Motley Fool Hidden Gems Investing - Box Office Is Back, For Now

Episode Date: July 24, 2023

A good weekend at the box office doesn’t mean movie theaters are out of the woods yet (00:15) Jason Moser and Deidre Woollard discuss: - Why partnerships may be the future for ESPN. - How a decision on AMC’s preferred stock complicates its future. - The importance of loyal pizza lovers for Dominos. (17:13) Sanmeet Deo and Ricky Mulvey look at the short report for Xponential Fitness and separate out the inflammatory from the potentially concerning. Companies discussed: DIS,  DPZ, AMC, APE, XPOF Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, Sanmeet Deo Producer: Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

box office is back at least temporarily what's next for movie theaters motley fool money starts now i'm deidre woolard here today with motley fool analyst jason moser jason how are you today i'm doing great how about you deidre i'm doing well and you know i don't want to oversell it i think we have the most fun episode of the week you know there's a lot of earnings coming later there's going to be a lot of intense stuff happening. We've got it easy. We've got a little bit of sports, a little pizza, a little Barbenheimer. Let's start with the sports because we heard on Friday that ESPN is maybe considering potential strategic partnerships with the NBA, the MLB, the NFL could give leagues a share of the business. This is really intriguing.

How would that play out? Yeah, well, I agree with you totally. This is like breakfast table conversation, lunchtime conversation. This is a fun episode for sure. A lot of things, lot of people can relate to. I think when you look at the state of ESPN today, no surprise, the internet has disrupted media in just a big way, and ESPN is no exception. It's really all about distribution. When you think about ESPN, once upon a time, distribution was very limited. ESPN capitalized on that with a strong brand and its relationship to the cable bundle that we all had and that now fewer and fewer people have as cord cutting gains traction. We look at the state of it today. ESPN is not the only game in town. Leagues more and more have their own

distribution. They're moving to the Internet and offering up their own distribution, whether it's on different streaming platforms or their own apps. The competitive jockeying in this space has really escalated. ESPN is in a bit of a bind here. Their economics a time ago were far different. They had virtually endless pools of money to bid up content and monetize the advertising because more or less they could hide their profitability in the cable bundle. I think most people, we paid for cable, we got 500 some odd channels, but you didn't really know how much of that money was actually going to ESPN. It turns out that a lot of money was going to ESPN. ESPN was a very valuable part of that cable bundle. And now with cord

cutting, those numbers are falling precipitously. So, I think in a state of today where ESPN just doesn't carry the same sway, it makes a lot of sense that now they're looking towards partnerships because I think they see, hey, you know what, something is still better than nothing. Yeah, it's interesting. You talked about the bundling and now we're in the midst of there was the unbundling, now we're maybe in the middle of a re-bundling. A little bit, yeah. When you look at what Disney's done with Hulu and ESPN Plus and all of these channels, Disney Plus, there is this new 21st century bundle, so to speak. Yeah, and everybody's trying to figure out how to profit off it. With ESPN,

I think the other options are maybe it would be spun off or it could be acquired. If in a fantasy world, who might acquire ESPN? That's a really good question. I'm just not sure. ESPN today, I think it's 80% owned by Disney and then the other 20% is owned by Hearst Media. I don't know that I would look to something like a Hearst to just try to acquire this outright. I really don't know that I see ESPN being spun off or acquired. Maybe it is. I think the best outcome for Disney is to figure out some sort of profit-sharing relationship with the leagues, right? Again, something is better than nothing here. And ESPN does still carry some brand equity in the sporting world, right? It's not what it used to be maybe, but there is a lot of history and a lot of work

that's gone on behind the scenes into building up ESPN to what it is today. There's still something there, but they aren't in control of their own destiny like they were before. And I think a lot a lot of this, it'll be very interesting to see. Bob Iger says he has an idea of when ESPN is going to stand on its own as a streaming service. That could be perhaps an indicator. If the idea is to really get that out there sooner rather than later, then they get a better idea as far as consumer demand and the pricing that they can achieve, which probably then helps dictate exactly what kind of relationships they are looking to forge with the leagues in the future. So, if it's spun off, if it's acquired, I mean, it's very difficult to say who would want to

acquire it, because I don't know necessarily that Disney wants to get rid of it. I think they're just really trying to figure out the best path forward to monetizing these assets. It's all about monetizing your assets, which is kind of the perfect segue for Barbenheimer. Like, if we had a water cooler, this is what everybody would be around the water cooler talking about. Which one did you see? What did you think? All of that. Incredible box office this weekend. Did you see either one? I didn't. No, I didn't. But my daughters did go see the Barbie movie on Saturday, and they loved it. They came back with rave reviews. Yeah. This might be either the second biggest or the fourth biggest box office of all time.

Biggest box office ever from Mattel toy, beating out Transformers, which is really interesting. So obviously, good news for Universal, which had Oppenheimer, Warner Brothers, which has Barbie. This could be the start of the IP avalanche over at Mattel. I'm now wondering about the movie theaters, right? We have this moment. Everybody went to the theaters. Finally, they're back.

But is this like raid after drought? We're not out of the woods when it comes to movie theaters, right? No, I don't think so. I don't know that it ever fully gets back to the way it was when we were growing. up. Again, with ESPN, distribution has changed everything here. Movie theaters themselves just don't hold the same sway, but for certain exceptions. I think we saw those exceptions this weekend in Barbie and Oppenheimer. Two very specific audiences that they were catering to, two unique concepts, unique stories, I think, and they were fresh. These were not stories

that were rebooted or concepts that we had seen before in some fashion or sequels or whatever. We're seeing theaters recovering from the pandemic lows, of course, but it still feels like it's a long, slow decline in theater traffic, just as more options exist now. But I really do think that theaters still hold a place for specific content. I think content like we saw this weekend can be the exception. If you look at the other side of the coin there, and I hate to go back to Disney, but it just seems like such an obvious example right now. We see what Disney is doing in the theaters. There's a lot of big bomb after bomb after bomb. These movies that they've been launching here just have not succeeded. Now, that can be for a number of reasons. I think part of it

is just the theater isn't what it used to be. But I think it also goes to show that you mentioned IP, you still got to do some of that hard work. You can't just rely on that IP to take you down that profitability road forever. I'm not a Marvel guy personally, but does the world really need another Marvel movie? I don't think so. Don't even get me started on the Star Wars stuff. I was a big Star Wars fan growing up, and even now I look at what's going on with Star Wars, I'm like, golly, I can't follow what story they're telling, none of it makes sense anymore, it becomes very confusing and it becomes very flooded, it becomes very saturated. And so, you start to ask yourself, how is this differentiated? And I think that's where the

theater really still holds special places for unique and specific content that is going to be seen as special by consumers. But I don't know that that on its own really makes theaters, from the investing perspective, very attractive. Yeah, especially AMC. AMC, I find myself a little grimly fascinated with. And they've been trying to make some moves. They were planning to do this rollout of pricing called Sightline. They tested it out in a couple of theaters. They're going to charge higher prices for good seats, lower prices if you're stuck in that terrible front row where you're just, you know, the movie is practically on top of your face. It works for concerts. I guess it, why do you think it didn't work for movies? Is it just,

we just want one price? It's a good question. I mean, it's a pivot, I guess, from what we're traditionally used to as consumers, right? And changing consumer behavior can be tough. I mean, that's just not something that historically theaters, it's not really been a dynamic of the in-theater experience. But I mean, it could make sense maybe if it was seen as discounting certain seats as opposed to charging more for other seats. Like if you're going to be stuck in the front row, and some people love the front row, I guess. I mean, I have other choices higher on the priority list. But maybe if you said, hey, these are the first two rows, you get a little bit of a discounted rate, maybe that would be a little bit different just in the

way they frame it, as opposed to not charging more for certain seats, but just maybe charging less for certain seats. But maybe just that perceived variance in seating isn't really enough to convince consumers that it's worth more or paying more or less. But I think ultimately, it really just boils down to demands. This is economics 101, and theaters are really looking for any way to get people in the seats these days. Charging more probably isn't going to be the way to do it. No. AMC is tricky. You'd think that AMC stock would be rising, but there's a problem that happened. On Friday, there was a decision regarding the conversion of the AMC preferred equity units, also called Ape shares, into the regular AMC entertainment stock. Delaware court

ruled against the move. I guess around 3,000 people wrote a letter to the judge asking him not to do this because they were afraid of dilution. Shareholders won in the short-term, but I don't know if they won in the long-term because AMC is now in this position where it's got to find capital somewhere. Do you see any hope here? What could they do next? That, I'm not really certain. I mean, do I see hope? I don't know that I would call it hope. I guess I would see, you know, anything's possible. I try to keep an open mind. But, I mean, when you look at AMC, the state of AMC right now, it's not terribly inspiring, right? I mean, between the long-term debt and leases, you know, the company has on the

balance sheet, I mean, the debt load is really, it's unsustainable in current conditions. I mean, it's close to $10 million. They don't even have a coverage ratio because the operating income that the company's generating is actually in the red. They're losing money still. So, there's consequently nothing in the way of positive cash flow. If you look at the balance sheet, the cash burn is real. Cash and equivalents down from $1.6 billion in 2021 to just under $500 million today, that's a red flag. Share account continues to go up. Their debt that they have on the balance sheet, that's coming due sooner rather than later. It's not anything I personally would invest in. When I look at something like this, I think the first question many investors will ask

is this a value play or a value trap? It certainly seems like a value trap to me, but that comes with the caveat, Deidre, that we live in a meme stock world today, and these things can catch fire for just the stupidest reasons. That doesn't mean it's a good investment, and that's what you got to remember. Meme stock is a completely different world that you have to be willing to take on that risk. But it's difficult to separate emotions from investing sometimes, and so you really have to keep in check that when you look at the fundamentals of this business, nothing really stands out. Yeah, don't get attached too much to the stock price on this one. Let's wind up our fun with a little pizza talk. Earnings for Domino's,

not barn murders here, same-store sales about 0.1% up, sales up globally, better around the world around 6%. We've got McDonald's reporting later this week, Chipotle too. How should we be thinking about fast food? Are we worried about the consumer a little bit? I don't think we're really worried about the consumer. I think you're right in that we've probably seen a little bit of a pullback from the last several years where delivery became such a core part of life for so many folks for the obvious reasons. But when we see the last several quarters we've seen with companies, McCormick is one that stands out just because of what it does, but we've seen that pendulum shift back over to the cooking more at home side of things when people can. People maybe

aren't necessarily viewing eating out and delivery as much of a necessity as it was viewed over the the last three years. For those familiar with the concept of Porter's Five Forces, though, you talk about the power of substitutes. There are so many substitutes in this space that no restaurant company is immune. They're all going to be faced with this challenge quarter in and quarter out. Then you start to look at just how big is the concept, how big is their footprint, is it national, is it global, what kind of growth opportunities is there ahead. Domino's is clearly very well-established around the world, as is McDonald's. Seeing a little bit more of a growth runway for something like a Chipotle as it's still a little bit

younger in its development there. But it's a very challenging industry to maintain success on a sustainable basis. Yeah. One of the things I'm thinking about with Domino's is where the growth comes from. I was listening to the earnings call and they were talking about the partnership with Uber Eats. That'll launch in September, I guess around two thirds of the stores will be sort of served by this program. It's interesting because at the same time, they're also launching a loyalty program or relaunching their loyalty program in September. And they see these audiences as a little bit different.

So they kind of want the value customer, their traditional person, they want that person to go to dominoes.com and order and reorder and get the benefits of being a frequent customer. And they see the other customer, the one who comes in through Uber Eats and eventually probably other platforms, as more premium. How might that shake out for Domino's if you're looking at it as an investor? Yeah. I think those relationships like with Uber, it's a bigger win for probably more meaningful for Domino's than something like an Uber in the near term. Uber Eats, for example, so many options on that platform, adding Domino's to it, that likely results in some incremental sales. But typically, if you're ordering Domino's,

most people are going through the Domino's app already. It really does make you appreciate the investments that companies like Domino's and Papa John's have made in that tech presence. Those apps that they have, they really put a lot of work into building those apps and they work very well. Generally speaking, they're looking to keep people in that universe, which is what those loyalty programs are meant to do. The loyalty programs are about engagement, about value, it's about creating that longer-term relationship and communicating with your customers that you value them coming back, particularly now when we're all pinching the purse strings a bit more as life gets more expensive. But for Domino's, I think most people think,

yeah, Domino's delivery, that's just one part of it though. It's delivery and it's carryout. If you look at the numbers, delivery makes up in the neighborhood of 55% to 60% of the transactions, but it's closer to 65% to 70% of the sales versus carryout. They both really matter. I think it's just a matter of really continuing to get that brand out there and creating more options, more ways for people to order. If they're able to capture those incremental sales via Uber eats, for example, and then that ultimately results in creating a longer-term relationship with someone who signs up for the loyalty program and therefore starts ordering a little bit more regularly from Domino's, well, you can see the longer-term win there. Yeah. And you made a good

point about the carryout too, because they're also trying to incentivize that by making, because it's a lower price point, they change the reward structure. So hopefully that works out in the long term. Absolutely. Well, Jason, thank you so much for your time. This was indeed quite a good time. Well, thank you very much. What happens when a short report is issued on one of your investments? Ricky Mulvey and Sandmeet Deo discuss the controversy surrounding Exponential Fitness. Sandmeet, a stock you follow closely. It's found itself in the crosshairs of short report. Exponential Fitness is the franchisor of boutique fitness chains, including Club Pilates,

Cycle Bar, and Stretch Lab. Now, Fuzzy Panda, a short research firm, issued a report in late June titled, Exponential Fitness, Abusive Franchiser That Is a House of Cards, end quote. Upon that report, the stock fell 40%, but it's recovered a bit since then. Before we dive into the details and the accusations, what was your first reaction to that short report? Anytime you see a short report on one of the companies you own and follow and have recommended, it's like a stab in the heart. And one of the first impressions is, oh, geez, here's another short report. Really long, really poorly formatted, just a bunch of fabricated stuff to bring the stock down and enhance the short seller's position,

which usually they have. But as I went through the report, some of the allegations, they felt eerily similar to what I experienced as a franchisee of a boutique fitness studio myself. So, you know, the reading through the report kind of brought about those personal experiences that kind of compelled me to at least think about the report a little deeper than I would other short reports. You had more personal trauma rise to the surface than one normally has reading a short seller's report. Oh, sure. Personal trauma and financial loss to add to that. So, yeah. Let's get to that. But the high level accusations is that Exponential Fitness and Geisler have lied about the health of franchised locations. They've made it difficult to cancel memberships. Sure, why not? And also, the big one, I think, was highlighting CEO Anthony Geisler's involvement with a company called Interactive Solutions.

You never want to be in the same sentence as Bangkok Boiler Room, but Geisler was alleged to have been involved with a Bangkok Boiler Room scheme, where salespeople pitch speculative investments, often through cold calls. This seemed to be not so good about the character of the CEO. Let's talk about anything you want to break down from those accusations. anything in the report surprise you? Well, the most surprising thing of the report were the accusations on the CEO, Anthony Geisler. A portion of my thesis on the company and a portion of any thesis on a company is management and executive management,

specifically the CEO. So I was always impressed with how he built Exponential from a single brand, Club Pilates, to multiple brands and used a lot of unique and creative ways to lead the business through the pandemic, with some interesting partnerships where they actually get paid, mobile apps, online fitness, the support he gave to franchisees during the pandemic in terms of helping them fight, get lease abatements, reducing the royalties, things like that. So, having trust and faith in the CEO management team is always important. these accusations kind of made me question his character a bit. I've always known that he's a bit of an aggressive executive.

He's very, very, very aggressive on growth of the company. And while that is something that is very helpful for CEOs many times to grow a company and get it to a successful place, Sometimes they cross the line and it gets from aggressive to abusive, which the accusations, I'm still not sure how abusive in his current company he is. Maybe the environment is tough. Maybe the environment is stressful. But there's companies, not to say that they are like this, but there's companies like Apple and Steve Jobs who have been accused of very aggressive, difficult working environments. Jeff Bezos is another one.

So, no one is perfect. People have the ability to change. What's past is past. But it does bring about some questions, that seed of doubt in the CEO and his character and his trustworthiness. He may have changed. He may be running the company in a totally different way and exponential than how he did in the past. But when there's multiple things like that in his past, you wonder if he has changed or if some of that is still there. So let's talk about your experience as a gym franchisee. The short report highlights that those relationships might be strained. One example is that 20% of studios transition to new owners over a three-year period and highlights how Exponential sometimes sells gym equipment for higher than market rates, exercise bikes going significantly more than Peloton bikes, boxing gloves that were bought for like four or five bucks being sold to franchisees for like $50, $60. Yeah. See, I don't see these as specifically as signals of the relationship being unhealthy. Ultimately, the profitability of franchisees is what drives the overall health of the system and

the relationship of the franchisee and franchisor. So, when many franchisees are unprofitable or struggling, it's not only financially challenging for them, but it's emotionally challenging for them. When these emotions elicit a strong charge and anger towards the franchisor and begins cracking the relationship. Many franchise businesses charge and have specific vendors that they want their franchisees to use. Many franchises have been accused of upcharging those, making a lot of money from those, and squeezing the franchisees. Gym equipment amongst the fitness industry is sold by franchisors to franchisees. Often, another company that makes a lot of money off of selling equipment and things is Domino's. They sell their stuff to franchisees.

But the real issue is the cost of that equipment. Does it cripple the franchisees to actually make money? Clearly, there are some brands within Exponential, Club Pilates and Stretch Lab locations that are actually making good money. That was even highlighted in the short report. those are the two brands that are the most profitable amongst all the brands. It's possible that franchisees can still make money above and beyond those costs. Is it though that they're feeling squeezed where it's cramping their profits such that they can't make it now? The biggest cost for a franchise, especially a fitness franchise, is labor and rent. If their labor and rent is inflated and high, that can cause a huge

dampening of their profitability. Look, exponential has grown very rapidly. With very rapid growth comes a lot of growing pains. Sometimes there's a lot of franchises that are built in places that don't support the growth or the rents are too high or the labor is too expensive. I own a fitness franchise in New York City, one of the hardest places to do business. My rent, my labor was very, very high. There were other franchisees that had the same business, same business model, same franchise or relationship, but they were profitable because their rent and their labor was lower. And it is very difficult to make money as a gym You will have franchises that within the system, there's a small percentage that are doing very,

very well. And there might be a big percentage that are either at profitability or below it. So it's a hard business, no doubt. Exponential Fitness pushed back on some of the claims. I'll give you a chance to push back on some as well. Some of the claims that Exponential pushed back on are how much revenue is recurring. The short say 60% of revenue is one time. Exponential claims that three-quarters of their revenue is recurring, and that the report also confused permanent closures with temporary ones. Exponential also claims that insider ownership is strong, CEO Anthony Geisler owning about a quarter of outstanding shares. Yes, I wasn't too impressed by the response by Exponential, to be honest. It was pretty generic,

reiterated a lot of the things that they have already stated in their publicly available materials and presentations and releases. The two items that I thought were helpful was one where they made an adjustment to average unit volumes to add back some of the excluded stores and show that the impact was pretty immaterial. The other thing that was helpful was that they reiterated that Geisler still owns about 8.2 million shares of the company. Still a significant shareholder and still owns more than the five largest institutional owners combined. So, he still has skin in the game, even though they said that he sold a lot of stock. Finally, the report, oddly, I've never seen this before, where the short report finishes out with

a pitch to buy another company's stock. In this case, it's Planet Fitness. Also, remember the billing issues at that company? Anyway, it points out the insider buying, no franchises for resale, positive net income. You follow the fitness industry closely. Do you think Planet Fitness or exponential represents a better opportunity for us public market investors. Yeah. And it's funny because Planet Fitness also had a short report about their billing practices. Billing practices were also mentioned in Exponential's short report. That is an industry issue across companies and brands. But in terms of your question, that's a tricky question because it really depends on your risk tolerance. I see Planet Fitness and Exponential as two sides of

the spectrum for the fitness industry. Planet Fitness is a low-cost gym, traditional big box gym. If you're risk-averse, Planet Fitness actually might be a better option. They're more well-established. They have consistent, steady revenues and generate nice earnings and cash flow. It's not a cheap stock, but it's not overly richly valued. So, it's been a very successful company and stock. So, if you're risk-averse, it might not be a bad investment. Exponential, if you're willing to take some risks, especially now after this short report, it's become a bit of a battleground stock now. There's a lot of overhang with the CEO concerns, with the franchisee health. Will that deteriorate the business? Are there cracks in that system?

But if they can overcome those, it still has a long runway of growth with the U.S. domestic growth, international growth. They're still signing licensees, franchisees internationally, France, Japan, all across the world. They have plenty of growth drivers still ahead of them to weather the storm. Samit Deo, appreciate your time and your insight. Thank you, Ricky. 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 woolard thanks for listening we'll see you tomorrow