Motley Fool Hidden Gems Investing - CEO's Seat Getting Warmer

Episode Date: November 9, 2022

The House That Mickey Built appears to be struggling. (0:21) Tim Beyers discusses: - Disney's 4th-quarter financials disappointing Wall Street - How the media division is dragging down the parks division - Redfin shutting down its home-flipping business and laying off 13% of staff (14:13) Deidre Woollard talks with Bernie Marcus, co-founder of The Home Depot, about the retailer's early days and other observations from his book "Kick Up Some Dust: Lessons on Thinking Big, Giving Back, and Doing It Yourself". Companies discussed: DIS, NFLX, RDFN, HD Host: Chris Hill Guests: Tim Beyers, Deidre Woollard, Bernie Marcus Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Chris Hill. If you're looking for an investing show that won't be talking about the midterm elections, you're in the right place. Motley Fool Money starts now. I'm Chris Hill. Joining me today, our man in Colorado, Motley Fool Senior Analyst, Tim Beyers. Thanks for being here, Tim. Thanks, Chris. Fully caffeinated, ready to go. Likewise. And we're going to need it because Disney added 12 million subscribers to its Disney Plus service in the fourth quarter. And that appears to be the lone bright spot for the house that Mickey built because Disney's

fourth quarter profits and revenue were solidly lower than expected. They warned about slowing growth for Disney Plus. Other than the sudden drop in March 2020 that we saw in most, if not all stocks, shares of Disney are trading at their lowest point since 2014. Where do you want to start? Well, I think we got to start with the subscriber numbers because what I see here, Chris, is that the business, the media and media distribution business is the drag that it's the anchor that the parks business is lifting. And the reason that parks business did well during the year and during the quarter is because there's no more COVID-19. People have gone back to parks. That part of the business, Chris, did really well. I just want to cover that

quickly because that's a great thing. The overall parks experience and products business for the quarter was up 36% on a revenue basis. For the year, up 73%. Again, not COVID, so this isn't too much of a surprise. On the operating income line for the quarter, more than doubled, and for the year, more than doubled. Again, not too surprising. But if we look at the media and entertainment distribution business, on the operating income line, Chris, it was profitable, operating profit of $83 million in the October quarter, but it was down 42% year-over-year to $4 billion in terms of operating income. So, making money, but not nearly as much as it was making. And I think part of the problem is that the subscriber

base isn't growing nearly as fast as Disney wants to see it grow. So, for example, Disney+, domestically, which is kind of the benchmark, that's like, let's call it Disney Plus Classic. That was up on a subscriber basis, it was up 20% year over year. Chris, I don't think that's anywhere near good enough. Now, on the other side of that, there are some other subscriber numbers. It's fascinating to me. You and I are both sports fans. I love my sports ball. ESPN Plus was the bright spot on the subscriber numbers for this quarter, up 42% year over year. The average revenue per subscriber, not nearly good enough. Disney Plus Classic, growth in that domestic part of the market, not nearly good

enough. A lot of investment is going to be required to transition Disney from what it was, profiting very heavily from cable and linear TV to more of a direct consumer business. The amount of lift here, Chris, I think is much bigger than maybe Wall Street and most of us thought it would be. There's a lot to unpack there. I'm struck by the fact that we're seeing this reversal where you can go back a year or two and when the pandemic was really at its height and parks were shut down partially, if not entirely. It's the media business, it's the streaming services that's helping to lift the overall company and therefore the stock, and now we're seeing the reversal of that. Let me go to the CEO for a second, because in February

of next year, Bob Chapek is going to hit his three-year anniversary as CEO. The stock is basically today where it was when he took over. Higher degree of difficulty for Chapek and all CEOs over the last few years with the pandemic. But I'm thinking ahead to an episode of Motley Fool Money that we're going to do in late December, Tim, where we do our preview for 2023. Long-time listeners know one of the questions we always kick around is, is, who's the CEO on the hot seat in 2023? I'm not going to be surprised if one of the analysts puts Bob Chapek's name in, because it seems like if he's not on a hot seat, it's a seat that's certainly getting warmer. Fully agree. It's a little unfortunate

because how much of this is Chapek's fault, because he's trying to navigate a transition that incorporates a century of history. Building a really competitive, but also profitable, direct-to-consumer business for Disney Media is incredibly difficult. They're in 150 countries right now. But just to give you a sense of how the degree of difficulty is, it's just so different and i something to consider so the average revenue per subscriber for netflix is what like you know it's certainly in the double digits it's well over ten dollars um i think it's closer to 12 you know maybe 14 i i should have been prepared with that number chris here's what i know it's way bigger it's way bigger than the disney number here the blended number for global

Disney+, as of October 1st, 2022, is $3.91, and that was down 5% year-over-year. Domestically, it's $6.10. That's down 10% year-over-year. Some of that's due to price increases, people not choosing to take up Disney+, per se. There's some fluctuations there. But it's not just that they have to grow the pie. They have to charge more and they have to get the mix right. If you looked at, I guess it was the most recent Disney reveal of all the new programming, Disney went hardcore on lots of new programming, particularly on Disney+. That's not cheap, Chris. At some point, Disney has to normalize. JPEG has to figure out how to normalize and get prices higher on Disney+, or figure out how to bundle better and get better bundled pricing. Because without that,

the bleeding is just going to continue. And we're going to have a different comparable next year for the parks division. So where's the growth going to come from? It looks like it has to come from price increases, plus a larger pool of direct-to-consumer subscribers. So yeah, I do think the seat is warm. I think the job is difficult. And all due respect to Netflix for kind of figuring this out a while ago. I'm going to make a bold statement here that you should feel free to disagree with, Chris, but I think the Netflix transition is easier than the Disney transition. How about that? I'm not going to disagree with that, in part because Netflix has a simpler business. They're just doing the one thing. They're not

dealing with parks, they're not really dealing with merchandise. If you want to zoom in on the ESPN part or the cost side of the ESPN business. Netflix isn't really dealing with the rising costs of live sports and the rights therein. It's going to be fascinating to watch. I want to get your thoughts on Redfin real quick before I let you go. Because Redfin announced they are closing down their home flipping business, they're laying off 13% of their staff. If you had asked me what Redfin stock has done over the past year, I would have been directionally correct, but I would not have guessed that the stock is down 93% over the past 12 months. This is now a $350 million market cap business. Where does Redfin go from here? It's so hard, Chris. I love this business.

I love the CEO, Glenn Kelman. He wrote in a blog post, they're going to report earnings, I believe, a little bit later today as we tape this on November 9th. He wrote, a layoff is awful. We can't avoid it. We plan to keep increasing our share of the market, but that market in 2023 is ... He said this, so I'm quoting here, is likely to be 30% smaller than it was in 2021. Where does Redfin go from here? It's a bit of batting down the hatches time here, Chris. Ride it out, like ride it out the way they rode it out in 2008. So they've been in really tough positions before, and Kelman's been through those tough positions. I think it's the right move to get rid of the iBuying business because it's capital intensive and the return is

uncertain. And the good news for Redfin shareholders like me, not that there's much good news here, but that part of the business, iBuying, was always a very small part of the business and it was always experimental. And they were always really careful with it. They always said like, we could turn off this spigot at any time. We don't believe this is something we should go all in on. So, by turning that off, they do make their business a little bit more capital friendly. So, the turnaround possibly comes a little faster when the market turns. But I think it's full-on batting down the hatches time, Chris. It's heartbreaking. I hate it. I plan to hold the stock because I believe in Kelman and I believe in Redfin and just its business of nationalizing

real estate brokerage using technology. I think that's the right move, but it's going to be tough for a while, man. Is this a business that can survive another year or so if the housing market basically just stays where it is right now? I mean, activity has dropped off considerably. You see it even in things like the number of people looking to refinance their mortgage. That number just dropped off a cliff. I'm wondering how well capitalized is Redfin? It's a really good question. Again, we're going to find out more when they report earnings, but if I just have to give you just a straight shot here, bear in mind that these numbers include the iBuying for the moment. But on the balance sheet as of the end of June,

As of the end of June, in terms of net cash available on the balance sheet, there isn't a lot, unfortunately. The net debt is higher because of the investment in houses. They're about $1.3 billion in debt. They're going to have to unwind that. Their cash position was about $473 million as of June. Take a look at the quarter, let's see what the cash burn was. But I do think there is a path forward as they unwind the inventory of homes. Honestly, they're not going to be looking to make profits off of these homes. They're just going to look to liquidate, get as much cash as they can on the balance sheet and ride this out. the moment, I think they're okay, but it's a bit of a wait and see. For those who are thinking

about this as like, hey, maybe this is a deep value play, I'd say not yet. Not yet. Let's take a look and see just exactly how healthy this business is and what they have to say about their plans to ride this out. Tim Beyers, always great talking to you. Thanks for being here. Thanks, Chris. In 1978, Bernie Marcus co-founded The Home Depot and all these years later, he is still bullish on the company. Deidre Woollard caught up with Marcus to talk about The Home Depot's early days and other thoughts from his new book, Kick Up Some Dust, Lessons on thinking big, giving back, and doing it yourself. I want to talk about founding of Home Depot

because you're at this pivot point in your life. You're about 49 or 50. It kind of starts with a humiliation. So how did you turn what could have been just this career crushing moment into this amazing business? When you look at it, it was about the worst thing that could have ever happened to me in my life. I'd always been successful. We ran this business, Handy Dan, which was a good business. We started with a few stores. We built it into a big chain, a very popular chain, one that was very, very successful. But I didn't get along with the people who owned the stock of the company. Dalen owned 81% of the stock of the company. And the head of Dalen basically hated me. He was the antithesis of who I am. He's a raider, a guy who took over bankrupt companies,

a guy who loved to let people go. I'm more of a builder and a creator and a marketing guy and an advertising and promotion guy. And we didn't see eye to eye or anything. But I must tell you, it was a shock. Walking into a room one day full of lawyers and finding out that you've been thrown out on your own. It didn't really work well. It was the first time in my life I'd ever been fired. And I didn't react well to it. It was a setback. I couldn't, why did this happened? You know, how did it happen? And I'm sure this happens to a lot of people in their life. They have that setback and some people come out stronger and some people never recover. And the ones who don't, don't recover are ones that carry a burden all their lives and, and have

the blame thing. You know, it wasn't my fault. I didn't do it. And you know, why did this happen to me, and oh my God, look what you did to me. I had to assume that some of the responsibility was mine. Or maybe I was arrogant. I don't know. Maybe I thought too much myself. But I didn't communicate well with the powers to be. And I certainly didn't like to suck up. That was one of my big problems, sucking up. And

along came Ken Langone. And Ken Langone, as you know, of the Langone Center, is a great friend of mine. He's like a brother. Ken invested in our company, Handy Dad. He flew out to California and he called me on the phone one day and said, buy every blankety, blankety, blankety, blankety, Share a stock you can in your own company Because I'm buying all of the outstanding shares Well, I thought the guy was a nutcase I said, well, I can meet you next week He said, no, tomorrow morning

And I said, where are you? He said, New York He's out flying out I'll see you tomorrow morning And he didn't say, poor Bernie And why did this happen to you He said, you've been hitting the a** With a golden horseshoe

Now is the time to open the store that you told me about. Because one of our trips, Kenny and I, in Houston, in fact, he was asking me why we were opening so many stores. And I said, because someday somebody's going to come in here and just wipe this industry out and take it over. And he said, well, how? And I said, if I tell you, you'll be the second one to know. But I'm not telling anybody. that's something that's in my own mind and we let it go but kenny brought it up and said you remember that story you talked to me about let's open it let's do that store and uh kenny is the

gave me the uh the emotional push to do it along with uh author and ron brill and um we did it we sat down. We figured it out. We put it on paper. We did projections. The projections didn't work. Arthur, who is the accountant and the financial guy, looked at the numbers and said, the numbers don't crunch. We can't make money selling product for the price you want to sell it for with the overhead that you're talking about. And so it doesn't work. And I said, well, what do you have to do? And he said, well, it just needs more volume. I said, good. Put in more volume. He said, I just can't do that. I said, why not? I said, do you know anything about this? How much these stores are going to do? Do you have a clue? He said, no, I don't. I said, well, I have a feeling

it's going to do a hell of a lot more than you think they are. And just put the damn volume in. And we had this meeting in New York And Arthur, I thought, was very unhappy He was going in with numbers that he didn't really believe in I did, he didn't believe in it And we presented it to the board They came up with $2 million To finance this adventure that we went into

Then we found out that we didn't have enough money Because in order to do it we needed a hell of a lot more than $2 million. So it set us on the journey. But the journey started with actually with Ken Langone kind of giving us the push to shove. And then Arthur and I took it over from there. I love that story so much. I love your confidence in that moment when Arthur's giving you those numbers and you just have to say, no, we're going to increase the volume. What gave you the confidence to do that? And what do you think was the secret sauce, the thing that you mentioned earlier that you saw something that other stores weren't doing

that you think you could do. What exactly was that? It was all conceptual. And I said, look, if people have an ability to buy a product in a store that they previously couldn't buy in that one store, so the thing was to have everything under one roof, everything, so that people didn't have to go to five different stores. You know, if you're a contractor and you're a plumbing contractor, you need different tools. You need different products to finish the product. Imagine the time it took for contractors going from store to store,

paint store, carpentry store, hardware store, to put it all together. My concept was put it all under one roof. and put it all on the roof, but buy direct from the manufacturers. Don't buy from middlemen. Therefore, you save the money of the middlemen and you give it back to the customer in lower prices. And then on top of that, you have people on the floor who are plumbers, painters, carpenters, a hardware people that understand tools and all of those together give you a winning a winning thing that nobody had ever done before so nobody ever did it before so how do you know how much volume you're going to do with me i said i think it's it'll be enormous i think the stores will

be overflowing with people i think they'll be they'll love what they have because people love a bargain, but not just a bargain, but I mean, a quality kind of merchandise. And it worked out that way. And we were very, very lucky. We found four stores to start with. And those four stores became the basis of really the Home Depot. But Deidre, one of the things that That I like to bring up at this point Is that This is where capitalism Comes in

If it hadn't been for capitalism These young, you're talking about Arthur, myself, Ron Brill Pat Farrar We couldn't have gone anywhere or done anything Without the money You just don't have the money And the banks would not lend us

The money, the banks didn't know Who you were, didn't care Home Depot. What are you kidding? Well, what is that? What is that? It's like a train station somewhere. So we went to the market. We sold stock. The stock allowed us to buy four more stores. The business built up, built up, and built up. And four more stores became available. we went to the market. And we, again, sold shares, brought shareholders in, and capitalism won out. And capitalism is the basis of Home Depot. It's one of the great stories of capitalism in the United States. And if you think about the value of what's come out of Home

Depot, the value of the stock over the years with its great history of earnings and sales and profitability and innovation over the years. How many people have become millionaires in Home Depot? People, especially that worked on the floor of the stores who only had college and high school educations. These people didn't go to Harvard. They didn't go to Yale, but they made a hell of a lot more than the Harvard graduates, I'll tell you that much. They were successful because they worked their butts off, because

they had a piece of the company. They knew they were working for themselves as well. Okay. Well, you did mention something in there that I want to zero in on, which is the idea of how important the associates were for the business itself. When you think about your employee training program, why was that such an important part of it? I think you touched on this a little bit earlier with this idea that when you were 11, you learned how to do things in a store and that you could do it yourself. How did you pass that message on to your employees? Well, it was an innate feeling about customer relationships. When you go into a store and you stop at a cashier and just say, how are you? And you say, fine. And she says,

okay. And she bags it up. Okay. And once in California, I just did it. A woman was bagging my stuff. She says, how are you doing? I said, I'm terrible. I have such pains in my back and my legs and my veins. And she said, oh, have a nice day. Boom. At a Home Depot, that's not what happens. They would stop you and say, what's wrong? What is happening? They care about you. They care about the customers. And because they care about the customers, the customers know that they're going to get a product that they need to help them do whatever project they're working on. So it's one of these things, you teach them to treat people differently. I remember when we opened in New York, you know,

we had this great opening in New York, open stores in New York, New York, you know, what do you want here? You know, New York, tough people. You may be in New York. I'm not sure, but I come from the, I come, I come from the Northeast. So I could tell you that I had a call from one guy said, what cult are you working with to find your employees? I said, what do you mean cult? He said, your people are not normal people. They probably come from a cult, some religious cult. I said, yeah, they come from the Home Depot cult. It's a Home Depot cult.

It's a culture that we have at Home Depot that I will tell you, I've been out of the Home Depot now for 20 some odd years. It's still alive and breathing and doing the same thing. our people care about a customer. They care what they're worth. They know that when a customer comes in the store, they have a problem. They don't come through to drink Coke, you know, and eat a Whopper. They come through because they have an issue. They have a plumbing problem, an electrical problem. They have a carpentry problem. And we have people there that could help them solve those problems. And that's the role of Home Depot in everybody's life. And that's why the company keeps getting stronger and better, even in these terrible,

ridiculous times that we're living in. Home Depot is still number one out there and will continue to be number one. Chris Hill. 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 Chris Hill. Thanks for listening. We'll see you tomorrow.