Chris Hill: It’s Thursday, November 29th.
Welcome to MarketFoolery! I’m Chris Hill. Joining me in studio, Emily Flippen,
in the house. Thanks for being here! Emily Flippen: Thanks for having me!
Hill: We’re going to dip into the Fool mailbag. We have to start with a tale of two retailers,
Abercrombie and Fitch and Express, both with third quarter reports out this morning. Kind
of like we saw yesterday with two stocks with a huge difference in their spread.
Abercrombie and Fitch up about 20% this morning, Express down about 10%. It was worse than
that when the market first opened. Let’s start with Express. Any time I see a company like this,
and by that, I mean, it’s now somewhere in the neighborhood of a $450 million market cap.
They are struggling in what is historically a tough industry. Apparel retail is a tough
industry. My first question to you is, how bad of shape do you think Express is in right now?
Just on the surface, in the wake of this report, and it’s not a particularly big company,
I’m wondering how much trouble they’re in? Flippen: I don’t think they’re in as much
trouble as JCPenney or Sears or something. They haven’t gotten to that point yet.
But I do think that as a company, they’re operating in a segment that isn’t going to be there
in the future. It’s middle-line retailer. You have your high-end goods aimed at adults,
then your discount goods. TJ Maxx vs. Nordstrom. And they’re in this weird middle zone where
they’re trying to get somebody at that $40-50 price point. It’s really a challenging area
to be in. I’m not sure if they’ve really bottomed out. I do think that it is concerning,
if I were Express, to be operating in this segment where we’re seeing retailers be really pushed.
Like you said, it’s a hard area to be operating in. Hill: It sounds like you’re saying, maybe not so much a knock on Express and their
management, it’s just the space that they’re in. You think this could go away?
Flippen: I would not be surprised. I think it could be acquired, I would
also not be surprised by that. Hill: No, I’m saying the space. When you
were talking about, what is Express trying to pull off, in terms of who they’re
appealing to, one of the things I was thinking was, “Wow, that sounds a little bit like Gap.”
In the same way that Old Navy is more discount, aimed at a younger consumer, Banana Republic
a little higher end. And as we’ve seen in Gap’s quarterly reports over the last couple
of years, that’s kind of how that’s played out for that company. Old Navy’s doing well,
depending on the quarter Banana Republic does pretty well, and Gap, the namesake
brand, is the one that struggles. Flippen: Exactly, and I think it’s for exactly
that reason. They’re playing in the middle market. Malls in America, where the majority
of their revenue used to come from, people browsing through, walking, they now have
to push these people to start ordering online. And the problem is, when you’re ordering online,
suddenly your options have exploded. You’re no longer limited to where your ability to
walk in a mall is. Express’ management maybe hasn’t pushed digital sales as much as they
should have, so I’m not surprised to see this middle area falling through. You get the people
who are going to continue to buy higher-end stuff online, and people who are probably
going to be buying these lower-end, discount clothes in stores.
Hill: Let’s flip it around for Abercrombie and Fitch. Are they as good as this report?
The stock is up close to 20%. They’re having a great day. Good for them and good for their
shareholders. But you widen the lens and you look at, “Oh, this is a stock
that’s basically where it was a year ago.” Flippen: This is something I love. We talked
about the middle industry. It’s really interesting. Yeah, Abercrombie and Fitch reported today,
beat expectations. Both companies beat expectations, but the guidance at Express is what caused
their stock to drop. It was really interesting, because when you think about Abercrombie
and Fitch, you think, “They must be a competitor to Express,” because they’re in that middle
$40-50 price range, as well. And when you dig into the numbers of Abercrombie and Fitch,
you’ll find that as a brand itself, Abercrombie and Fitch actually didn’t do that well.
And when you start looking at their sub-brands — Hollister, that’s one that’s doing really well.
You notice the different segments at Abercrombie and Fitch are going after here
compared to Hollister. Hollister is aimed at younger audiences — millennials, kids,
teenagers. When you go on their website, it’s not men and women, it’s boys and girls.
And those are the people you’re probably going to get with that price range, where they want
that brand name recognition, but they’re not going to nourish them, they’re not going to
spend a few hundred dollars on an outfit. But they’re also not shopping at discount
retailers because they still want that cool factor. So, I think we’re seeing a lot of
success for Abercrombie and Fitch in comparison to Express because of the fact that they have
this Hollister brand, which is really differentiating their services.
Hill: Also, with Abercrombie and Fitch, you look at the numbers that they just put up
— I think you’re right, as much as anything, the guidance that Express gave is what is
doing that stock in today. With Abercrombie and Fitch, their guidance for the holiday
quarter was pretty strong, particularly on the same-store sales front. And their
same-store sales for the third quarter was up 3%. That’s not an amazing number, but it’s
certainly better than people were expecting. Flippen: 3% as a company. Abercrombie and
Fitch itself, about 1%. That’s on par with Express. Express’ same-store sales were flat.
It was the Hollister brand that was up 4%. When you look at those two separately,
Hollister is the one that’s really killing it in this space. Abercrombie and Fitch is
just being dragged along. Hill: Do you suppose on any level, there are
conversations that are going on, whether it’s Express or Abercrombie and Fitch or at Gap,
where someone in the room is saying, “We really need to think about what is going to change
the game for us in terms of this middle market retail, or we need to seriously consider getting
out of it?” At least in the case of Abercrombie and Fitch and Hollister, Hollister is the
one that’s doing better, but Abercrombie and Fitch is the better-known brand. There’s some
brand appeal there. Maybe you can’t put a number on it, but it’s certainly a higher
recognition factor than with Hollister. In the case of Gap, I get that it’s the
namesake brand, but still, they’ve got two other brands that are pretty darn strong. I’m wondering if,
on any level, you as an analyst want to reach out to them and be like, “Seriously,
either figure out a way to change the game or get out of the game altogether.”
Flippen: I would not be surprised. In fact, I would be very disappointed if management
in these companies weren’t having that conversation. I don’t think anyone is blind to the fact
that that’s where the market is going. But I think you hit the nail on the head when
you talked about the brand. A lot of these companies, the reason why they haven’t moved
out of the game is because they attribute a lot of value to their brand. They think
they can drive customer growth through brand name recognition. To an extent, that’s what
we see with Abercrombie and Fitch and Hollister. These are brand name clothing, they have their
labels, their logos, right there for you to see. So, I’m not surprised to see that these
maybe compete better vs. Express, which is a retailer. You can’t tell an Express
sweater from any other sweater that you could buy anywhere else, because
they’re not that brand name. Hill: Yeah. I was on the Express website this
morning. That was one of the thoughts I had. And I think it’s just express.com. I was looking
at it and thinking, I can’t remember ever seeing any of this out in the world. Whereas
pretty much every week, I’ll see a young person with, whether it’s Gap, Old Navy,
American Eagle, Abercrombie and Fitch. Certainly a lot of Hollister, that sort of thing.
You can see that stuff out there. Our e-mail address is [email protected]
Question from Tom Crone, who writes, “Longtime listener, first time e-mailer. I’m a beginner
investor building a small defensive dividend portfolio through Robinhood. I currently have
shares in Walmart, Kraft Heinz, Tyson Foods, Verizon, AT&T, Bank of America, as well as
a dividend aristocrat ETF. I’m looking to round out my portfolio with consumer beverage
stocks, either Coca-Cola or Starbucks, but I’m also considering adding Waste Management.
One thing I do not hear a lot about is the waste that all of this increased production
and growth produces. I know Waste Management and Republic Services are the two leaders
in the industry but would love to hear your thoughts on waste management stocks
as defensive stocks. Thanks for all you do and all the great content you provide.”
Thanks for listening, Tom! Great question. You and I were talking right before we started taping,
Waste Management, one of those companies with a straightforward name. They’re in
the business of trash. And it is decidedly unsexy as a business. But if you’ve been a
shareholder of Waste Management for the past 10 years, you’ve been
handsomely rewarded for that. Flippen: I love the idea of owning
a portfolio of defensive dividend stocks. Especially with a market that’s overrun with tech
companies and these high valuations, I love the idea of having a more modest portfolio that’s just
sitting back and doing the work for you. And when you look at a lot of those names, like
Walmart, Kraft Heinz, none of these are, like you said, sexy companies. None of these,
you’re going to say to your best friend, “Yeah, I bought some Walmart
yesterday.” It’s not that exciting. Hill: “I’ve got a hot tip
for you. It’s called Walmart.” Flippen: [laughs] But these are great companies!
These are great companies to own. While they might not be your next Facebook or Amazon
or Netflix, they’re going to be great companies that likely are very cash positive
and can pay a steady dividend. Looking at waste management itself, it’s not
something that we spend a lot of time talking about. Like you said, nobody really likes
to talk about waste management. But when you have an economy that’s growing and scaling,
you’re going to have increased waste. It’s a natural part of
that progress. So, I like the idea. I think when you look at Waste Management
in particular in comparison to some of these other dividend paying companies or industries,
you have to be aware of some of the unique risks that Waste Management poses.
The first being, of course, normal economic cycles. Coming out of the recession, that would have
been a great time to buy into Waste Management. You know that as a country, we’re going to continue to
grow and develop, especially throughout that period. A good argument could be made
that we’re reaching the peak of our economic cycle now. We’re having lots of houses
being built, lots of different businesses being built. All of these things produce waste.
That’s an important thing to realize. This is going to be, to an extent, a cyclical kind
of investment, because while we do produce more waste, it does depend a lot
on the economic cycles that we’re in. It’s also important to recognize that this
has exposure to commodity prices. You might think, Waste Management doesn’t have exposure
to commodities! They’re not selling oil here! But, to an extent, they sell recyclables.
It’s a smaller part of Waste Management’s business, but they do have to still sort out
these recyclables and sell them. The biggest buyer of our recyclables is China. A lot of
issues with China right now. The biggest one is that Chinese regulatory authorities are
getting really mad at the U.S. because when we send them recyclable material, it’s not
really recyclable. We don’t do a great job of being like, “Here’s a clean glass or plastic
or aluminum container!” We send everything in one pile. So, there’s been a lot more regulations,
in terms of what we can sell them and we can’t sell. And that does hurt companies, because
it increases the cost that our waste management companies have to do to differentiate what
can be recycled, what can’t be recycled, what we can sell back to the market,
what are the prices for aluminum or paper fibers, how much can we get for this.
So, to an extent, it is kind of variable. Those are unique risks that you’ll get when you buy into
Waste Management. But as a long-term investment, this is a cash company with long-term
contracts, very predictable cash flows. As part of a dividend portfolio,
it can be a great addition. Hill: One more thing working in its favor
— and, to that extent, Republic Services’ favor as well — high barrier to entry.
Flippen: Oh, completely! There’s so many regulations. For example, owning landfills
is a natural part of this business. You can’t just go build a landfill when you’re trying
to get into waste management. It’s not part of the business, you can’t do it. So, yeah,
there’s very, very high barriers to entry. Arguably a duopoly in this space. As far as
inherent competitive risks, I agree, pretty low. Hill: I’m thinking about Tom’s portfolio with the dividends. Look, it’s always great
to look at a stock in your portfolio, or just your portfolio at large, and see growth over
time, whatever time period you choose to look at. But one of the sneaky, fun ways that growth
can happen in your portfolio is with dividends. It doesn’t get the biggest headlines,
it’s usually something that gets thrown into a press release in the quarterly report.
“Oh, by the way, we’re pumping up our dividend by another couple of pennies,” that sort of
thing. But over time, if you’ve got dividend aristocrats in your portfolio, you are faced
with the happy problem of, “Now what do I do with this cash?” There are some who say,
“No, I’m not going to turn the dividend into more shares. I just want the cash.” That’s
what happens with dividend aristocrats overtime. Eventually, you get to the point where
you have enough shares, the cash is piling up in your portfolio, and you have to
figure out what you’re going to do with it. Flippen: Exactly. And usually, with a lot
of these companies that pay steady dividends, you have a pretty long lead way to figure
out whether or not there’s an issue that’s coming. You’re aware of the fact that dividends
start decreasing, cash stops coming, that’s a big sign to have you if you’re a dividend
investor that maybe things are squeezed. GE is a great example of that, a company that
used to be a great dividend aristocrat, but now is non-existent. But there’s a long lead
way there. We’re looking at a year of potential for this dividend to be cut. As a dividend
investor, you have a longer lead way with your investments to whether or not that
investment is going to turn quickly on you. Hill: Emily Flippen, thanks for being here!
Flippen: Thanks for having me! Hill: As always, people on the program may
have interests 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. That’s going
to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Chris Hill.
Thanks for listening! We’ll see you next time!