Motley Fool Hidden Gems Investing - Carnival Sets Course For Debt Reduction

Episode Date: June 26, 2023

Bookings are spiking for Carnival Cruise Lines, how can the company make the most of the cruise boom? (00:21) Jason and Deidre Woollard discuss: - The strong demand for cruises and travel. - How Carnival’s plans to pay off its heavy debt load. - The prospects for Oddity Tech, a new DTC-brand IPO. (14:55)  Ricky Mulvey and author Robert Glazer discuss why investors should look for businesses with a cultural advantage and how to spot one. Companies discussed:  CCL, GS, ABNB, TSLA, AMZN, WP, BARK, BIRD Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, Robert Glazer Producer: Ricky Mulvey Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Deidre Rollard Carnival cruises to a strong quarter as more people are ready for summer adventure. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Rollard. I'm here with Motley Fool analyst Jason Moser. Jason, how are you today? Jason Moser Doing great, Deidre. How are you? Deidre Rollard I'm doing well. And you know who else is doing well? It's Carnival Cruise Line. So we had their earnings this morning. You know, we've talked a bit on this show about the move from goods to

services, this sort of like post-pandemic thing, everyone wanting to go travel, experience things. Travel has been booming. Cruising kind of slow to catch up, but it seems like after the pandemic beat up cruising, the demand is back. So total customer deposits, Carnival reported all-time high of $7.2 billion at the end of May. 26% increase compared to the prior quarter. The company had record revenue, $4.9 billion. So, Jason, what should we make of the cruise boom? Well, I think it's just following the greater trend, really. When you look at the tourism industry as a whole, this is a massive market opportunity. It's greater than $2 trillion all in. We saw clearly over the last few years, everybody had to put everything on hold.

I think that shift from goods to services has been a theme we've heard throughout earnings calls here over the last couple of quarters. We're just seeing travel companies left and right really benefiting from this pent-up demand. Airbnb is another good example there. We're just seeing bookings continuing to accelerate, really rebounding from the lows over the last several years. Cruises, people are just ready to get out and experience things. Cruises are a nice way to do that. Yeah, absolutely. Airbnb, air travel, all of the airlines have been relatively optimistic.

Hotels also doing well. The thing about cruising, though, is it is expensive. There's a lot of energy costs there. There's a lot of shipbuilding costs. Big issue for Carnival. They reported a gap net loss of $407 million. Cash from operations is up into the positive zone, so that's good. The company's really struggling to pay off a lot of debt. They've paid down about $1.8 billion during the quarter, which is super impressive. Most of their debt, fixed debt, also good, so it's not subject to crazy interest rates. But with a company like this and with companies that carry heavy debt, how should we think about it? Is it just part of the business that we need to factor in?

It's kind of a new normal. I think you've got to get used to it, at least for the next several of years. It wasn't always that way. Carnival and cruise liners in general, they do have to manage that balance sheet to an extent. But it's gotten a little bit more troublesome for companies like Carnival here recently. Frankly, we were having this conversation over the last several years, wondering if these companies would even make it through. So, it's good to see that they've been able to make it through. But they do have to have to deal with some of that debt here over the next several years. The total debt, $36.5 billion, A lot of that is pretty expensive. You're right, it is fixed. They know what's coming.

But they are paying a lot for that debt. That's something that they're going to have to service for the next several years. When we look at companies that manage heavy debt loads, we want to look at something called the coverage ratio to get a better idea, at least, can this company service this debt? You look at the coverage ratio, which is basically just taking a look at their operating income vs. the net interest expense, the money that they're bringing in vs. the money they have to pay out for that debt. You go back to 2018 for Carnival, the coverage ratio was close to 20. Higher is better. That means that they're making a lot of money and they can service the debt they have on

their balance sheet. You look at it today, and they technically don't even have a coverage ratio because, as you mentioned, operating income is in the negative, and they're paying a lot more to service that debt than they were just five years ago. Now, that doesn't mean it's always going to be this way. they have to climb out of this hole that they dug themselves into. It was not fully of their own doing. They were just subject to the global pandemic. Every company had to deal with it. Carnival, again, made it through. That's great to see. But they are going to have to figure out how to service this debt going forward. Much of that is going to rely on demand.

If we can assume that the demand will remain steady, if we don't run into another global crisis, then I think in time, that balance sheet should continue to look better. And let's be fair, too, they do have $5.5 billion in cash and short-term investments on the balance sheet. They have liquidity and they have a business. It's just the priority right now is to make sure that they are focused on that expense control and service that debt, get themselves in a little bit of a better position with the balance sheet. And that's just going to take time. It's going to take time, and it's going to have to be increased demand going forward.

And as you said, we never really know. They've got a turnaround program. It seems like every company gives their turnaround program a cute little name. This is Carnival. They've got SeaChange. They're setting some pretty ambitious goals for 2026, one of which is they're going to more than double the return on invested capital between now and 2026. It would be the highest level in two decades for the company.

A lot has to go right. At the same time, they're trying to cut back debt, but they still have to build new ships, build new amenities, keep attracting customers. The market didn't love the earnings. Is this healthy skepticism about the plan, or is it something else? I think it's probably healthy skepticism. We're seeing a rebound. I think the question is, will that rebound sustain? Is this sustainable demand, or is this going to be something that sort of normalizes here over the coming years. I think it's probably healthy skepticism, which makes a lot of sense to me. Management's job in any company is to tell you how awesome they are.

You want them to be honest, right? But they're always going to really try to give you the most glass-half-full sort of view. I think that's what they're doing here. Setting goals, especially seemingly unachievable goals sometimes, can be a good thing. You want to set that are high, so even if you don't hit it, you're still hitting some pretty lofty goals. Elon Musk is one that comes to mind. He sets a lot of crazy goals. People say, you'll never achieve that. That's not necessarily the goal. He's like, maybe I'm not trying to achieve that goal, but I want to get somewhere close to it. If you get somewhere close to it, those are still pretty darn good results. So, I think in this case, maybe it's healthy

skepticism on the market's part, but I absolutely do not fault management for setting those lofty goals. Again, part of their job is to really paint that picture as nicely as they can. So, it's kind of a shoot for the stars, maybe land on the moon scenario? There you go. Perfect. Well, let's talk about... Cruises are back. IPOs, are they back? I'm not so sure. But we've got another one that was announced. This time, it's Israel's Oddity Tech. Nobody's probably heard of this, but they probably may have seen the Il Makiage makeup ads in their feed because, man, they are in my feed so much. They're everywhere. This company is interesting. It's been around

since 2013. It had around $325 million in net revenue in 2022. Is it time for IPO, direct-to-consumer businesses now? Are we back? Well, I think it's a great time if the recent CAVA IPO is any indicator. That was really well received. I do think the market is ready for some real businesses, no funky corporate structures, some good consumer-driven businesses, understandable, no SPACs or anything like that. I think the market is really excited for these types of businesses. Kava probably has gotten off to a little bit of a hotter start than most anyone would have assumed. I would imagine that we will see that pull back in time. But it just goes to show the

optimism that's out there for strong brands and consumer-driven businesses. It sounds certainly like this could be another one in oddity tech. I'm not very familiar with the business itself, but I am somewhat familiar with the market. Beauty and wellness is a tremendous market opportunity. To even capture just a little bit of it could be very meaningful. Yeah. They're pretty strong because they've got around 40 million users, but then they've got about 4 million active customers buying at least one thing a year. There's There's a lot to like about it, but I worry about some of the direct-to-consumer companies that IPO'd in the last couple of years. Results not so great. Allbirds, the sneaker company,

they're down around 95%. Warby Parker, eyeglasses, down around 79%. BarkBox, down 88%. Did these companies just go public too early? Or is there something about direct-to-consumer that is a little tricky as an investment? It's possible they went public too early. But I think you have to look at it from two different perspectives. For investors, it's maybe not the greatest situation right now when you're seeing that stock price taking such a hit. But the company was able to raise, obviously, a lot of money going public, which is a good thing, assuming that they're doing good things with that capital. I feel like, again, you get back to the state of the market today, it's been a real lull

over the last couple of years. I think a lot of investors are ready for a lot of these companies to get out there and show us what they're made of. So, even if it's a little bit early, as an investor, yeah, you keep an eye on that. It doesn't mean they're uninvestable. But oftentimes, when it comes to IPOs, you want to sit back and wait and watch the story play out a little bit. Let that enthusiasm wane to then understand, is this a business that really has staying power? That remains to be seen in regard to Odyssey Tech, for sure. I think what's interesting about Oddity is that they're building a platform versus just building brands. They've got Il Makiage. They've got a second brand, Spoiled Child.

They're building that one out. They've done a couple of acquisitions. They're trying to build out other brands. I think one of the things that's interesting with this one is that maybe it's not just reliant on the trend for one thing, hopefully. Yeah. Well, that's it. Oddity is the umbrella, and you have a number of brands that fall under that umbrella. Very tech-driven, very data-driven. That obviously is a good thing. Going through their S-1, they did not fail to mention artificial intelligence more than once. They did indeed. That'll probably play in their favor as well. I think about this, and I think about

other companies that are data-driven, so to speak. I think of something like a Stitch Fix, where on paper, yeah, I get it, I understand what they're trying to do. But at the end of the day, are you really a data company? You're trying to serve consumers. Let's not lose sight of that. I think it just remains to be seen exactly their position in this market. Again, such a big market opportunity. I think they quoted in their S-1, they're talking about a $600 billion market opportunity in the S-1. That's clearly not their total addressable market or serviceable addressable market. But again, to capture even just a little piece of that could be very meaningful. Yeah. One of the things that I really

like about the beauty space is, they just keep adding more products to your routine. It used to be, you would just wash your face, maybe there'd be a moisturizer, now there's a serum. There's all these different things. It's a good business to be invested in because you can just keep adding more things, and customers will buy them. They will. I will tell you. I have a wife and two daughters, and they see my fair share of beauty and wellness products in our house. Yeah, it's a very reliable, steady market. Well, a lot of times when we have an IPI, we're saying, X is the next Y. You mentioned Kava. Everyone was saying, is that the next Chipotle?

With Oddity, the question I'm asking is if they're the next Elf Beauty. Elf is ELF. They're moderately priced. They're in CVS and things like that. Their stock has done incredibly well, up about 328% since it launched in 2016. Oddity's not in stores yet. One of the things we've seen with direct-to-consumer, you know, we talked about Warby Parker earlier, they had to go into stores. Is that part of the direct-to-consumer thing? Did some of those companies maybe go into stores too fast? What do you think about that as a part of the playbook? Well, I think eventually you need to go into stores. I think this boils down

to that word we've used before in the retail space, omnichannel. It's ultimately, you want to be everywhere your consumer wants you to be. There's plenty of research out there that supports the idea that for companies to be able to take that leap into becoming a billion-dollar-plus revenue business, they really do need that physical presence. It's a cost-effective way to acquire new customers. You can only go so far, really, as an online business, in many cases. I'm not saying it's that way always. But generally speaking, having that physical presence is an advantage. One that comes to mind is Harry's, the razor company. I actually subscribed to Harry's, believe it or not, back in the MarketFoolery days,

when we were running ads for Harry's. I got the MarketFoolery offer, and I still have Harry's mail to me every quarter. It's just a great way to get my razors and shaving cream. But even now, you find Harry's products in Target, for example, in stores everywhere. So, I think being able to make that leap to becoming that billion-dollar-plus business, it requires that physical presence. The company that comes to mind for me is Ulta. A very strong online presence, but also a very strong physical presence. I can just speak from experience. I see my wife and my daughters love to purchase it both ways. They love to go to the stores, but they also will purchase stuff online. You see something

like Ulta, where they acquired some technology along the way to incorporate augmented reality into their apps, so you can actually try stuff on via just your phone. You don't necessarily have to go to the store, but there's also no substitute for reality, I think, as we've all come to learn. So, ultimately, it does all boil down to that omnichannel concept. I would imagine for Oddity to make that leap, to really take this business to the next level, it will have to rely on a physical presence to some degree. Thanks so much for your time today! Always good to chat with you! Thank you!

As companies still figure out the remote, hybrid, and in-office dynamic, one business is creating a long-term cultural edge. Ricky Mulvey caught up with Robert Glazer, author and founder of Acceleration Partners, to discuss why investors should look for business with a cultural advantage and how to spot one. Bob, you're a big culture guy, but you think many investors have made a mistake in not focusing on culture and CEO leadership as a proxy for performance. Maybe they were just looking at revenue growth, especially during those low interest times in the pandemic. Yeah. Look, uh, Peter, Peter Drucker, kind of the, one of the fathers of leadership always said

culture eats, eats strategy for lunch. And I think we were coming off a very strange period that I think, uh, for those who have only lived in it, it feels like it's been that way all the time. For those of us kind of before it feels more abnormal and you could, you could cover a lot of mistakes with, with, with free money in the last five or 10 years. But I think as we think about it and we look at companies that have had sustained outperformance, you know, there, there tends to be great leadership and great culture behind that. And there's a lot of numbers and some studies that have been done with public companies to, to back that up. What have you learned from those studies? Yeah. Uh, you know, I read one, so one glass door looked at 10 years

of the sort of the highest performing, uh, companies versus that were public versus stock prices and other one fortunate and great places to work looked at it. And it was consistently standard deviations higher over the longterm with the companies that had better cultures and leadership. And I, that really shouldn't be a surprise for those of us who have worked in these organizations. And usually, you know, talent leaves bad leadership. And, um, you look at companies where I think there's poor leadership, poor culture, and you don't have good innovation. And it's hard to exist these days. If you can't innovate, you know, you and I are chatting before look at a company like Intel, you know, just, I mean, they were just the shining star and Andy

Grove and he wrote all the leadership books and not, you have a decade of just missing market after market and poor engagement. It just feels like it's a constant downhill at this point. Yeah. A lot of missed opportunities starting, you know, it's, it's, it's tough when Steve jobs comes to you and says, Hey, we're going to make an iPhone. Would you like to, would you like to make some chips for it? And your response is that the numbers simply don't work for that. Yeah. So it was one of those great, you know, greatest, worst decisions of all time books. You'd like, you'd like that one back. Yeah. I mean, you can blame, you can blame a decade of chip, uh, cheap money, but is that, is that the only, uh, is that the only culprit

when you're talking about these organizations with, let's say, focus on growth at all costs plus poor leadership? Yeah. No, I don't think it's the culprit. I think it sort of covers it up. I can never remember whether it was Warren Buffett or Charlie Munger that said, when the tide goes out, we see who's not wearing their bathing suit. And I think that's been the case. And so think about all these series of corporate malfeasance shows that we've all watched over the last couple years, you know, as soon as, as soon as the musical chair stopped, everyone kind of saw what was actually going on there at, at WeWork and Theranos and some of these, you know, companies where, again, you had very sort of autocratic, unhumble leadership. It looked really good on

the outside. I think the suspension of disbelief, but then when you actually see what's going on and that's the difference between putting together, I think, uh, what looks like a good year or two and putting together, you know, a five-year run or, or, or a decade of, of outperformance. Yeah. I mean, Theranos is, is, was a straight up fraud. I think that's, that's a little bit more difficult, but you know, there are examples of companies that have been high growth, high turnover that have done fabulously well for, for shareholders. Like, like, you know, Amazon would be the exception to that rule. Tesla might be another exception to that rule where they're working people to the bone, but it's, it works for their company. Yeah. And I think it, I think

it's really, those are great points because look, you know, how a lot of people look at a, a Michael Jordan or LeBron James or Tom Brady. And they're like, well, I don't need him to go to school. You know, I, I, I'm going to be that. And those are just the 1% of the 1% exception. So once a generation, we give companies sort of a suspension of, of disbelief and, and Tesla and Amazon, you know, I think one, you know, both had incredibly product visionary leaders, not known actually for great cultures, but known for just incredible product innovation and, and, and massive competitive advantages. And that can, that can hold you afloat for a while, but you know, as you know, you, some people might argue, as you, like you were saying, maybe,

maybe that was sort of built into the, you know, the, the, the growth rate at Amazon for a while, that was just sort of part of the equation, but you know, the last couple of years have been harder for everyone since the pandemic. So sometimes you can definitely get things working in your, in your favor for a while, but yeah, Tesla is a tricky one, right? I mean, if you look at the numbers, if you look at the thing, like it's a, it's a pretty rough place to work, it's pretty high turnover, but I mean, there's not that many Elon Musk's out there. Yeah. I mean, you've said, quote, we have a whole generation of leaders who don't know how to make money or grow companies in a way that doesn't break people and quote, you know, for people on the outside,

what are the signs that a company is going through this? What's that, what's that look like in action? Yeah. And again, we have a lot of leaders, you know, that have 10 years of not having to make money and you can always get more and it was cheaper and, and not knowing how to, and part of the real downside of that is I think a lot of companies haven't figured out product market fit. So let's do a perfect example of this with some, you know, public companies like food delivery, right? I mean, so here's the thing where at, at, at a certain price that you're willing to charge, the customer's really interested, but you make no money. Or if you try to charge the price where you make money, then, then, then the customer is not interested. So, you know, I, I think we've

had a, the way to look at this is where you see, you know, tremendous revenue growth. That's not, not that profit is everything, but to me, profit is, do you have something sustainable? Do you have product market fit where the profit is not there, where there's a ton of turnover, where you don't see the company generating those next level of, of leaders look for Steve job, all the faults he had, you know, he built and developed a lot of the leaders at Apple, including his successor, Tim Cook. So, you know, you, when you, when you see a company that's getting the leadership, a lot of leaders are coming up from within they're staying, they're not, you know, it's not just this constant revolving door of, of talent in which no one seems like they're,

they're willing to stay very long. Let's talk. I know you covering culture. Now the big shift is, is figuring out remote work. In my opinion, the only public company that I have seen managed this well is Airbnb essentially in different companies have different abilities. If you're making, if you're making cars, you need people to show up. If you need security, you need security, your headquarters, you need people to show up. All right. With all those caveats out of the way, I think Airbnb figured it out. They basically said, Hey, if you're working, you can go to an office. You can be at home, but we're going to have these events pretty set throughout the year. And you're expected to be there. You'll know about them months, years in advance. I think

that might be the, is that the only way to do it at this point? The way to do it is to pick a strategy that makes sense to the team and the people, and then support the strategy, which is exactly what Airbnb did. A lot of these companies were doing it for the wrong reasons during the great resignation. We got to get people. So let's tell them they can work from wherever they want. And then they move and do whatever they want. They tell them they got to come back to the office or you got companies with, you know, that have been operating really well during the pandemic, but they got some real long-term leases in New York city. And so they declare you are going to have to come back to work, not with a business reason or not like Airbnb said, Hey, it's important

to our culture that people get together and they do these things, but with sort of an authoritarian, you know, mindset, the, the opposite of Airbnb, I think is, you know, Goldman Sachs and David Solomon. So in January, 2022, when Goldman's coming off the best quarterly profit in the history of the company and revenue with everyone working from home, he says, we're going to force people back in the office on this date. And, and remote work is an aberration that we're going to fix. Wow. That to me sounds like a huge slap in the face. Your employees who just worked through a pandemic recorded the best quarter in the history of the company. And you're telling them that's something you need to fix as fast as possible. Cause an aberration fast forward a

year, everyone is back in the office because they're required. Goldman has the worst quarter that they have in 10 years. Now that is not because they were working from home or not working from home in those cases, but clearly there's a lot of factors at play and it is not that black and white. And so I think, look, if I'm someone at Goldman Sachs, I I'm saying, look, we've got a $50 million IPO pitch tomorrow. Like you better be in the office. Like we're not doing this on zoom. Cause we're about relationships and in person, and we're going to lose if we do it on zoom. And by the way, then there's no bonus for you. So the employee understands, but if you're crunching a spreadsheet on the deals closing tomorrow for 16 hours a day, I don't need you

to come into the office to lock yourself in the office for, for 16 hours. So like, let's focus a little bit on the, on the why we're doing it and the type of company and the type of culture that we want to build and understand that we can't be everything to everyone. And I think that's one of the biggest mistakes that leaders are making today, and it's going into marketing and all kinds of stuff, just trying to be everything to everyone and not having a message and a focus that resonates with a core group of employees and customers. Let's stick on that example for a little bit, though, because cyclicality hit Airbnb and Goldman Sachs a little bit differently. It might not just be the in-person culture. Airbnb still has people traveling that want to

use their services post-pandemic. A lot of those are maybe higher-income folks that haven't been hit by the recessionary winds that many others have faced. In the case of Goldman Sachs, maybe they're Airbnb travelers, but they've also experienced a complete dearth of IPOs after the pandemic, and deal flow has completely dried up, no matter where they are. Right. That's what I'm saying. It's not absolute from either way, 100%. 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