power might be hitting a wall for this consumer goods giant.

Bill Barker: Yeah, there's not much cyclical about eating. Do it every day, and you're going to tomorrow and for many years to come. It doesn't have the highs and lows by any means.

General Mills brands, you look at them, they're the ones that you've grown up with, you know, whether it's Lucky Charms or Bisquick or so many... Pillsbury. There are things you know from however old you are, you probably learned about them through commercials from your earliest days.

What they're looking at now is the population is not growing that fast, and they're going to be looking at more or less inflation plus population growth as the benchmark. Unless eating habits change dramatically, that's the growth you can look for here. Absent, really discovering, a better selection of things that people want to eat.

Of course, a lot of their historical legacy brands are on the wrong side of the nutritional and health trends. I don't know that they've got a better-looking future than their past.

Ricky Mulvey: Seems like a lot of disrespect for the Lucky Charms, there, Bill Barker.

Bill Barker: I love Lucky Charms. There aren't enough people like me. That's the problem. For General Mills, I think, is that there are too many people that have decided to pay attention to all the nutritional information.

Ricky Mulvey: What a shame for their shareholders.

General Mills I think, also ran out of some room to cut around the edges. Maybe people are finally getting fed up with the shrink-flation. General Mills is not the only culprit in this phenomenon, but they did cut family-size cereals by an ounce. Members of the Reddit community have pointed out the Pillsbury Toaster Strudels are getting smaller, and the amount of frosting in packets is also diminishing. Even for your current customers, they might not be delighting them like they used to.

Bill Barker: No. A couple of places in their earnings report, they refer to lower organic pound volume. They're maybe selling the same number of packages but with less weight, and they are ending up with slightly improved revenue but really not quite keeping up with inflation.

Inflation is going a little hotter than what they added to year over year. Net sales increased 6%. Inflation was a little bit higher than that over the previous 12 months.

I think that this story is going to look very similar from quarter to quarter, from year to year. But there are limits on what people will put up with in terms of being charged the same or more for less and less. The media is putting a spotlight on that, and that's not helping General Mills.

Ricky Mulvey: Let's move on to Costco. Now, Costco is cracking down on membership sharing. Maybe they're taking a page out of Netflix. Bill, the retailer says that it is now asking shoppers to show photo ID at self-checkout registers. Does this signal anything to you, or is this just a fun news story?

Bill Barker: I think it signals an interest in supporting their membership. Members are asked to pay an annual fee, and by definition, they're subsidizing the nonmembers, the free riders that are borrowing somebody else's memberships.

So I think that the honest members -- not that there's really, wouldn't go so far as to call sharing a membership dishonest. But the people who are playing by the rules are subsidizing the free riders, and it's in Costco's interests to, with very crowded stores, much of the time, to make sure that the ones who are getting in the door are the ones who are supposed to be getting in the door and paying for the privilege to do so.

Ricky Mulvey: We'll, also, I think it's worth noting just how important those membership fees are to Costco and the investors in the stock.

Bill Barker: The membership fees are the lion's share of the profits here. They are dedicated to keeping costs low and running a very, very tight margin operation outside of the membership fees, and people are glad to pay them. Find value in the membership fees. Renew at extremely high rates, way, way, way above 90%.

They don't get raised every year. I think we're about due, but I think that Costco has done a great job of keeping the loyalty through service and through not frequently raising prices on the membership.

Ricky Mulvey: Big news for AutoZone. Its CEO, Bill Rhodes, announced that he is stepping down in January of 2024 after leading the company for 18 years. Bill, this is someone that we don't talk about a lot. But this guy has been a tremendous friend to shareholders during his tenure.

Bill Barker: This is an underreported story, I think, or underappreciated by many who haven't followed it. AutoZone has just done a tremendous job of, for long-term shareholders, largely following a model of aggressively buying back its own shares. Not overexpanding, not wasting money on acquisitions. Not necessarily empire building as much as just taking as much money as it can, borrowing a little bit as well to fund share buybacks.

And the result has been, for long-term shareholders, a compounding, increasing ownership stake in the company that's reflected in the share price, which is $2,400-some today. There are many, many, many happy shareholders who are going to be sorry to see Rhodes go.

Ricky Mulvey: I think one reason this isn't getting a lot of attention is because there's not a lot of drama associated with it, and that makes the story a little bit juicier. This transition is probably a relatively boring one with about six months to go to hand the reins to Philip Daniele. He is a vice president of merchandising, marketing, and supply chain teams, and he's the guy who's going to succeed Rhodes.

Bill Barker: Yeah. A stable leadership team. Rhodes, sticking around, though not in the CEO position. I think that the market is going to continue to look for the past business practices to continue.

It might be a little harder, with interest rates at 6% running a buyback, which is partially debt fueled, rather than the near-0% interest rates that were available for a large chunk of the last decade. Nevertheless, I don't think that you're going to see a big change in the business model here, and AutoZone and O'Reilly are likely to continue feasting on the carcass of advanced auto.

Ricky Mulvey: Yeah. I think it's worth discussing the balance sheet, flagging funding share buybacks, free, that debt. Right now, AutoZone has about $750 million in cash and receivables, but it's got $8 billion in payables, current debt, and retirement benefits. Is this a real problem in a rising interest rate world?

Bill Barker: Well, it's a growing payment that they need to make to fuel all this. The thing is that the car repair business is extremely predictable. We know how many older cars there are, we know how many new cars there are. We know that the age of the entire fleet. You know that when there is a particularly tough winter in terms of weather, the number of potholes that that creates, and then how much additional damage happens to cars. So there really aren't new variables that appear.

So it makes the predictability of the cash flows something sustainable and allows a little taking on more debt than you otherwise would like to see as observed. I'm sure shareholders would love to see less debt on the balance sheet. But they can't complain with what the debt that has been put onto the balance sheet so far as translated to in terms of equity. So I wouldn't look for the same returns to shareholders over the coming decade that they've had over the last decade. But I continue to have faith in this company.

Ricky Mulvey: Bill Barker, appreciate your time and your insight.

Bill Barker: Thanks for having me.

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Ricky Mulvey: Apple has entered the battle for your deposits. Jason Moser and Matt Frankel take a look at the tech giant's offering and check in on regional banks.

Jason Moser: Hey, Matt, it's great to catch up with you again. It's been a while.

Matt Frankel: Yeah. I haven't seen you in a few months now.

Jason Moser: [laughs] Well, we want to get back to what we've done so long and talking financials and, and talking banks. Particularly today, we want to dive into banks and talk about the regional banks in this fight for deposits.

Interest rates, of course, have moved up considerably, making these deposit accounts a little bit more attractive for consumers these days, and as such, these banks need to compete a little bit more for those deposits. Looking at the state of regional banks today and specifically in regard to deposits, how are these regional banks holding up yet?

Matt Frankel: So it's been a strange dynamic this year, to say the least. So when interest rates started to rise last year, a lot of consumers started to take their money out of the big banks, which pay nothing. My Wells Fargo account pays 0.01% still. [laughs] They started moving out of the accounts like that into regional banks, which can afford to pay more. They generally have lower regulatory costs, for example, and can offer a little bit more with still having the convenience of an in-person bank.

Then when this banking panic happened, if you will, earlier this year, people started to move their money out of regional banks at a rapid pace, especially in March and April. Since then, it seems to have calmed down

There's a few reasons for it, but we're starting to finally see some positive numbers. Recent Federal Reserve data shows that overall, U.S. bank deposits are starting to increase for the first time in a while. A lot of people are just taking their money out of banks and putting them into Treasury bonds and nonbank assets like that. Now that seems to have stabilized.

A few of the most affected banks are starting to report good numbers. Western Alliance Bank was one of the big, hard-hit ones in the panic. They recently said that their deposit base grew by $2 billion in the recent three-month period. So we're seeing some positive numbers come out of the regional banks. They're doing a lot to bolster consumers' confidence in the regional banking system.

Jason Moser: Yeah, it does feel like a lot of this just stemmed from a lack of awareness on the consumer's part, maybe, that regardless where their money was parked, FDIC insurance is a real thing, and maybe folks weren't, I don't know if there's a crisis of confidence, I guess, is really what it all boiled down to. But but at the end of the day, the funds are still insured, whether it's a regional bank or a big bank.

But you mentioned something there that I want to dig into a little bit more. You mentioned a phrase, "nonbank instruments," and that makes me think of Apple. And Apple now, they're rolling out a banking relationship or a banking product, a savings account, I think it is.

It's interesting. Apple is not a bank. It's the home of those same types of regulatory constraints that banks typically are, but they partner with banks, I think maybe in this case it's Goldman Sachs. Is the Apple bank a threat, do you think, to regional banks? Are they feeling pressure from this?

Matt Frankel: Like you said, Apple is not a bank. They have no desire to be a bank. There's a lot of regulatory headaches that come with that. They don't want to be a bank.

Jason Moser: Yeah.

Matt Frankel: What they're doing is they're essentially offering a Goldman Sachs savings account product that they're just slapping their name on. Big companies do this kind of stuff all the time. Big brands, they slap their name on products to get them to sell. That's what they do. That's the whole premise of a brand like Coca-Cola acquiring a new up-and-coming beverage: could sell better under their brand.

We saw a lot of early traction from the Apple savings account. It pays a 4.15% APY, which is pretty good. In the first four days of its debut, which happened in April -- which was right after the big banking panics; take that for what you will -- it attracted about a billion dollars' worth of deposits in four days. That had people thinking, is this going to destroy the banking system as we know it? Doesn't every other person in the world use Apple? Between me and you and the two people behind the glass, I'm sure at least two of us have an iPhone.

It's understandable why people would think that that could be a big disruptor, but there are a few things to keep in mind. No. 1, that APY makes them competitive with other online-based banks, not dominant. I'm a SoFi customer, for example, and mine pays 4.3% right now, so better than the Apple savings account. It's not the highest rate you're going to get out there.

The rollout has not been without its speed bumps. If you Google "Apple savings account," all the news stories that come up are how people can't get their money in a timely manner.

Jason Moser: I was going to bring that up. That's the one thing that stood out. I've not used this product, and I'm not going to use it. It's not something I'm interested in. But I've already read enough of those stories where people couldn't get their money. I mean, that, to me, would be the most frustrating thing of all. You can't get your money, I'm out.

Matt Frankel: I don't expect it to necessarily be overnight. If I withdraw from my online savings account at 4:00 p.m. today, I don't necessarily expect it to be there tomorrow, but maybe the next day, it should be there. Not two weeks later, I'm still wondering where my money is and going back and forth with customer support.

There have been some hiccups, and hiccups like that will kill a bank. Can you imagine if some of these regional banks came out in the weeks following the crisis and people couldn't get their money?

Jason Moser: That's the reason for being right there: They're supposed to do one thing and do it really well.

Matt Frankel: We're in the depths of a crisis that people could easily get their money with these regional banks.

The third reason that I'm not too worried about Apple is other fintechs have a lot more to offer in the financial context. Apple's a big ecosystem, but the savings is like an adjacent product. It makes sense because that's where people's Apple Card rewards points are being deposited into. That's where the cash back goes.

But as far as the primary place somebody puts their savings, people don't want to deal with two or three or four banks. They want everything in one place.

Jason Moser: Yeah.

Matt Frankel: I mentioned SoFi. The reason I use SoFi, it's not just because they have a good APY. I can get that in other places. It's because I can also have my investment account in that same place. I can also get a mortgage from them if I want to. I can also finance my car. I can also do a student loan refinance. I can also have a credit card through them. I can have a big banking relationship with a lot of these other fintechs that you can't with Apple.

Yes, it's a niche product. It serves a purpose well. The Apple credit card, it's a nice user base, it's desirable, but I don't think it's going to be a serious bank disruptor. There's something like $14 trillion of deposit volume in the last month in the U.S. banking system. That $1 billion might sound like a big amount of money, but in the scheme of things, it's really not that big in banking. So I don't worry about Apple really being a big competitor to the rest of the banking system.

Jason Moser: Well, in regard to the regional banks, it does sound like, I mean, at least Apple, isn't necessarily the threat that maybe some thought it could have been. But when you're putting those regional banks up against the big banks and looking at the evolution of this industry, it seems like we're seeing more consolidation, and that likely will continue. Do you view regional bank stocks is a good investment today?

Matt Frankel: I would say if you're going to invest in regional banks... I mean, we've talked on podcasts a lot about doing a basket approach. I would say even an ETF approach with regional banks makes a lot of sense right now. Especially with some being really volatile, some being really stable.

The regional bank SPDR ETF, the ticker symbol's KRE, is still down about 30% for the year. It was down 43% in early May at the lows. It's come back a little bit. But that's a great way if you want regional banking exposure but don't... you believe in the system itself but don't want to bet on any individual regional banks, that's a really good way to go.

I kind of like the regional banks that have specialized in certain things. As an example, Ally Financial's in my portfolio. They're an auto lender. They are really good at auto lending. They used to be part of GM before they spun off. They have a great business model, great leadership, and most of their deposit clients are under that $250,000 FDIC limit, so they don't really have to worry about uninsured deposits. It's really just a straight savings-and-loan play. Not a lot of business banking there.

I like those if you're going to play an individual name, but my biggest bank stocks are still the big banks. Bank of America and Wells Fargo is still my two largest bank investments.

Jason Moser: Very interesting indeed. Well, we will leave it there, Matt. Thank you so much.

Matt Frankel: Thanks for having me. I hope to do more of these with you.

Ricky Mulvey: As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.