As king of retail Wal-Mart ( WMT -0.32% ) recognizes its growing reliance on online sales, the company plans to experiment with drones to beat Amazon.com ( AMZN 2.80% ) to the punch. The e-commerce company made headlines in the past year after launching Prime Air, an experimental delivery system to bring packages to customers in just 30 minutes.
Meanwhile, we will also discuss how Cheesecake Factory ( CAKE -1.67% ) served up solid results for its most recent quarter, what investors should look for in Buffalo Wild Wings' ( BWLD ) earnings release, and how a popular retailer is saying "no" to the Black Friday shopping craze.
A full transcript follows the video.
Sean O'Reilly: The drone wars are heating up, on this consumer goods edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Tuesday, October 27, 2015. Joining me is the always insightful Vincent Shen. How's it going today, Vince?
Vincent Shen: How are you, Sean? We've got a lot to talk about today.
O'Reilly: Yeah. We've got four big stories. Let's dive right in, here. Before we talk about the attack of the killer drones -- bad Star Wars joke -- we've got a few restaurant earnings releases to chat about as earnings season ramps up. Who do we have first?
Shen: There's two companies I want to talk about in particular for the restaurant industry. Those being The Cheesecake Factory ...
O'Reilly: You really like your high-calorie meals, don't you?
Shen: I look at this company as having recovered very well compared to some of the other companies in the sector since the financial crisis. It's developed this leading brand and dining experience that has resonated very well with upper middle class consumers.
O'Reilly: My family and I went to the location in Clarendon over the weekend -- 45 minute wait, place was hopping. It was nuts.
Shen: Yeah. Most of the times I've tried to go there, there's usually a wait. If you go there on a Friday night, for example, you can expect a nice, long wait.
O'Reilly: Game over. How did they do this quarter?
Shen: Revenue came in at about $526.7 million, which is up 5.5% year over year. Their same-store-sales growth was also up 2.2%. Definitely positive. Adjusted earnings per share were about $0.59. That's actually up from what the gap EPS would have been.
O'Reilly: Wow ...
Shen: It took a writedown of about $6 million on their RockSugar Pan Asian concept.
O'Reilly: I've never heard of that. Have you ever been?
Shen: No. they only have one of those.
O'Reilly: They're clearly throwing in the towel on that one.
Shen: Adjusted at $0.59 per share, that's still a 23% bump year over year. That's very strong on the bottom line. That represents -- at least on the same-store-sales front -- 23 consecutive quarters of same-store-sales growth. Like I said, that recovery has actually taken place very strongly since the financial crisis.
O'Reilly: The results sound pretty good, yet we don't care about short-term stock prices; but just for the heck of it, we'll talk about it. The stock was down 5% after the release. What gives?
Shen: This morning we came in, it was down 5%. Ultimately, I think on the bottom line, people were pretty happy; but on the top line, it fell short of estimates. We're not concerning ourselves with that too much. Overall, you've got to keep in mind that the stock's declared a $0.20 per share dividend. Yield was 1.5%, and that's not bad at all.
O'Reilly: The profit number was awesome. Did you catch why it was a bigger check size, or more people? Did they even break that out?
Shen: I did not see that in the report. In terms of breaking down their costs a little bit, across the restaurant industry, labor costs have been going up. This is going to impact the other company that we talk about, as well. They were able to hold that steady. Their cost of sales, they actually brought it down 100 basis points from the quarter a year ago. Overall, I think their operating margin was still about steady. They were still able to deliver that earnings growth. It was strong.
O'Reilly: Looking forward, what about the longer-term outlook for the company's expansion? They do have restaurants in every major city now. What's the deal there now?
Shen: There's been guidance -- just giving you the numbers -- they had a midpoint of about $2.62 in earnings per share for fiscal 2016. That puts the company trading at about 20x their forward earnings. That's not too bad.
O'Reilly: Pricey, but not crazy.
Shen: Exactly. It's in line with what the stock has traded at pretty recently. I'm glad you brought up overall expansion. It's very interesting the way their business operates, because overall, they're very selective in terms of where they open a new location.
O'Reilly: You need a certain population density, traffic ...
Shen: It's not even that. It's really about what kind of customers they want, and where they want them. For example, they'll often target what is considered the "top tier, class A" malls. These malls will have anchor stores that are stronger than a J.C. Penney's or a Macy's that has struggled in the recovery. They'll target a Nordstrom or Bloomingdales. We're talking about overall wealthier customers who have done much better in the recovery since the financial crisis, who are OK opening their pocket books to go out to eat.
O'Reilly: They have disposable income. End of story.
Shen: Cheesecake Factory gives them the consistency of a chain-restaurant experience, but also that more upscale dining feel. They're targeting that market very selectively. Overall, management thinks they can sustain about 300 restaurants.
O'Reilly: In America.
Shen: Yeah. Right now they have about 194 total. That includes some of their Grand Lux Cafe, which is around 12 restaurants, but most of them are Cheesecake Factories. They're also expanding a bit through licensing agreements abroad, so they have new locations coming in Mexico, in the Middle East, Lebanon, and Kuwait.
O'Reilly: I don't know this for a fact, but I bet money there's one in the UAE.
Shen: They're also going to open their first one in China soon. I'm sure that will be big for them, as well.
O'Reilly: Oh, yeah. I'm sure it will be huge.
Shen: That's early stage; I think they have 11 locations abroad. I'm sure that's going to be a big part of their expansion opportunities.
O'Reilly: Awesome. Moving on to a great place to watch a football game and have a cold one: Buffalo Wild Wings. A lot of people in this building love this company.
Shen: I agree with you, a lot of people ...
O'Reilly: What does your crystal ball say, Vince?
Shen: A lot of people are bullish on the company, and overall, I wanted to discuss them, as well, just because I feel like they're leading class for the restaurant industry with some of the success that they've seen in the past five to 10 years. The things that I think investors should be watching are same-store sales, their cost management, and their new concepts. For example, with same-store sales, the company reported 4.2% growth last quarter at company-owned restaurants and 2.5% at franchised restaurants.
Any improvement in this metric, the way I see it, is going to be indicative of how successful or unsuccessful they've been with some of these initiatives they've rolled out. They're using a lot of new, technology-driven product experience enhancements. They're using tablets to order or pay; they're also implementing games, trivia, and things that are all part of that technology-driven side.
At the company-owned restaurants, they've also hired a lot of these guest experience captains. They're in charge of interacting with customers about promotions and things along those lines to make their dining experience as positive as possible. That will be reflected in that same-store-sales growth.
O'Reilly: The CEO of Buffalo Wild Wings has publicly stated that they don't just want to own BW3s. They want a portfolio of companies like a Yum! Brands kind of deal. What are these other concepts, and what have they said about that?
Shen: The thing that's really interesting about that is that they're going to get aggressive there. Right now, they have two: PizzaRev and R Taco, which was recently rebranded from Rusty Taco.
O'Reilly: That's a great name.
Shen: Management stated that they were going to pursue another seven concepts in the next five years.
O'Reilly: Is it hoping that two or three of them would get big, and then the other ones ...
Shen: I think, overall, you're not going to get a major success with every one, but overall, I think they're targeting that as an outlet for them for growth in the future.
O'Reilly: Wow! Seven concepts?
Shen: Overall, that's another big part of their long-term plan. Bringing it back a bit to some of those initiatives I mentioned, rolling those out costs money. Labor costs have definitely hit the restaurant industry hard.
O'Reilly: Yeah. That was the other thing you wanted to touch on. Labor costs were actually up last quarter. Like 29% or something?
Shen: They were up 90 basis points to 32.2% of sales last quarter.
O'Reilly: So we're definitely looking for what they saw this quarter.
Shen: Exactly. There have been some mandated minimum-wage hikes, hiring all these guest-experience captains, who are also paid at a higher wage, is going to hit that number, as well. That's something that we definitely want to watch on the cost-management side. Also, keep in mind that, just for their inputs, traditional chicken wings increased 26% -- the prices at least -- year over year last quarter.
That's actually down from the first quarter when they were up 41% year over year. They have some agreements in place now with their suppliers to potentially stabilize the fluctuation with chicken prices, but that's something investors will want to watch closely in the report.
O'Reilly: Okay. Moving on, before we talk about the drone wars, I wanted to point our listeners to a newly redesigned focus.fool.com. There you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer. Once again, that's focus.fool.com.
If you're just joining us, the big story of the day -- it was announced that Wal-Mart has applied to the Federal Aviation Association for access and allowance to test drones in the skies. Vince, are you scared?
Shen: I'm just curious to see if they start shooting each other out of the sky when Amazon has their drones in the air.
O'Reilly: This actually would be drone wars. Actually shooting each other with lasers and stuff. On an unrelated note -- although Wal-Mart may very well have seen this, and I'm sure they've done a lot of market research -- Walker Sands Communication, who are a consultancy for retailers, released an interesting report around consumer preferences. It actually had some really surprising numbers. What did it say?
Shen: Basically, the customers they spoke to, their main takeaways were that 80% said they would be more likely to shop at a retailer that offers drone delivery within an hour. On top of that, 77% said they would pay for this service.
O'Reilly: That is a far more interesting number.
Shen: Amazon obviously made headlines not long ago where they said their Prime Air service -- which they have a page for on their website -- is targeting this idea of using drones regularly to delivery packages. Bezos sees it becoming as common as seeing a mail truck driving down the street, eventually.
O'Reilly: They've actually made more headway in the United Kingdom, as I recall.
Shen: Yeah. The thing is, right now it's not really the technology that's holding them back. If things really went full scale, I'm sure there would be plenty of companies willing to fill that space. It's really regulatory issues where the U.S. -- the FAA has been trying to figure out how to regulate this new technology. In the U.K. they've been much more supportive of the idea.
That's part of the worldwide -- more so for Amazon -- but both of these companies with their worldwide operations. They're going to have to deal with a lot of different regulatory bodies getting this technology in place. If and when it does, maybe the next five to 10 years, but it's interesting that Wal-Mart has obviously shifted a lot of focus into e-commerce, as well in its online sales and this is part of those ongoing efforts.
O'Reilly: In your opinion, Google and Amazon clearly have a head start over Wal-Mart. This just came out, and I would not have imagined this, but they clearly see that customers are willing to pay for instant delivery within an hour through a drone. Are they doing this just because Amazon is doing it, or do they actually think that -- I only go to Wal-Mart to get things...?
Shen: Wal-Mart is a huge operation. The drones don't just present a delivery method for them. Sure, that's a great part of it in terms of publicity, and the way it looks, it definitely puts them in a position of appearing to be more forward thinking and innovative. At the same time, I could see a lot of companies with these major operations like Wal-Mart using drones to just improve some of their operational efficiencies.
O'Reilly: That's what they've been using inside their warehouses, I think.
Shen: There you go. If that's the case, there are a lot of applications here, and on the delivery front, it's just that people seem to be interested in them.
O'Reilly: Right. "Get my stuff immediately!" Before we go, and on a lighter note, it seems that there's one retailer in particular that thinks Thanksgiving is sacred.
O'Reilly: Who is this particularly human-minded retailer?
Shen: This is something I really appreciate when I found out about this. REI ...
Shen: Retailer of a lot of outdoor goods, exactly. Outdoor sports equipment and things like that. They've basically said that they're not going to be participating in the frenzy that is Black Friday this year. They're launching a campaign -- #optoutside. Basically, instead of people focused on shopping, they want people to spend that Friday outside, in nature, where they think it's a greater benefit for people overall.
O'Reilly: That's awesome. I wish we were a radio show and I had one of those buttons I could hit like an alarm bell or a "Yay!" That's a big deal. You see all these customers -- and even Amazon is trying to get in on the Black Friday thing -- they're opening up at midnight, they've got search lights in the parking lot.
Shen: That's the issue. I feel like there was a big trend where all these major retailers like Wal-Mart, Target, Costco, Macy's, and J.C. Penney were all expanding their hours. Black Friday shopping originally started at 6:00 a.m., then it went to midnight, then it started pushing to Thanksgiving at 8:00 p.m., then 6:00 p.m. There was this trend where it was encroaching on what I considered to be a very important holiday -- at least for family.
Then, some stores started shifting away from that due to the bad publicity of making employees work on Thanksgiving to satisfy what is shopping desires. Some companies started opting out of opening on Thanksgiving but keeping their Black Friday schedules. Now, I'm curious to see if this kicks off a new trend where companies -- it's obviously an important holiday for them, but it's not an end all, be all.
The holiday shopping season has expanded where it used to be really important just between Thanksgiving and Cyber Monday. Now, companies are launching holiday season promotions in the beginning of November through December. That expansion of the shopping window means Black Friday's importance has actually shrunk a bit in terms of percentage of sales. I'm curious to see if this creates a trend where that frenzied time right after Thanksgiving starts losing its importance more and more.
O'Reilly: This actually makes me want to go buy something at REI.
Shen: I think it's a great idea. They've generally been a strong, great company with very forward-thinking policies regarding its employees, customers, and things like that.
Shen: I'm not surprised by it; that they're launching this at all.
O'Reilly: Do you think this will be the start of something?
Shen: We'll see.
O'Reilly: Cool. Thanks for your thoughts, Vince.
Shen: Thank you, Sean.
O'Reilly: Always a pleasure. If you are a loyal listener, and have questions or comments, we would love to hear from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com.
As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!