In this podcast, Motley Fool hosts Deidre Woollard, Mary Long, and Ricky Mulvey talk about companies that could ride the tailwinds of back-to-school season.
They discuss:
- Surprises from a survey revealing the brand preferences of college interns.
- Why "experiential" spending could be the future, or failure, of one big-box sports retailer.
- If chatbots killed the homework help business.
- And stocks that play to back-to-school trends.
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 Sept. 16, 2023
Ricky Mulvey: Call me a pessimist, but I still think students are going to use their parent's money to pay for homework help. Sometimes you might want a human to help you prepare for a test. Or when you have a complex image-based problem that comes from a textbook, we'll see what happens. It's on my watch list. I currently don't own the stock, but I think it's one of the most interesting canaries in the coal mine companies with regard to the generative AI story.
Mary Long: I'm Mary Long and that's Ricky Mulvey. I got together with Ricky and our fellow Motley Fool Money co-host Deidre Woollard to talk back to school season and which companies could see a boost as students return to the classroom this fall. We discuss big-name brands that have won over the hearts of college interns. Six stocks that cater to back-to-school trends and some foolish wisdom for the students in your life. Somehow it is September, and while many stores might like you to think that it's already Halloween and that the Winter holidays are just around the corner. Here, at The Fool we like to live in the moment, and the moment is still back-to-school season. I'm here with Ricky Mulvey and Deidre Woollard, and today we're covering some companies that could ride the tailwinds of back-to-school trends. Those tailwinds also are pretty substantial. Deidre you dug into some of the numbers from the National Retail Foundation, just how big is the back-to-school market?
Deidre Woollard: Yeah, it's pretty big. Back-to-school spending expected to reach $41.5 billion. People are expected to spend an estimated 900 dollars each and electronics is huge. Sixty-nine percent are expected to buy electronics. College students spending even more, an average of about 1,300 dollars a person which is up from last year, since 2019 back to college spending has nearly doubled. College spending is really interesting because now there's the whole dorm room thing. There's just a lot happening there and the other thing I think is fascinating is, back to school, we're in mid-September, this started in mid-July. It keeps getting earlier and earlier like the holidays.
Mary Long: If that's the case with everything, as soon as we can have a new transitional holiday, it's right there. Those are stats from the National Retail Foundation, but it's not just retail that gets this boost from back to school. A mysterious listener has shared a survey with us that wound up on our doorstep. It pulls Morgan Stanley interns, about 80% of whom are between 18 to 23 years old about their preferred brands and different trends that they're seeing across a bunch of industries. Basically what the youths think? Ricky, you said you saw some surprises here. What from the grades stuck out most of you?
Ricky Mulvey: I think the biggest surprise was how the interns view brands, one of which is that they see, at least for a car brand, Mercedes is more desirable than Tesla. I wonder how much of that has to do with some recent controversies around Elon Musk. But I think one of the appeals of Tesla is that it's the Apple brand of electric cars, and everything else is an Android I've heard in some cases. Then the other surprise for me is that Instagram is still by far the most popular social media app. When interns had to pick three that they used most often, Instagram had an 82% agreement rate. By contrast, TikTok was at a third, YouTube was at a third, and Facebook proper was just at 4%.
Mary Long: Another thing that stuck out to me in that survey, they asked about preferred ride-sharing apps. Uber versus Lift and Uber blew Lift out of the water. Eighty-five percent of the respondents preferred that. Lift took about 13%. To me, on the one hand, that makes sense. When I personally go to order a ride share, I go to Uber first and then I check Lift to see if it's cheaper, and if it's cheaper I go with Lift, and if not, I'll just stick with Uber. Uber is the go-to, but I wonder how much of that is actually based on preference. How much of that is indicative of true loyalty, or if it is just a cost-benefit analysis. Also how much of that might have to do with some parents footing the bill or having a perk, or a relationship with one of those ride-sharing services through a credit card or something and then linking their student up to that. Then because of that relationship, Uber becomes the preferred brand.
Ricky Mulvey: Yeah, Mary, I think you touched on something important which is it's difficult to build a mote if you have an immediate competitor that can price match or undercut your prices within just a few seconds. The thing with Uber, I think it allows teen writing, so maybe you have a little bit more use going on from that. These are interns who are presumably above the age of 18, but maybe they got used to a little bit of stickiness from being used to being on one app. Lift, on the other hand, I think you have to be 18 to be a writer on the platform.
Mary Long: We were talking about surprises in the survey. I think there were some other things that were less surprising. Spotify is the go-to music streamer to me that made a lot of sense. Apple Music is a distant second, but it's only pulling at about 22% of respondents. Again, I think back to like my own days in college and I wonder when the survey asks which music streamer are you subscribed to, if even people that are using the free version of Spotify are saying, "Oh, I'm a Spotify subscriber". I know that my first two years of college, I was eking by on that free subscription for as long as I could. Until the ads just drove me up the wall and I couldn't take it anymore. I wonder how much of that is playing out here. Other non surprises for me at least were that Venmo took the cake when it came to peer-to-peer payments. Seventy-seven percent use Venmo on a monthly basis. Zel follows at 45%. But when it comes to paying for goods, Apple Pay is the preferred method to use and Apple's got a pretty tight hold on phones, I feel like that will be a surprise to no one.
Deidre Woollard: Piggybacking on the Apple thing. One of the questions they asked was about the Vision Pro, and if people were interested in buying that. They asked it in two ways. They asked it at the price that it is going to be tail at around 3,000 and then at 1,000 dollars and the response was pretty muted. It didn't seem like even the price point didn't shift that and most people said they weren't rushing out to buy it. We'll see, it's interesting, Apple announced that their new iPhones will be shooting special video later this year. Maybe that shifts things, but so far it does make me wonder a little bit about the Vision Pro.
Ricky Mulvey: Yeah, I saw it as well Deidre. I don't know, I disagree just a bit or I'll just play devil's advocate. How about that? When folks were taking the survey, I would say at least 99% of them have not had the chance to use it, see what it can do, myself included in that category. I would be very curious if you had a control group of folks who hadn't been on the Vision Pro and then a test group of folks who have gotten to demo at at least one time and see how those responses may change.
Mary Long: That sounds like a future podcast episode, Ricky. In preparation for this episode, each of us went out channeled our inner student, and then have brought back to the table a couple back to school stocks. This isn't so much a bucket as it is like an idea factory and we've separated those ideas into two distinct categories. One company that could benefit from the return to grade school or high school, and another that's more targeted toward college students. Let's start with high school. Deidre you looked at Dick's Sporting Goods ticker DKS. Tell us more.
Deidre Woollard: This is an interesting company. It's a company I really like a lot and think about the trend to capitalize here, I would say is the growing interest in participation by women in sports is a growth area for them. A relatively large company, about a 9.4 billion market cap. You know, a lot of retailers had lower sales last quarter, not Dick's. I mean not a great quarter. Sales up 3.6% in the second quarter, about 1.8 percent comparable store sales, and their margins were down a little bit. One of the things that they're doing is they're getting deeper into experiential retail. They've got these House of Sports conversions where they're taking this large footprint and creating really experiential places to try stuff out and play with the equipment. They're saying that they're seeing already, even though they're just starting this, that they're seeing a lot more sales per square foot from that. That's something to like about them. Also with Dick's, you don't get a lot of trade-down. This is something where if you've got kids and they're in sports, you don't really have an option not to do it. There is some safety there. The company has really just had a steady growth. It's got solid margins. As much as I love the house of sport thing, the only thing that I'm a little worried about is are they going to overspend on that. Because building out these experiential real estate things that are really cool is awesome and it's great. They're seeing results so far. But if they go too big, too fast, that could drag on margins.
Ricky Mulvey: They don't want to bet against parents spending money on youth sports Deidre. Eventually one of them will make it to college on a scholarship. So really you're saving money.
Mary Long: I grabbed what might feel like an obvious pick, Target, also known as Tarjay, also known as TGT. I pick Target mostly because it's effectively synonymous with back-to-school. In my mind, I have a bucket full of memories of it being fall and me being in grade school and being so amped to go to Target for years, like ticking off everything on that school supply list. But also shopping for a first-day-of-school outfit. I would hate to think that the age of Amazon has totally done away with that tradition. But also just that idea and experience of stepping into Target speaks to something broader that Target itself knows exists and refers to even as the Target effect. Which is you go in with knowing in your heart and mind that you're going to get one thing and walking out having spent hundreds of dollars and with things that you didn't even know that you needed, but will totally spice up your house. As I think about that, I just ask myself what other places really have that kind of grip? We talk a lot about digital sales and digital storefronts, but Target, even in COVID, saw an increase in sales, which is almost surprising considering that it has such a large physical footprint. They've tapped into E-commerce in an interesting way. Still using that as a mechanism to push people into stores. Even today, like 95% of all their sales are fulfilled in the store. Even if someone is ordering something online, they're still getting into the store to pick it up. Which again, speaks to, and caters to that target effect of, we got them in for this one thing, but hopefully, they'll leave getting even more. Ricky, you snapped up snap the social platform with the disappearing photos. What are you seeing here?
Ricky Mulvey: Snapchat, I think is an interesting trend. I will say that I do not own the stock nor do I plan on ever owning the stock at least at the time of this recording. I really thought this trend would die. I was completely wrong. It has 750 million monthly active users. It also has about 400 million daily active users. For context, Instagram is 500 million daily active users. I thought that was just absolutely incredible cause my user experience on it has been poor. One of the strangest features is Snapchat's map, which is used by 300 million people per month. The daily map users open it six times per day on average. For some context, this shows you the exact location of some of your friends on Snapchat and if you have friends on Snapchat, many of them are peripheral people. Folks you have not spoken to in five-plus years, maybe since grade school, maybe since your freshman stats class. They have said, you know what, I am happy for everybody to see my location at all times. A couple interesting things with the company. It became free cash flow positive in 2022 stocks down from a high over 80. Now it's around $10. They really like issuing new shares and they spend about a 1/3 of their revenue on stock-based compensation. Maybe it'll bounce, maybe it'll do something. I'm putting this in the bucket though of companies, I just don't like. Sub folks, odd snap. At least from the people I've seen use it. They use it in place of text messaging where you take a selfie and then you have like a one-line response to what someone has said. That sounds exhausting.
Mary Long: Let's graduate and go to college, just as if it's that easy. DJ for our college, idea factory, you took a look at e.l.f. Cosmetics ticker Elf. What's the story with this beauty brand?
Deidre Woollard: Yeah, e.l.f. stands for eyes, lips, face. It's appealing to both high schoolers and college students. The origin of this company was a wet and wild, where you've got selling makeup for $1. They've graduated up now, they now sell makeup for in the $10 range. They have grown by leaps and bounds. It's a company that's been around 16-17 years. But in the last 3 or 4 years, the growth has been incredible. It's now in the top five brands along with the OG's of the space. The CoverGirl, Maybelline, Revlon, all of those. Eighteen quarters of net sales growth and the most recent quarter, net sales up 76% year over year. Gross margin is 71%. The growth has been phenomenal. The thing I'm watching with them, the trend is skincare and self-care. Skincare is fascinating because it seems like, you used to just wash your face. Now you've got to get the serum. There's like five steps now for everything. They just acquired Naturium, which is a skincare brand for about 355 million. I'm wondering if they're using the playbook that Estee Lauder has been using recently, which is, when you have a lot of money and you need to keep on top of things, you just acquire those buzzy brands. Of course, Estee Lauder ended up shuttering a couple of those, but I'll be interested to see if that's the next step for e.l.f. They do very well at Walmart, at Target, at Ulta. Growing their loyalty plan of program, a little bit of a weak spot for them, just around four million. I mean, you compare that to Alta, they've got like 41 million. I mean, there's a lot to love about the growth, the wide distribution, the price point. I don't own this one. I'm not sure I would want to dive in at this point because I'm afraid it's a little bit overpriced. You've got a P/E ratio of around 76%. They're spending a lot on marketing. They just had their Super Bowl commercial last year. With brands like this, you have to wonder if it falls out of fashion, what happens and how fast could all of that growth go away. But for right now, it's an incredible growth story.
Mary Long: I am a self-professed salsa obsessive. I don't really think I had any choice here but to go with Chipotle. Reason being, when we think about back to school is that college towns actually play a pretty outsized role in the success of a lot of particular Chipotle locations. Management talks about this pretty frequently on earnings calls and in fact, during COVID, when a lot of campuses shut down and emptied, Chipotle saw a huge dip in sales at these college town locations. Again, this is something that management has mentioned frequently. Small-town Chipotles, of which College town Chipotles are apart, tend to come in a bit below average restaurant margins, but the cost structure is a bit more favorable there. A thing I will flag when it comes to Chipotle is its valuation. Part of the reason for that is that the stock has historically been a pretty strong performer. In the past 10 years, it's shut up over 350% in large part. Because of that, it's been viewed as pretty heinously expensive. The average P/E ratio has been about 82.6 over the past ten years. Because of that, even if you like the business, it might be hard to bite the bullet and buy. These days it's trading closer to 48.2 times earnings. That's still steep if you look at it in comparison to something like a McDonald's or a Starbucks, which is closer to 26, 29 respectively. But compared to the historical average over the past 10 years, it's a bit easier to stomach. Something to keep an eye on. Ricky, last but not least, you looked at Chegg, which I primarily know is the website that sometimes has the answer to an essay question.
Ricky Mulvey: Yes, Chegg has a subscription service which is we will generously call homework help. They also do textbook rentals. I think this is an interesting company to follow because this is really the quarter. This is the year that we're going to find out if chatbots killed the homework star. It's a pretty simple narrative. No one wants to use Chegg anymore, because you can get all those answers from ChatGPT. I don't know if the narrative is quite that simple. It went from a trailing P/E ratio of about 75-8. It's also now at about an eight times price to free cash flow multiple, which is deep value territory for any kind of company. Call me a pessimist, but I still think students are going to use their parent's money to pay for homework help. Sometimes you might want a human to help you prepare for a test. Or when you have like a complex image-based problem that comes from a textbook, we'll see what happens. It's on my watch list. I currently don't own the stock, but I think it's one of the most interesting canaries in the coal mine companies with regard to the generative AI story.
Mary Long: Before we go, let's close out with a wee bit of foolish wisdom. What's something you wish you did or didn't do while at university?
Ricky Mulvey: I went to Ohio State, Go Bucks. It's pretty simple. Listen to your gut when you're in college. This is the first time where you're going to have complete freedom to make choices that you used to not be able to make. Very often, your gut knows best, whether it's a bad class, a bad friendship, it'll tell you what you should be doing a little bit more than you may give it credit for.
Deidre Woollard: I'm going to go really practical and say, watch your spending in particular. Watch what you spend on food and learn to cook for yourself. [laughs] One of the things that can really eat up your budget when you're in college is all that pizza and Chipotle and everything else. It's a trade-off between moving off campus and missing out on some of the college fun. But moving off campus and making your own food and things like that can save you some money.
Mary Long: I'll go academic. I so often wish that I took more varied classes. I feel like I showed up at college and was like, I'm going to major at this and do this and was so set on checking the box that by my fourth year. I remember looking around and thinking, my gosh, I can just take French because, and I can take a class to learn to code because. I felt like I just realized that as I was about to leave and didn't realize the uniqueness of a liberal arts environment where you have so much knowledge right at your fingertips. It sounds perhaps very adult to say, I wish I had taken more classes, but I wish I had taken more classes
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 Mary Long, thanks for listening. We'll see you tomorrow
