Motley Fool Hidden Gems Investing - Burgers > Exercise

Episode Date: May 4, 2023

For one day in the stock market, investors voted with their stomachs. (00:21) Bill Barker discusses: - The Federal Reserve meeting expectations - Paramount Global slashing its dividend 80% - Peloton struggling with its turnaround - Shake Shack posting higher revenue in the 1st quarter - Potential names for Darden Restaurants newest franchise (16:29) Ricky Mulvey talks with Motley Fool senior analyst (and Star Wars superfan) Jim Gillies about Disney's acquisition of Lucasfilm and ways to improve the franchise. Companies discussed: PARA, PTON, SHAK, DRI, DIS, FNKO Host: Chris Hill Guests: Bill Barker, Jim Gillies Producer: Ricky Mulvey Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. May the 4th be with you! Motley Fool Money starts now. I'm Chris Hill. Joining me in studio today, Motley Fool Senior Analyst Bill Barker. Welcome back! Bill Barker. Thanks for having me! Before we get to earnings, let's get to yesterday's announcement from the Federal Reserve. As expected, we got a rate hike of a quarter percent. I don't know about you, I like when this happens. And by this, I mean, we were all expecting a quarter percent. We got a quarter percent. That's what I want out of my Federal Reserve, historically. I don't want

surprises? No, there hasn't been a surprise for a long time. The actual communication signals from the Fed have led to no surprises on the day of, at least regarding the headline. Is it 25? Is it 50? 75? Is it zero? All that. It's the words afterwards or the color that people react to. and there's an indication, we'll just hold it here, not a promise. Of pausing rate hikes? Pausing rate hikes. Right. Yeah, yeah. Let's think about that. We are going to tell you we're kind of interested in that, but we're not making any promises. Yeah. I probably watched more of this press conference with Jay Powell than any in the past six months or so. And not all reporters do this,

but some reporters still try and get him to speak in very concrete black-and-white terms and absolutes. And when that happens, I just think, it's Jay Powell. He's not going to do that. Why are you even trying? It's a Fed chair. I mean, he studied at the feet of Greenspan and others who know to hedge their bets. And so, we think we know. I think the market is pricing in a 98% chance today of no change in rates at the next meeting in June. We'll get there. That will change a little bit here or there, maybe, as new numbers come in. But 98% market feels like we're in a pause, and the next move is going to be down. Market's not always right about that, but that's where the market is betting.

Let's get to some earnings, then. The stock of the day is Paramount Global, and it's not stock of the day for good reasons. Shares of Paramount Global down more than 25% after first quarter profits were much lower than expected. They cut their dividend by 80%. How bad is this for Paramount Global? Because this looks pretty bad. Ultimately, what you get out of a stock is the money that gets paid back to you. The dividend is, as you pointed out now, shy by 80% of what it was going into the day. That doesn't mean the stock's going to be down 80%, but it is down 28% as we're talking right now. I think that the need to hold onto some cash to run the business properly is the signal

that is being sent. This comes against the backdrop of the writer's strike that started this week. And we've got shares of Warner Brothers Discovery down a little bit, not nearly as much, but down 4% or 5% earlier today, because they're going to report in the next 24 hours. And I think that investors are looking at businesses like Paramount Global, streaming businesses. And in the case of this company, they're saying, You know what? I think we're all in agreement. You don't have the strongest business. You're not the leader, by really any measurement, unless they're somehow able to recreate Topcon Maverick year after year. Weekly, I think, is what they need.

Right. The bulk of the business still is the TV networks and basic cable channels that they've got. That's about two-thirds of the total revenue. So, the direct-to-consumer part, your Paramount Plus grew nicely, 39% year over year for the quarter. But that's not enough to keep things flat. The revenue for the whole company down 1%, because there's an 8% hit to TV media division, which is all the channels, CBS, BET, MTV, many, many other letters. That's a problem, because that's the bulk of their business, and people are leaving it. What do you think the move is for a business like Paramount Global? Is it to try and raise cash by selling off some of these other networks? They've already cut the dividend 80%. There's

only five more cents to go in the dividend. Yeah, well, it's not a great time to sell off these networks. I think BET has been discussed as maybe something that they could sell off. Simon & Schuster, the publishing business, isn't really core. So, there are some parts that they can get rid of. I don't think they're going to be strapped for cash anytime soon. And the direct-to-consumer will probably continue to grow. You've got Star Star Trek is a major sort of thing that you'll get people to subscribe, chasing the new shows there, some of the other stuff, I guess. These guys are Yellowstone, right? Everybody's watching that?

Yes. Am I right about that? Yes. Are you watching it? I'm not watching it. I don't have Paramount+. Well, you can watch it in other places. I could, but that would require effort.

Not much. Everybody else is watching it, except you and me. That's the kind of brand that's something that they need. They've franchised that into every time zone. I think there's probably Yellowstone in space coming up because they've done the past and the distant past. They've got everybody doing that now. So, they're all in on that, but they haven't taken it to the logical extreme, which is, what does Yellowstone look like in the year 3580? That is the logical extreme. Stop me if you've heard this one before. Stop! Peloton's third quarter loss was much

bigger than Wall Street was expecting. I think the only solace for Peloton shareholders today is, the stock is only down 14%, not as much as Paramount Global. It's down 60% over the past year. Where does the future lie for Peloton? This is a $2.5 billion company. There is value here. There is affinity for the people who use Peloton. At some price, Peloton becomes an acquisition target. Is $2.5 billion where other companies start getting interested? They're saying what you would want them to say if you're a shareholder as part of this release, which is, yes, the numbers are the numbers, and they're not what we want them to be, but the turnaround plan that we've put in place is starting to bear fruit.

Yeah, 60% down is only scratching the surface of the story on what has happened to the stock. It was up around $1.70, something like that, peak COVID, Christmas 2020, I think. And apparently, the market was thinking everybody was going to buy two or three Pelotons. I mean, it never made any money. And now it's a $7 stock. So, the story here is much worse even than down 60% over the last year. Where is the future? In the shareholder letter from the company today, it emphasized that they are not just bikes, that they're going into and have been into yoga and meditation and fitness, and this leads to the logical question, what are you talking about? How well does meditating work on a bike? And the answer is,

you're not listening to us. We're not just about the bikes anymore. It's not just the hardware. We've got an app. We have an app that gives you fitness classes. That puts them in a category of, I would say, thousands of apps that give you a yoga lesson or a meditation. That's where they're going. Maybe they can be an all-in-one. I like my bike, and I want to take all the programming, and I'll concentrate all these other apps that I could have and just go with Peloton. Maybe that works. I don't know. It hasn't worked yet. Let's move to a happier topic, which is Shake Shack. The first quarter loss was smaller than expected. The revenue was a little bit higher than expected. Shares

of Shake Shack up 10% this morning. Sorry to make the awkward transition from fitness to burgers, but at least for today, anyway, burgers are winning. People like burgers. When Peloton went parabolic and other streaming things went parabolic, this sort of compares and contrasts with the other two stories in that this is an old-school thing. Going out to eat, the numbers are improving. They're better than they were this time last year. The restaurants are there. They're expanding into Canada. I still think they have to fill in the restaurants a little bit more than they've got right at the moment. But that's the projection. They're going to start making money. This is a company

that was growing pre-pandemic at a rate where actual free cash flow wasn't really so much the picture as, look at the growth, look at the growth of how many establishments we can grow and what is the same-shack sales at each one of them. Same-shack sales were good this quarter. It's not a complicated thing. People are going to be eating next year, the year after, pretty sure, no matter what apps are developed. I think if you're Shake Shack, aren't you looking at Chipotle and trying to figure out, how can we be more like them as a business in terms of the throughput, in terms of the ability to... I'm not saying they need to make the massive investment of, we're going to have two kitchens. One is for people eating in,

one is just for people picking up or drive-thru or that sort of thing. But it really seems like there is something of a blueprint with what Brian Nickell has done over the last couple of years with Chipotle? Maybe. I mean, Danny Meyer's background is not so much in that realm of the quicker serve and volume. It's more of a higher-end experience for a burger. It's a pretty high end there. So, I guess another individual might take it in that direction. I don't see it happening at Shake Shack. It might not. But it's worth remembering, Brian Niccol wasn't the guy who started Chipotle. Making his bones at Taco Bell, being a phenomenal operator, that's what really helped elevate

the business over the past few years. So, you're right, maybe it's time for a change in management at Shake Shack. I'm not arguing that'll happen. No, but I think if Shake Shack is a burger that you enjoy eating, and you're an investor and you're looking at it, you're like, yeah, I'm not enjoying the business as much as I'm enjoying the burger and the fries and the shakes, that could be a catalyst, bringing in an operator, a proven operator. Sticking with food for a second, I wanted to just touch on something from yesterday's show, when Ricky and Asit talked about Darden Restaurants buying Roots Hospitality, the parent company of Ruth's Chris Steakhouse. I think it's interesting,

because if you look at the portfolio of restaurants that Darden has, they have eight restaurant brands. Olive Garden is the biggest part of that business. That's more than half their business right there, just in that one restaurant. But this acquisition, I think, is interesting because it doesn't just expand the portfolio, it makes a pretty sizable bet on the fine dining part of the portfolio. Before this acquisition, it was just two restaurants, the Capital Grill and Eddie V's. But we were talking yesterday, you pointed out that there's another looming question, which I think is legitimate. Let me just say, Darden also has Longhorn Steakhouse, which is not nearly as high-end.

Right. If you're just looking at it through the lens of, is this casual dining, is this fine dining? Yes, they have a steakhouse in Longhorn. That's not in the fine dining category. Yeah. The question that has to come first to mind here is, are we going to rename this Darden's Ruth's Chris or something like that? Can we get a few more apostrophe S's in there to confuse diners. Do you think any conversation is taking place at Darden headquarters about rebranding? And if so, because I think it should, I think there should be the conversation about, do we rebrand some of these as Capital Grill? Do we make that investment? But then if those conversations are happening, God, I really hope someone is raising that. Like, wait a minute,

are we sure we don't want to put our stamp on this? Capital Grill's Ruth's Chris Steakhouse? Now you're talking. I don't think it's going to happen. Ruth's Chris has its very happy, loyal clientele. It's in most lists of where the top national steakhouse chains go. It's not too far from Capitol Grill. Capitol Grill is a quarter-step. They're really more on the basis of the breadth of the menu than necessarily having a better steak experience, I think. It's been a while since I've been to Ruth's Chris. It's easier to see, is my experience, than Capitol Grill, which is dark. Oh, you mean inside the restaurant? I thought you meant the sign outside.

No. Yeah, no, Capitol Grill, for anyone who's eaten there, it's a little dark in there. That's part of the ambiance. You have to get to a certain age, you have to pull out your phone, you have to get the flashlight on the menu, get out your reading glasses. But it's a good steak. They're both good steaks. I think it's going to work out for Darden. They know how to run these chains. I just wish it had a different name for Roosterus. Fingers crossed! Bill Barker, always great talking to you! Thanks for being here! Thank you! Since it is Star Wars Day, Ricky Mulvey caught up with Motley Fool Senior Analyst

and Star Wars superfan, Jim Gillies, to look back on Disney's acquisition of Lucasfilm and a couple of easy fixes for the franchise. May the 4th be with you. Jim Gillies joins us now. Before we get started, I think you need to show us your credentials as a Star Wars fan. Well, I'm old enough that I was in the audience in the first run of Star Wars in 1977, May 1977. My mother, God bless her, actually saw Star Wars. She has no interest in Star Wars. She saw Star Wars twice opening weekend.

Once, her and my father went to make sure it was okay for little six-year-old Jimmy to see. So, thanks, Mom. But I live in a house. You can see a little bit in the background. I live in a house. There's several hundred pieces of Star Wars merch, Star Wars memorabilia in this house. And I've got several of the strangest ones I could think of to show you here. I know we're not really recording, so fools imagine this.

First up, we have a Stormtrooper helmet bottle of hot sauce. And it is a clear, it's actually, it's full rendering. We have my favorite spatula of all time. it's a Boba Fett spatula with further proof that Star Wars is not, they didn't meet anything they've never been willing to slap their name on. I have a Star Wars slow cooker and I have a downed ADAT, which is the walkers, the walkers from Empire Strikes Back, but downed ADAT tape dispenser on my desk. So it's an entertainment property that I largely love that was from my formative years. I'm happy to see how it's grown, and I'm unhappy to see some of the things

that have happened under the present ownership. That's Jim Gillies. You've been listening to Antiques Roadshow. Disney purchased Lucasfilm for $4 billion back in 2012. Disney has made $4.5 billion just on the box office receipts from the newest trilogy. Let's get into the business of Star Wars. That doesn't include the theme park lands. That doesn't include the merchandise, that doesn't include whatever you want from streaming, the Disney Plus subscribers. Is that $4 billion, was that spent on one of the best entertainment acquisitions ever? Or what am I missing? Yeah, I think it was a good acquisition for Disney. I think George Lucas, the creator, and basically the man who got to decide who

took ownership of his baby, I think he wasn't going to do anything more, really, with Star Wars. I know he'd always talked about three more movies, but I don't think there was really a lot of appetite at that point. It was kind of reduced to a couple of animated shows at the time, one that thankfully never saw the light of day because it was just something called Star Wars Detours. Look it up if you've never heard of it. I think it would have been just abysmal. And he was smart enough, the George was smart enough that he took half the $4.05 billion

he was paid, he took half of it in stock, and Disney's done about 7% annual return since the deal was done. So, if George kept his stock, you know, he's got more than $4 billion. I mean, I don't know what you do. Anything past the first billion, I'm not sure what you spend it on. But I think it's grown in popularity. But I'm not sure I would call the sequel trilogy box office receipts as the measure I would like. Because, of course, they have to share that with the distribution.

And, of course, there's marketing. And I think the sequel trilogy actually did some irrevocable damage to the franchise. And I think Disney has doubled down on that damage. I was recently in Florida. We went to the Galaxy's Edge, the Star Wars land, if you prefer. We didn't do that at Disney World. Yeah, we didn't do the hotel experience, which is ridiculously priced. We went and looked at it and we came away disappointed, especially because a month later,

my daughter and I were at the Harry Potter World at Universal, which is immersive and fun. And the Star Wars land kind of, number one, was very focused on sequel trilogy stuff, aka the stuff that Disney has produced, not the stuff that most longtime fans love, which is the original trilogy. And even, frankly, the prequel trilogy has a lot of love. And the merchandise was disappointing. My significant other and I, we walked out going, is that all there is? We were actually quite disappointed in it and won't go back. We're glad we went once, but won't be back. And I think that's kind of the, if I was to have one statement

for Star Wars under Disney, it's, well, that was fun and that was fine, but I'm not going to be back. Whereas with the original trilogy, and there's some exceptions to the rule, the original trilogy, however, is still, I think, very beloved in this house. And we routinely have arguments about certain facets of the original trilogy and the prequel trilogy in this house. Not sure what that says about us. Jim, there's also a direct correlation of what Star Wars series you like and if they came out while you were a kid. And I'll also push back. I mean, Disney, not to say that they're working with any crutches here, but they've had Star Wars land open for, I think, just under a few years now, whereas the Harry Potter world you visited has been open for way

more than a decade. They've had time to work on it. And speaking of having time to work on things, streaming is a largely unprofitable business. But do you think Disney and Star Wars have gotten it right? Sure, the shows are expensive to watch and produce, but they've also been able to build that merchandise business around it. They've built the expansive theme park lands or the not-so-expansive theme park lands that you spent probably thousands of dollars to go visit, and then they're able to have the billion-dollar movies with a string of shows to keep you interested in between. So, here's the thing. I think the Star Wars shows have been hit and miss. Now, you could argue that some of the movies have been hit and miss, too.

The Mandalorian, when it came out, I think it was genuinely really good. I think fans loved it. I think they loved the Lone Wolf and Cubs-style storytelling of the Mandalorian. And of course, Baby Yoda, Grogu, whatever you want to call them. That was new. That was interesting. I think it tied up neatly in the first season with a pretty good storyline. I think the season two actually was pretty decent as well. But you started getting into a little bit of what we'll call overt fan service. Boba Fett's back. You can't see all the details in my office here, but there are multiple pieces of Boba

Fett-themed art on my walls in my office that were here long before, actually, a couple were here before Disney bought Star Wars. So, I was thrilled to see him come back. And, of course, but they started seeding. They started, like, rather than focusing on telling a story, it's almost like they started seeding different things that they wanted. Okay, we're going to do this next. We're going to do this next. They kind of lost focus on what they're going to do.

So, they, oh, we're going to do the Book of Boba Fett, which was fine. Which was fine. Wasn't great. Kind of diverged. And it changed the key piece of what happened at the end of Mandalorian Season 2. It changed it. And so, you start Mandalorian Season 3, and you're kind of like, well, how'd that happen? Oh, you had to watch a different show for that to be there.

They seeded the plans for the Ahsoka show, which is going to be coming out later this year. They then went in the direction of going towards an Obi-Wan Kenobi show, which I think was dreadful. But I understand why we'd want to see Anakin Skywalker, or Hayden Christensen back as Anakin Skywalker, sort of. Ewan McGregor back as Obi-Wan Kenobi, sort of. But you're telling stories within a pretty established, increasingly crowded universe. But you also have shows like The Clone Wars, which is actually pretty good, especially Season 7, which was made under Disney's purview. And I actually think there's some really good stuff in there. But the problem is, the shows were kind of hit and miss. People were kind of like, interest in The Mandalorian has

kind of really fallen off. Season 3 was not good. Obi-Wan Kenobi is largely, people didn't like it. But Book of Poe, if that was confusing. And so, when a truly good Star Wars show comes out... You're talking about Andor? I'm talking about a show called Andor. Andor is actually great. Because it feels more real and more lived in. It's by Tony Gilroy, who I believe did The Bourne Identity, at least a few of those movies. The problem with Star Wars, I think, is it's a little bit cartoonish in that the good guys always win. Even during a time of tremendous oppression and government oppression, the good guys always win. And that's not what happened in Andor. Andor, it feels like what's... And you know

the ending of what's going to happen to this character. It feels more oppressive. So, I like that. When you think of companies that aren't Disney that have really benefited from Star Wars, are there any? You could have Funko, Hasbro, or for a lot of these companies, is this just... The obvious one. One massive one. It was absolutely Lego. Yeah. Lego has made a mint on Lego Star Wars. And it's been a really good partnership for both Disney and Lego, because you've got all ages, from relatively old people like me to younger folks like you to my kids. My kids are now teenagers, so not that young. But you've got parents like me pushing Star Wars on their kids, and the kids go, oh, this is kind of cool. And so, every year,

my kids get the advent calendars, and my daughter gets the Lego Friends one, which is a Lego-owned brand, and my son generally gets the Star Wars one. And there is a very definite dollar figure difference between those two calendars. And you can infer exactly what Disney is raking from each one of those things that is sold, because the Disney one is $10 or $15 more. That's the Disney rake. But hey, people like me will pay for them. People with younger kids will pay for it. I like that. I think Funko's done well. I've always been very confused by Funko because unabashedly a fad, and you can see one in the background behind me. But I'm always worried it's going to go away. If you ever go to a Comic-Con or those types of shows, every other

booth is selling Funkos, and they're piled as high as you can see. There's no shortage of them out there. And I'm always wondering, like, you know, I'm waiting for Funko to end, the fad to end. But I think Lego's done really well. Star Wars, arguably, George famously, George Lucas famously retained the merchandise rights, right? And which is why it turned into the merch and the toy juggernaut that it was. And it was a very savvy piece of business on George Lucas' part. But it did mean we got, you know, cannibalistic teddy bears fighting the final battle in Return of the Jedi, rather than Wookiees, which is what we were supposed to originally get. I'm going to give, as we wrap up, I'm going to give one easy fix for the Star Wars franchise.

It's a character named Dr. Aphra. She needs to get her own film franchise. That is easy. You can do an adult Indiana Jones kind of storytelling with her right off the bat. And it's a new character that doesn't have the baggage that a lot of film characters have. And now I'm going to give you the floor for Kathy Kennedy, Bob Iger, the rest of Disney's executives for your pitch for one easy fix for the Star Wars franchise? It's a two-parter. Get out of the present era. We've exhausted the storyline for the Skywalker era. Get out. Go 1,000 years further down the line. Go 1,000 years back to the Old Republic. Do a storyline that's got nothing to do with the Skywalker saga. And the next thing is, think through what your movie arc is going to be. Sit

down. If you want to do a trilogy, do the story treatments for all three and how they work together. I don't care who you get to direct. Have one guy, have three different individuals direct it, that's fine. Because it's not just what they did with the sequel trilogy, but how many movies had they announced, Star Wars movies had they announced, and they've just evaporated. You had Rogue Squadron. Oh, well, that's gone. You had a trilogy being done by the guys who ran Game of Thrones. Oh, those are gone. Rian Johnson, who did The Last Jedi, was going to have a trilogy. Oh, that's gone. Taika Waititi, is he still doing one? Kevin Feige, is he still doing one? There's not been a president. Frankly, they panicked because they

thought they would just be throwing these Star Wars stories out when they did Rogue One, which is excellent, and they did Solo, which is less excellent. It's fine. I actually quite like Solo, but I understand why people got a little annoyed by it. They panicked. They pulled the Boba Fett movie, I think that became the TV show. They pulled the Obi-Wan Kenobi movie, I think that took form a little bit in the TV show. They don't have a coherent strategy. Sit down and plan out what you want to do, and then execute it. Stop with the slipshod stuff. Jim Gillies, appreciate your time. Thanks for joining us for May the 4th, Star Wars Day. Thank you kindly.

As always, people on the program may have interest in the stocks they talk about, 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 Chris Hill. Thanks for listening. We'll see you tomorrow.