Catching Up on the News at Macy's and "Sports Illustrated

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

• What could impact the stock market's recent rally?
• The potential future for Macy's.
• Sports Illustrated and the value of legacy brands.

Deidre interviews Jamil Khan, chief strategy & small business officer at H&R Block, on where the tax-preparation company is headed next.

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 January 22, 2024.

Deidre Woollard: What goes up must go up. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst, Jason Moser. Jason, how's your Monday going so far?

Jason Moser: Hey, Deidre just great. How about yours?

Deidre Woollard: Well, pretty good and really good. I guess if you're watching the stock market, we hit an all-time high for the S&P 500 on Friday and this morning it zoomed up again. Interesting because the last all time high was set in January of 2022. Not that long ago, but feels like a long time.

Jason Moser: It does, doesn't it?

Deidre Woollard: It does. What should we be thinking as we look at this rally?

Jason Moser: Well, I was saying on Motley Fool Money on Friday, as well as the market performed in 2023. It just didn't quite feel like it. Maybe they're just pockets about performance into that point. We can't ignore the Magnificent Seven. I know a lot of people are probably sick of us sings. But the fact of the matter is, while we've talked about the Magnificent Seven for a while, their outsized impact cannot be ignored.

I mean, when you look at these seven companies and then you think that over the course of 2023, the laggard of the seven was Apple, which was still up 50% in essentially better than doubled the market's returns there. We can just see that clearly those seven companies have had a big impact on the way the overall market has performed. Now that doesn't mean that the rest of the market hasn't performed well or offered investors opportunity. I mean, obviously stocks on the whole are performing very well. I think a lot of that really is being driven by this idea that inflation really is now starting to come back down. The Fed's actions have made a difference. The conversation that comes with that is that now we went through such a long stretch of pushing rates up. Now it's a matter of when will they start cutting rates? Maybe the question is, are they going to be cutting rates sooner rather than later or is this something that will be put off for a little while? It's that question of cutting rates because you can versus cutting rates because you have to. I think we're not quite there yet as to understanding exactly which scenario will play out. But I mean, I don't want to be a Debbie Downer, I mean, I want to be as glass that full as possible. But I mean, there are reasons to at least be skeptical. You look at the holiday spending here, for example. You look at credit card debt.

Credit card debt is at record high. Delinquency rates have actually doubled over the past two years. If you look back during the pandemic, those delinquency rates were one thing. But if you look at delinquencies while they were at Historic Close during the COVID 19 pandemic, the rate of people who have gone more than 30 days without paying their credit card bill has recently topped pre pandemic levels. That just is all to say that we're comparing apples to apples. It's a bit more of a normal time versus a normal time. Buy now, pay later. You look at that. That's something we talked about a lot on this show. That was a big contributor to boosted holiday spending about 14% which is obviously a lot. We're starting to see some impacts there, some questions as to whether that is debt that's going to be paid back or at least is it going to be paid back on time. Student loan payments coming back into play. So I feel like there's a lot of stuff we're going to see unfolding here over the course of the next couple of quarters that will determine whether we hit that soft landing that I think a lot of optimists are hoping that we hit versus something like maybe a less than soft landing, should I just say.

Deidre Woollard: I think that's a concern. We're looking for interest rates, we're looking to see something there that we'll probably know in a couple of months. But the other thing that I'm thinking about is you said, the magnificent seven. So much of this is the AI story. As we look forward to earnings, could that be a place where we get a little blip here of not a full blown reckoning, but definitely a check in?

Jason Moser: It's absolutely possible. AI has become the headline de jure. I mean, for a long time and I mean, I read a great article over the weekend by, I think it was Christopher Mimms in The Wall Street Journal that was talking about these technologies that have gotten so much attention over the last several years that maybe it's time we start pulling back the expectations on them. Artificial intelligence clearly taking over whereas all of these technologies we've been talking about in regard to things like block chain and crypto or autonomous driving or even the metaverse. I mean, those are the three points of the article where it's like so much money has been invested in these spaces and so much time has been spent on talking about the merits in the benefits of these spaces. But we haven't really seen that stuff materialize yet and so now the conversations moving on to AI. We're talking a little bit less about these other things and that makes sense. The question is, will AI actually materialize into something at least in the near term that's a bit more tangible. I think a lot of these technologies and it's not to say that things like crypto and autonomous driving and whatnot and the metaverse, it's not to say they won't pay off, but it is to say that maybe it's going to take a little bit longer than perhaps a lot of people expected. I don't know that AI is necessarily going to fall to that bucket. I think we can really see a lot of the benefits that come from AI. But they may not necessarily be directly connected to us as investors. It feels like a lot of this is stuff. AI is really benefiting us behind the scenes, making our lives easier, but not necessarily as explicit of an opportunity for investors as we may hope. I guess time will tell.

Deidre Woollard: I think the other thing that I'm looking at is we're seeing these results in aggregate. But also I mean, January has been a rough month in terms of layoffs. Some of the companies expected like Stitch Fix or even Solar Edge but Amazon, Alphabet. So I'm wondering if we're seeing signs from individual companies versus the aggregate rise up, does that worry you at all? It worries me a little bit.

Jason Moser: Well, I think it's fair. It's important to know that we're seeing these cuts across the spectrum. The companies that are doing well and companies that are not doing well are all cutting jobs. This is not something that's just limited to one specific demographic of capitalism, so to speak. You look at a report published by Challenger Gray in Christmas, which is in the hiring space, the pace of job cuts by US employers in 2023. We saw that number surge 98% compared to the previous year. Layoffs are a real thing and they're happening across the board. The cost of employment are going up. We're seeing unions, clearly unions have been a big story over the last couple of years. Whether you're pro-union or anti-union, it doesn't matter to me. But they are taking advantage of this point in history, disadvantage of the cycle. I think that's what makes sense.

Unions have to take advantage. They've got to strike while the irons' hot, so they're doing that. What that does is that changes the cost structure of some of these businesses. The cost of doing everything is going up, even with inflation coming back down. I think most people would agree the cost of living is a lot higher. Just tie this into just your everyday life. I was looking at this the other day, the cost of auto insurance is up 20.3% in December from a year earlier. When you look at something like auto insurance, which is basically a requisite, everybody needs it, if you're going to be driving a car and most people are, you're paying auto insurance in some form or another. When those costs jump like that, when they increase like that, that's something that impacts everybody, from consumers to the places that those consumers shop. It's always something to keep in mind.

Deidre Woollard: I think this is just a reminder that a rally is great. A rally is exciting, but a rally is also, stock markets have cycles. We are going to go through cycles and everything that goes down goes up and things that go up, well, they go down at some point.

Deidre Woollard: Let's talk about a company that has had some layoffs recently, Macy's, that they announced layoffs on Friday announced they're closing more stores and then over the weekend, they confirmed what we knew in December, which is that they had received a takeover offer for 5.8 billion. They officially rejected it, but I felt like they left the door open and it's an interesting play because it's a great brand, a fading brand. In a vertical that is definitely seeing pressure. You've also got a nice bit of real estate including that Prime flagship store in Herald Square. We know private equity wants it. Do you think there's a public play here?

Jason Moser: There absolutely could be a public angle there. I would imagine this is more attractive from a private equity perspective. When you look at the reason why this deal won't happen, there are concerns over financing and valuation. Valuation is obviously a bit more subjective, the financing pieces. You're going to make that assessment and go forward. To me though, when you look at Macy's as a business, I think we all would agree every metric. This is a business that is challenged right now. Every metric tells you that this is a challenged business. Revenue growth is not there. Cash flow. We're seeing cash burn margins on the decline. Every metric tells you this is a challenged business and from that perspective, it's probably nicer to be able to keep that stuff off of the public radar. Something like a private equity can get in there and buy this out and then go in there and do their thing to try to fix the business. Now the problem is at the end of the day, if that happens, then at some point down the line, you probably see an IPO again and then they're just saddled with a ton of debt. That's happened before. I don't know that that necessarily is the ideal long term play but to me, it feels like still, even though this deal didn't really work out and it still may you never know they could come to a negotiation. But it does seem like the PE perspective is a bit more of an attractive one as opposed to staying in the public eye.

Deidre Woollard: I've been watching this too because you've got a CEO who's been there for a while. He announced his retirement last year. It's supposed to be in February yet no official date has been released yet. But you've got this new CEO, Tony Spring, who's the president of Bloomingdale's, coming in with an idea of we're going to do smaller stores, we're going to get off mall. If you were in charge of Macy's at this pivot point, what would you do?

Jason Moser: That is a big question.

Deidre Woollard: It's fun one though.

Jason Moser: Yeah, it is. Because there are a number of different ways to look at it, I'm assuming that you want to continue on as a retail concept, the key for retail operators. You want to keep growing your revenue and selling stuff and that ebbs and flows. You can't force people to buy stuff. Obviously you can create a store with things that people want to buy. But I feel like I'd focus more in the near term, at least what I could control. In looking at the metrics like I was talking about earlier, the metrics of this business are in decline. Focus on the cost structure of the business. Focus on the inputs that go into making this business run. If you just look at operating margin alone for this business, you go back 10 years. Operating margin has been cut by more than half over the last 10 years, so clearly, this is a business that is not operating as efficiently as it could and that's exacerbated when you consider declining sales. Obviously they need to figure the sales part out but I think that the operating side is a bit more in their control in the near term. I think I would really just be laser focused on that. Then the other thing I keep coming back to and I wonder if this is not something that we might not see at some point because you hear folks talk about Macy's and the real estate dynamic right there, real estate being a big part of the investment thesis there. I wonder if there's not something where Macy's figures out a way to become a real estate investment trust a real or if they merge with a real or something like that to take advantage of the real estate side of that argument because it is something worth keeping in mind. There is that dynamic to the business but I think near term I'd be really focused on just the costs that go into maintaining this business.

Deidre Woollard: You were just giving me flashback to seritage there with what Sears did to try to spin out that red aspect and get the value there. That did not work out although those properties is definitely still has value.

Jason Moser: It's a really tough problem to solve.

Deidre Woollard: Yeah, absolutely. Well, Jason, did you watch football this weekend?

Jason Moser: I did. I watched a lot of football this weekend. Did you?

Deidre Woollard: I did. The reason I'm asking is because it was a tough weekend for Sports Illustrated. Bunch of their employees were let go on Friday. It's an interesting case because the brand used to be owned by Meredith with publishes food and wine and a bunch of other things. They sold it in 2019 to Authentic Brands which owns Reebok. It's got Brooks Brothers, it's got I think, Dot and Gabbana, as well as some sports figure licenses like Muhammad Ali. What happened was in a group, who had been operating Sports Illustrated, they failed to make the payment, that agreements terminated. I'm wondering what do you think is the value of the Sports Illustrated brand now? This was the sports brand when I was growing up. But now you've got things like the Athletic. Does Sports Illustrated still have that cachet?

Jason Moser: I don't think it does. It reminds me watching the Sports Illustrated story, play out over the last several decades. It was a big part of my childhood growing up. I remember it very well just every week you the new Sports Illustrated came in. It was a big deal. Immediately this reminded me of the Warren Buffett quote, first come to the innovators, then come the imitators, then come to the idiots. I think for the longest time Sports Illustrated was the innovator in the space. They were the ones that really were doing something special, something noteworthy, something different. I think a lot of that was based on just the landscape at the time. This is pre-Internet, so distribution was a big deal in that regard and Sports Illustrated had figured that out. Distribution was a big part of the equation. When you think about sports reporting on the whole, it really is at the end of the day. It's a commodity business. Personalities I think play a bigger role today than probably ever before when it comes to sports reporting and I think you can look at the sports landscape now and you mentioned the Athletic. That's one of many names out there that really are out there competing in the space. Look at how quickly things like bar stool sports are out kick. Look at personalities like Pat Mcafee or Colin Coward, Stephen A Smith. It's much more now than it used to be before. Distribution is what was once a competitive advantage. It's not really the advantage anymore. SI had to lock on that back in the day. It was how we got it but as we've seen with so many businesses, the Internet has brought those costs down to basically nothing which brings a lot of new competitors into the space, the imitators. People may hear the word imitator and think poorly, but honestly that's where a lot of money is made there, folks that are copying what you're doing. We've got new ways of disseminating information, disseminating that content. I think it could be argued very effectively that SI has been completely asleep at the wheel when it comes to this stuff. It's a shame to see a brand that carried so much sway for so many years, really lose its status. But it has, and I don't know that the brand itself is even enough really to get it back.

Deidre Woollard: I think that's a really good point. It's interesting because we've seen so many brands go this way and there's always the chance that authentic find someone else to manage it but at this point, it's not the happiest way to see it go.

Jason Moser: No, it just requires constant attention. It requires reinvention. You can never take your audience for granted. It's not something where you can rest on your laurels and it feels to me maybe SI for a while, perhaps is a little bit guilty of maybe resting on its laurels. I think that's gotten where they are today.

Deidre Woollard: A brand is a living thing. Well, thanks for breaking it down with me today, Jason.

Jason Moser: Thank you.

Deidre Woollard: We talk about a lot of stocks on the show, but it's just a peek at the Motley Fool's investing universe. This year we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month. Model portfolios and stock rankings, all based on your investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate as a thanks for listening to the show. For more information, head to fool.com/epic198. Will also include a link in the show notes for you. You may know H&R Block as a tax prep company, but that's just one part of its growth story. I caught up with the Chief Strategy and Small Business Officer Jamil Khan for a conversation about how H&R Block is harnessing artificial intelligence and what he's seeing in the gig work economy.

Deidre Woollard: I think most people think of H and R Block simply as a tax prep. We've all seen the commercials but what would you like people to know about the company as a whole as we get started here?

Jamil Khan: Yeah. I'd agree that our core competency is tax prep. We meet the needs of our clients by blending human expertise and cutting edge tech to maximize their tax outcomes. But I'll also share as a company we do so much more than seasonal tax prep through our small business block advisor services and spruce our mobile banking app. We're meeting our customer needs throughout the year. Whether our clients are a single mom, a small business owner who owns a plumbing business or an Uber driver who has a side hustle we're committed to maximizing their financial wellness and providing a human touch to.

Deidre Woollard: Interesting. I'm curious about spruce because I don't think most people would associate H and R Block with banking. Can you tell us a little bit more about that?

Jamil Khan: Absolutely. It's not my area of expertise but I'll give you a little high level. It's a mobile banking app. We launched it about a year ago and really it's providing a checking accounts, savings accounts for clients, it's no fee and it's really, we've had some great feedback from our clients. We have both H and L Block tax clients who use it and also people who just use the app by themselves as well.

Deidre Woollard: Interesting. So you joined the company in 2019. Of course, you'd heard of the company probably seen it from afar. What surprised you once you got on the inside?

Jamil Khan: That's a great question. My biggest surprise was just how big the growth opportunity was for us as a company. We've been flat for many years and the reason I joined is I saw some growth. But once I got a little closer and got a peek under the hood, so to speak, I could just see the opportunity. We have three lines of business, consumer tax which we are really well known for and that's how everyone thinks of us, small business and financial products and we were best known for as I mentioned, consumer tax at the time, I really didn't realize just how big the growth opportunity was for the other lines of business which included small business, financial products. They were meaningful established businesses but were a lot more upside and over the last few years, we've realized some of that growth and it's been a pretty exciting journey.

Deidre Woollard: I'm sure it has and of course, last year it probably got a lot more exciting with generative AI and the AI craze that I think has swept up every company and even from the outside, I can see some potential applications for H and R Block. As a chief strategy officer this thing comes at you. You see everybody integrating AI. How did you start the process of thinking about how it would work with the company?

Jamil Khan: We tend to really think about the customer and start the customer because everything we do is for our customers and so I would say speaking to block advisors, which is the plan we go to market for with small businesses, we knew that small business owners feel pressure to make the best choices for their company. Entrepreneurs often want to know what should they be doing now? What should they be doing in the future to optimize their taxes? And these needs really inspired our AI tax assist product, which we launched in the last month or so which helps clients who choose to do their own taxes. This product is an AI product it helps them efficiently work through their tax preparation process, answer questions, as well as give it specific guidance on tax rules. We're still in the first innings, we're still learning a lot here but that's really how we started thinking about this.

Deidre Woollard: Interesting. I'm assuming that you would have to figure out a large language model of all of the rules and regulations across the entire country. How did you even start that process?

Jamil Khan: Yeah, think about a couple of ways. Firstly, we have a partnership with Microsoft and their open AI service. So that's helped us a lot and we've really taken that partnership in their technology and we've combined it with our own expertise. We have an organization called a Tax Institute which is also our internal think tank which really helped us update those thousands of tax law changes that occur every year at the state level at the federal level, at the city level. We're making sure our model works in conjunction with the LLMs we have and really it's providing answers. It's been running for about a month now and we've seen it having an impact on our customers.

Deidre Woollard: I'm curious about the ways that people choose to interact with H and R Block because you've got this AI and I'm assuming that AI maybe doesn't necessarily connect with everybody. Some people really want to use AI driven tools. Some people really want to go into an H and R Block office and talk face to face someone. What are you noticing in terms of who wants to do what? Are there demographic differences? What do you see?

Jamil Khan: Yeah, I'd say it's less around demographics and more about customer need and their want and where they are. So we think about our customers. We have customers who, what we call do DIY tax, that's you're doing your own taxes, you do it online and that's where our AI taxes is a really helping them now. I can share some examples of stories I've heard already but then you have customers who want a human. They want their human, they want their tax professional to help them and you can see them in a couple of ways. There's those who want human help but never want to go into an office. They'll send their details, they'll work by phone, they work by email. It's how I get my taxes done with my tax pro for five years now and I haven't yet met my tax pro and it's all done virtually it works really well. But then I can tell you that most Americans live within a five mile drive of an H and R Block office and we have thousands of clients, millions of clients who are coming in into an office, they want to meet their tax professional, shake their hand, ask them questions and sit with them so we have different options for however they want to interact. I'd say that they all cut across different demographics and it's really about the need for the client and what they're looking for.

Deidre Woollard: Well, thinking about the small business aspect of things, one of the trends that I've been following, it just has to be the gig economy, the rise of entrepreneurship and side hustles. It seems to me that that gets even more complicated. What types of shifts are you seeing and what are people asking for on that front.

Jamil Khan: It's another great question. First, I'll say yes we've seen huge growth in the gig space side hustle people use different words. I'd say one of the biggest things we've learned and one of the biggest trends I've seen is that gig workers don't know what they don't know. Let me explain what I mean by that. The basic example is many of them don't realize that in the eyes of the US government, that they're classified as a small business. And that comes with burdens and additional reporting needs but also a ton of opportunity as well, in terms of being able to deduct expenses, omatization, different tax things you can do, so that's been a real big trend and just showing how you're considered a small business now and how we can help optimize you and your taxes is a big part of our business.

Deidre Woollard: How do you get the word out for people who may not know they're a small business?

Jamil Khan: Yeah. So firstly, when people come and see us in person, we have to explain to him. So like, you're doing a schedule C now, you're considered a small business. I'd say a couple of things we're learning. One is when you tell someone you're considered a small business and they are doing selling someone Etsy on the side, they're like that's not me or they're driving for Uber, they don't see themselves as that so what we'll often say is, here's your tax situation, here are the implications of that. I think using language they're comfortable like, you're a gig worker or you work for Uber and we'll talk to you in those terms as opposed to. We've had some robust debate sometimes our clients say I'm not a small business as I was like, well this is just how your taxes play out and how we can optimize for you. I'd also say and I was going to say before, the other thing we help, the other trend we see of gig workers, as they get bigger and grow their lives get more sophisticated and more complicated. There's a ton of new regulations.

So for example, I don't know if you've heard of it, but the new beneficial owner information guidelines that the US government asked you to report, this started in the last month. We believe 32 million small businesses which includes gig workers, are going to have to register and reregister a business. In fact, let me just redo on that. Not all gig workers, but some of them will need to do that. I don't want to scare people off here, but they're going to need to register their business and we help them do that with new services we have. As they get even bigger and they become more professional, they may need book keeping. They may even need payroll to pay others or pay themselves and we see some people start as a gig side hustle and that can end up in a full time job which is just an amazing part of the American entrepreneurial experience.

Deidre Woollard: What are you watching in general, beyond tax prep as growth areas for H and R Block in general?

Jamil Khan: Yeah, if I think of the small business area that I oversee, I'd expect there to be growth in all the areas. Let me say if in small business tax will benefit from the growth of gig and side hustle workers as those businesses mature, we expect book keeping and payroll to grow as more people need that. As I mentioned you, we're just getting started with the beneficial ownership service that we have. I think that has a lot of potential. We're also helping our clients think through the implications of registering their business, becoming an LLC or other forms of registration so I think all of those have a lot of headway. Our biggest share relative is in tax and we think there's a lot of upside in all the other areas. I pretty excited about the coming years and it's going to keep us all very busy.

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, Mark.